Changes Specifically affecting Private Limited Companies

Anand BankaPartner, Talati & TalatiChanges Specifically affecting Private Limited CompaniesWhat is Company?Latin wordCom = with or togetherPains = breadOPC?Salient FeaturesMade effective in Phased manner98 sections on 12 Sept 2013Remaining on 01 April 2014Rules the game changer!!Flexibility to notify sections separately via RulesCOMPANIES ACT 1956COMPANIES ACT 201313 Parts29 Chapters658 Sections470 sections15 Schedules7 SchedulesDefinitionNo. of members increased from 50 to 200Joint shareholders to be treated as one memberEmployees or Ex-employees are not included in the number of membersMinimum share capital of Rs. 1,00,000Commencement of BusinessCompany not to commence business unlessDeclaration filed with ROC that every subscriber to the MOA has paid the value of shares agreed to be taken by himA verification of its registered address has been filed with ROC

If declaration not filed within 182 days from date of incorporation, Registrar would initiate action to remove the name of the company

Further issue of sharesPre-emptive right of existing shareholderMinimum 15 days and max 30 days for acceptance of offerNotice of offer of rights shares can be dispatched through electronic modeIf not right issue then - To any person, if authorised by Special ResolutionAt a price to be determined by registered valuer

Bonus sharesSec 205 (3) of 1956 Act permitted capitalisation of profits or reserves for issuing bonus sharesThus, a company can issue bonus shares by capitalisation of revaluation reserveSupreme court decision in Bhagwati Developers v. Peerless General Finance & Investment Co (2005)SEBI (ICDR) Regulations, 2009 prohibits issue of Bonus shares by capitalisation of revaluation reservesNow, Companies Act 2013 also prohibits issuing Bonus shares by capitalising reserves created by revaluation of assets

Annual ReturnTo be signed by Director and Company SecretaryIf no CS, then by a CS in practice

If paid up capital > 5 crores AND Turnover > 25 croresTo be certified by a CS in practiceStating that the company has complied with all the provisions of this ActPenalty on CS for non-complianceRs. 50,000 to Rs. 5 lacs

ConsolidationSEBI mandated consolidationOnly for Listed companiesSubsidiary, Associate and JVCompanies Act 2013 mandated ConsolidationFor all companies, private or publicSubsidiary (incl. Associate and JV)AS 21 was issued in 2001Practical exposure to SMP?IFRS: Private Companies net worth in excess of Rs. 500 croresInter-corporate Loans (Sec 185)No company shall (directly or indirectly)- Advance any loan (or give security or guarantee in relation to any loan)Including loan represented by a book debtTo its director or any other person in whom the director is interestedDirector of holding companyPartner of directorFirm in which director or relative is a partnerPvt company in which director is a director or memberAny body corporate in which >= 25% voting power held by such directorAny body corporate BOD is accustomed to act in accordance with directions of BOD of lending company5 lacs to 25 lacs Imprisonment upto 6 monthsContdNot applicable to Loans to MD or WTDEmployee loanBy special resolutionIn ordinary course of business, provided interest is charged @ bank rate declared by RBI

Notification19 Nov 2013Sec 372A applicable till Sec 186 is notified

14 Feb 2014Sec 372A exempts loans, guarantees, security or investment by holing company to its wholly owned subsidiarySec 185 prohibits guarantee, security by holding company in respect of loan taken by subsidiary companyHence, till Sec 186 is notified, Guarantee, security provided by holding to its subsidiary in respect of loans made by banks or financial institutions shall be exemptedRulesFrom 12 Sept to 31 March 2014As per the interpretation, H Co cannot give loans to S Co

1 April 2014 onwardsAny loan made by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company is exempted from the requirements under this sectionProvided that such loans are utilised by the subsidiary company for its principle business activities

Investments (Sec 186)Investments to be made through not more than 2 layers of investment companiesExemptionsCompany incorporated outside IndiaFor the purpose of meeting the requirements under any law or under any rule or regulation

25,000 to 5 lacs Imprisonment upto 2 yearsCorporate Social ResponsibilityApplicabilityNet Worth >= 500 CrTurnover>= 1000 CrNet Profit >= 5 CrTo spend 2% of Avg NP of last 3 years3 Directors (incl. Independent Director)2 Directors allowedIndependent director not requiredDirectorAtleast one director to be resident in India for more than 182 days in a calendar yearMaximum directorships = 20 companies (max 10 public companies)Previously 15 public companies (Pvt companies excluded)

Disqualification of DirectorConvicted of any offence and sentenced to imprisonment for 7 years or moreConvicted of any offence and sentenced to imprisonment for not less than 6 months, and 5 yrs has not elapsed sinceConvicted of offence of dealing with related party transactions at any time during the preceding 5 yearsNot obtained Director Identification NumberIs a director of a company whether public or private which (Sec 274 (1) (g) of Companies Act.956)Has not filed annual accounts or returns for any continuing 3 yearsHas failed to repay on due date its deposit or interest thereon, or redeem it debenture or pay dividend for one year or moreRelated Party Transactions (sec 188)Arms-length transactionSec 188 not applicableNot an Arms-length transactionPaid up capital < 1 CrorePaid up capital > 1 CroreAll transactionsSPECIAL RESOLUTIONAll other transactionsBoard ResolutionExceeds 5% of T/o or 20% of NW, whichever is higherAppt at place of profit with remuneration > 1 lakh p.m.3. Remuneration for underwriting > 10 lakhsRPT (Sec 188) IssuesSpecial resolution (Votes for = 3 * votes against)Pvt Company with 2 members who are also directors?Interested directors cannot voteInterested shareholders cannot voteHence, transaction possible only if it is at arms lengthRPT definition different from AS 18, as in KMP and directors of holding, subsidiary, associate and their relativesSenior management of holding, subsidiary, associate and their relatives25,000 to 5 lacsAppointment of KMPPaid up share capital >= 5 croresMD/ CEO/ Manager/ WTDWhole-time Company SecretaryCFOCan be a KMP of only one company at the same time, except its subsidiary companyChairperson to be different from MD/ CEO, unless exempted by articles of associationTerm of MD = 5 years1 lac to 5 lacsRulesEvery listed company and every other public company having a paid-up share capital >= 10 Croresshall have whole-time key managerial personnel DepreciationComponent AccountingDepreciation based on useful lifeExample: P&MOld 4.75% i.e. 20 yearsNew 15 yearsChange in the useful lifeUsed = 15 yearsDepreciate over balance useful lifeCharge to retained earningsRotation of AuditorsProprietor = max 5 yearsFirm = max 2 tenors of 5 years eachCooling period of 3 yearsConfusion: what if resign in the 9th year?Auditor cannot provide other servicesOPC and small company excluded from rotationRulesall private limited companies having paid up share capital of rupees twenty crore or more;

OR

having public borrowings from financial institutions, banks or public deposits of rupees fifty crores or more

Part IX of 1956 ActSec 366 to Sec 374 of 2013 Act corresponds to Part IXPartnership to CompanyLLP to Company?LLP Act, 2008 no provisionPart IX no provisionAs per Companies Act, 2013 LLP, Partnership both can be converted into company

Acceptance of DepositsCompanies (Acceptance of Deposits) Rules, 1975Definition of deposit excludes Amount received from Director or relative of the director or from memberCompanies (Acceptance of Deposits) Rules, 2014Definition of deposit excludes Amount received from DirectorHence, amount received from relatives and members will be considered as public depositOther important pointsIt cannot issue securities (eg. debentures) to more than 200 in a year (private placement)Form Stakeholders relationship committee if security holders > 1,000Institute Vigil Mechanism if borrowings > 50 Crores from banks and financial institutionsExemption from appointment of Women Director and Small Shareholder Director

Fraud (sec 447)any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive,to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss;Imprisonment upto 10 years fine upto 3 times the amountAlso considered fraudIf in any return, report, certificate, financial statement, prospectus, statement or other document, any person makes a statement,(a) which is false in any material particulars, knowing it to be false; or(b) which omits any material fact, knowing it to be material

ThanQ?Anand BankaPartner,Talati & Talati

Email: anand.banka@talatiandtalati.comMob: 98673 53743