Companies bill 2012 by Chheda Sanjay Visanji

Kandivali Study Circle of WIRC of ICSI

Sun, 10th February 2013

Companies Bill 2012Companies Bill 2012Practical Aspects of Key Changes

1

AssumptionsAssumptions

� Covers Principles and not Procedures

� Implications of proposed Bill will differ once

◦ Rules are in place

◦ Many clauses not clear till the time details are

not “Prescribed” or “Specified” by authorities

Chheda Sanjay Visanji 2

not “Prescribed” or “Specified” by authorities

� Clause No. and Headings on each slide are merely

for broad understanding and maintaining flow

� Presentation focuses on Key Changes; Provisions

which are similar in “Act and Bill” are not

considered for discussion

HistoryHistory

� Companies (Amendment) Bill, 2003 introduced in

2003

� An Expert committee constituted in 2004

� On 31st May 2005 the Expert Committee

submitted its report


� But Bill didn’t see light of the day

� Companies Bill, 2008 lapsed due to dissolution of

the 14th Lok Sabha

� Government reintroduced Companies Bill, 2008

as The Companies Bill, 2009

3

HistoryHistory

� On 3rdAugust, 2009 MCA introduced Companies Bill, 2009 in Lok Sabha

� The 2009 Bill was referred to Parliamentary Standing Committee on Finance which gave its report on 31st August, 2010.

� In view of numerous amendments to the


� In view of numerous amendments to the Companies Bill 2009 arising out of the recommendations of the Parliamentary Standing Committee on Finance and suggestions of the stakeholders, the Central Government withdrew the Companies Bill 2009 and introduced a fresh bill – The Companies Bill 2011.

4

HistoryHistory

� The Companies Bill, 2011 was also referred to the

Standing Committee on Finance in 2012

� The Standing Committee Report came on 26 June

2012

� Based on the Standing Committee‘s

recommendations, the Bill was amended and


recommendations, the Bill was amended and

introduced as the Companies Bill 2012.

� The Bill is passed by Lok Sabha and has been

introduced in the Rajya Sabha

[Bill expected to clear in RS in February 2013

before Budget Session]

5

What are the ChangesWhat are the Changes� A drive to make it simple

� Financial Statement covered by ScheduleAct / Bill Schedule

1956 VI

1997 XII

2012 III


� Word “Prescribed” and “Specified” appear almost

in every other clauseParticulars Act Bill

No. of Clause 658 470

Use of word “Prescribed” 219 434

Use of word “Specified” 405 256

% to Clauses 94.83% 146.81%

What are the ChangeWhat are the Change

� The Companies Bill 2012 contains 29 Chapters, 7

Schedules, 470 clauses as against the Companies

Act, 1956 which consists of 658 sections under 13

Parts and 15 schedules.

� Bill is trying to

◦ Cover certain issues which SEBI was regulating


◦ Cover certain issues which SEBI was regulating

through Listing Agreement

◦ Taking disciplinary rights from other Institutes

◦ Unrequired move to define terms which were

already defined in AS

Some New ConceptSome New Concept

� Right issue norms applicable to Private Co.

� One Person Company, Small Co., Dormant Co.

� Stricter Norms for CSR

� Rotation of Auditor / Independent Director

� Transfer of Shares to IEPF


� Transfer of Shares to IEPF

� Formation of NFRA

� CFO /Whole time Director included in KMP

� Formation of NCLT &AppellateTribunal

� Change in Depreciation concept

� Electronic mode accepted / encouraged

Some New DefinitionsSome New Definitions

� Accounting Standard

� Arm’s length transaction

� Subsidiary / Associate Company

� Control

� Chartered Accountant

Independent Director


� Independent Director

� Related Party

� Remuneration

[Revised sch. VI was very clear that terms notdefined will take meaning from AS. But Bill and ASare in conflict]

Clauses of BillClauses of Bill

No Chapter

No. of

Clauses

1Preliminary 2

2Incorporation of Company and Matters Incidental Thereto 20

3Prospectus and Allotment of Securities 20

4Share Capital and Debentures 30

5Acceptance of Deposits By Companies 4


6Registration of Charges 11

7Management and Administration 35

8Declaration and Payment of Dividend 5

9Accounts of Companies 11

10Audit and Auditors 10

11Appointment and Qualifications of Directors 24

12Meetings of Board and Its Powers 23


No Chapter

No. of

Clauses

13Appointment and Remuneration of Managerial Personnel 10

14Inspection, Inquiry and Investigation 24

15Compromises, Arrangements and Amalgamations 11

16Prevention of Oppression and Mismanagement 6

17Registered Valuers 1

Removal of Names of Companies From The Register of


18

Removal of Names of Companies From The Register of

Companies 5

19Revival and Rehabilitation of Sick Companies 17

20Winding Up 96

21Companies Authorised to Register Under This Act 13

22Companies Incorporated Outside India 15

23Government Companies 2


No Chapter

No. of

Clauses

24Registration Offices and Fees 9

25Companies to Furnish Information Or Statistics 1

26Nidhis 1

27National Company Law Tribunal and Appellate Tribunal 28

28Special Courts 12


29Miscellaneous 24

CS in Practise CS in Practise –– Increased scopeIncreased scope

� While Incorporation of Co. – Declaration by CS

that all the requirements of this Act and rules are

complied with [7(1)]

� Annual Return of every co. to be signed by CS or

CS in practise [92(1)]

Certificate for correctness and adequacy of annual


� Certificate for correctness and adequacy of annual

return of Public Co. or Co. having capital or

Turnover as may be prescribed [92(1)]

� Listed Co. and Co. belonging to prescribed class

to have Secretarial Audit Report [204(1)]

Public Co. [2(71)]Public Co. [2(71)]

� Means a Co. which is not Private Co.

� Has a minimum paid up share capital of five lac or

higher amount as prescribed

Provided Co. which is subsidiary of Public Co. shall be

deemed to be Public Co. for purpose of Act even when

such Co. continues to be Private Co. in its article


such Co. continues to be Private Co. in its article

[Similar to old section 43A’s Deeming Provision]

Small Co. [2(85)]Small Co. [2(85)]

� ‘‘small company’’ means a private Co.

◦ with paid-up share capital of which does not exceed

fifty Lakh rupees or such higher amount as may be

prescribed which shall not be more than five Crore

rupees; or

◦ turnover of which as per its last profit and loss


◦ turnover of which as per its last profit and loss

account does not exceed two Crore rupees or such

higher amount as may be prescribed which shall not

be more than twenty Crore rupees:

One Person Company [3 (1)]One Person Company [3 (1)]

� New concept of incorporation of Company with

only one person as a member

� Prior written consent of other person in

Prescribed format in the event of death or

incapacity of first person (only member of OPC)

to be filed with Registrar


to be filed with Registrar

� Many consequential changes for OPC, like Board

Meeting, Annual General Meeting, Notice of Board

/ General Meeting

� OPC to have only one director

� OPC not required to have AGM

Dormant Co. [455]Dormant Co. [455]

� Often Co. are made for future purpose

� No significant activities in such Co. till

commencement of actual project

� Such Co. termed as Dormant Co.

� Certain relaxation in procedures for such Co.


� Certain relaxation in procedures for such Co.

Small / OPC / Dormant Co. Small / OPC / Dormant Co. -- BenefitsBenefits

� Need not prepare Cash Flow [Though as per AS

may be required to prepare]

� One meeting of the Board of Directors in each

half of a calendar year and the gap between the

two meetings is not less than ninety days:


Officer who is in default [2(60)] Officer who is in default [2(60)] � means any of the following officers of a company, namely:—� (i) whole-time director; (ii) key managerial personnel; (iii) where there is no key managerial personnel, such director or directors as specified by the Board in this

behalf and who has or have given his or their consent in writing to the Board to such specification, or all the directors, if no director is so specified;

� (iv) any person who, under the immediate authority of the Board or any key managerial personnel, is charged with any responsibility including maintenance, filing or distribution of accounts or records, authorises, actively participates in, knowingly permits, or knowingly fails to take active steps to prevent, any default;

� (v) any person in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act, other than a person who gives advice to the Board in a professional capacity;

� (vi) every director, in respect of a contravention of any of the provisions


� (vi) every director, in respect of a contravention of any of the provisions of this Act, who is aware of such contravention by virtue of the receipt by him of any proceedings of the Board or participation in such proceedings without objecting to the same, or where such contravention had taken place with his consent or connivance;

� (vii) in respect of the issue or transfer of any shares of a company, the share transfer agents, registrars and merchant bankers to the issue or transfer;

Promoter [2(69)] Promoter [2(69)]

� “promoter” means a person—

� (a) who has been named as such in a prospectus or is

identified by the company in the annual return referred

to in section 92; or

� (b) who has control over the affairs of the company,

directly or indirectly whether as a shareholder, director


directly or indirectly whether as a shareholder, director

or otherwise; or

� (c) in accordance with whose advice, directions or

instructions the Board of Directors of the company is

accustomed to act:

� Provided that nothing in sub-clause (c) shall apply to a

person who is acting merely in a professional capacity;

Memorandum of Asso. [4 (1)]Memorandum of Asso. [4 (1)]

Present Object clause of MoA had break up into

◦ Main Object

◦ Objects incidental or ancillary

◦ Other Objects

With Bill, Object divided into


With Bill, Object divided into

� objects to be pursued on incorporation (main

objects) and

� matters necessary for furtherance of the main

objects

Entrenchment Provision [5(3)]Entrenchment Provision [5(3)]

� Article of Association may have Entrenchment

Provision

� Entrenchment Provision can be incorporated

◦ at the time of incorporation, or later

◦ by private company, if all members agree


◦ by private company, if all members agree

◦ By public company, by Special Resolution

� Such Entrenchment Provision provide that

“Specified” provisions of the Article can be

amended only if conditions / procedures are more

restrictive

Incorporation of Company [7]Incorporation of Company [7]

� Declaration by professional engaged in formation ofCo. to the effect that all the provisions of Act andrules there under are complied with

� An affidavit from the subscribers that they are

◦ not convicted of any offence in connection withforming or managing company

◦ or not found guilty of any fraud or misfeasance in


◦ or not found guilty of any fraud or misfeasance inlast 5 years

� Co. having share capital shall not commence businessor exercise borrowing power unless – director filesdeclaration with Registrar that every subscriber haspaid value of shares agreed [11]

[Applicable to all companies now]

Disclosure Requirements [12 and 60]Disclosure Requirements [12 and 60]

� In case of change in the name of the Company,

fact must be disclosed on business letters, bill

heads [12]

� Where any notice, advertisement, or any business

letter, billhead or letter paper of a Co. contains

amount of the authorised capital of Co., same


amount of the authorised capital of Co., same

shall also contain a statement, in an equally

prominent position and in equally conspicuous

characters, amount of subscribed and paid-up

capital [60]

Alteration to Object of Issue [13]Alteration to Object of Issue [13]

� In case, if company proposes to amend Object of

Issue Proceeds after raising money from public, it

can be done by Special Resolution and

◦ Notice of said resolution along with justification

in two newspapers

◦ Exit option to be given to dissenting


◦ Exit option to be given to dissenting

shareholders

Prospectus [26]Prospectus [26]

� Requirements of Part I and II of Schedule II of Act

are covered in clause 26 of the bill

� Some additional matters which are required to be

disclosed in Prospectus

◦ Source of Promoter’s Contribution


� Report by Auditors on Assets & Liabilities not

earlier than 180 days before issue of prospectus

[earlier limit was 120 days]

Shelf Prospectus [31 (1)]Shelf Prospectus [31 (1)]

� Currently PFI, PSB and Scheduled Banks are

allowed to file Shelf Prospectus

� Bill empowers SEBI to prescribe the classes of

companies which can file Shelf Prospectus

� Validity of one year which shall commence from

date of opening of first offer of securities


date of opening of first offer of securities

Utilisation of Share Premium [52(3)]Utilisation of Share Premium [52(3)]

Purposes Act

Proposed in Bill

Prescribed

Co.

Other

Co.

Issue of fully paid equity shares as bonus shares Yes Yes Yes

Issue of fully paid preference shares as bonus shares Yes No Yes

Writing off preliminary expenses of the company Yes No Yes


Writing off equity share issue expenses Yes Yes Yes

Writing off preference share issue expenses Yes No Yes

Writing off debenture issue expenses Yes No Yes

Providing for premium payable on redemption of

preference shares/debentures Yes No Yes

Buy-back of its own shares or other securities Yes Yes Yes

Share can’t be issued at Discount [53]Share can’t be issued at Discount [53]

� Any shares issued at discount would be void

� Only exception to this clause is “Sweat Equity”

� Punishment for violations are as under:

Clause 53 (3) Min Max


Company punishable with fine > 1 Lac < 5 Lac

Every Officer in default,

imprisonment

< 6

months

Officer in default, Fine > 1 Lac < 5 Lac

Pref. Shares for Infra. Project [55]Pref. Shares for Infra. Project [55]

� In line with existing Act, Bill also has cap for

maximum term of 20 years for Preference Shares.

� However Company can issue Pref. Shares for

longer term for Infrastructure Projects

� Relaxation given not only to Infrastructure

Companies but all Companies, if such issues is for


Companies but all Companies, if such issues is for

Infrastructure Projects

� Infra. Projects / Facilities covered in Schedule VI of

Bill

Bonus Shares [63]Bonus Shares [63]

� Bill has new clause which provides for issue of

fully paid bonus shares out of

◦ Free Reserves or Securities Premium Account

or Capital Redemption Reserve

� Certain other conditions before Bonus Issue


◦ Authorised by AoA; after recommendation of

Board, authorised in GM; Co. not defaulted on

int. / prin. of FD or debt; not defaulted on

employee statutory dues; no o/s. partly paid

shares; not in lieu of dividend

◦ Such conditions as may be prescribed

Reduction of Share Capital [66]Reduction of Share Capital [66]

� Co. after Special Resolution, subject to

confirmation byTribunal

� Reduce Share Capital;Alter MoA

� No reduction of Share Capital, if Co. is in arrears

in repayment of Deposits or interest thereon


� Auditor’s Certificate that accounting treatment

proposed by Co. Is in line with AS

� Any violation of clause, Co. punishable with fine

not less than five Lakh which may exceed to 25

Lakh

Deposits [73 to 76]Deposits [73 to 76]

� After commencement of this Act, no Co. to invite,

accept or renew deposit except as provided in

this chapter

� A public company, having such net worth or

turnover as may be prescribed, may accept

deposits from persons other than its members


deposits from persons other than its members

subject to compliance with the requirements

� All existing deposits to be repaid within one year

from commencement of bill or respective

repayment due date, whichever is earlier

Deposits [73 to 76]Deposits [73 to 76]

� Credit Rating to be obtained

� From new deposits, 15% of current and next

year’s repayment to be kept in separate Bank A/c.

called as “Deposit Repayment Reserve Account”

� Co. to provide Deposit Insurance as may be

prescribed


prescribed

Annual Return [92]Annual Return [92]� Apart from “Such other conditions as may be

prescribed” and existing Act’s requirement.

� Co. should give details of

◦ Its holding, subsidiary, associate companies

◦ Promoters, directors, KMP and changes therein

◦ Meetings of members, board and various committeealong with attendance


along with attendance

◦ Remuneration of Directors / KMP

◦ Penalties levied on Co., director, officer, etc

◦ Complete details of holding by FII, their name,address, countries of incorporation, % ofShareholder

� Data in Annual Return as on close of FY

Annual Return [92]Annual Return [92]

� Except OPC and Small Companies, Annual Return

to be

◦ signed by Director and Company Secretary

◦ And if there is no Company Secretary, then

Company Secretary in Practise


� Annual Return of Listed Co. or Co. having paid up

capital and turnover as may be prescribed, shall be

certified by Practising Company Secretary stating

that Annual Return discloses facts correctly and

adequately and Co. has complied with provisions

General Meetings [96]General Meetings [96]

� First AGM to be held within 9 months from

closing of first financial year

� Statutory Meeting requirement done away

� AGM cant be held on National Holiday (earlier it

was Public Holiday)


� AGM to be held during business hours between 9

am to 6 pm

� Shorter notice of AGM, if 95% of shareholder give

consent [101]

General Meetings [96]General Meetings [96]

� Notice can be given through electronic mode

� Bill also recognises right to vote by electronic

mode

� Quorum for Public Co. meeting [103(1)(a)]

No. of Members Quorum


� Quorum for Private Co. is 2 [103(1)(b)]

No. of Members Quorum

Not exceeding 1,000 5

1,000 to 5,000 15

More than 5,000 30

Proxies [105]Proxies [105]

� Stringent terms for Proxies

� Person can not represent exceeding 50 members

and such number of shares as may be prescribed

� Co. should not, at it’s own expense, send any

invitation to any member to appoint a person or

one of number of persons to be appointed as


one of number of persons to be appointed as

Proxy

� Every officer who is party to such offence, shall be

punishable with fine which may extend to Rs. 1

Lac

Secretarial Standards [118(10)]Secretarial Standards [118(10)]

� Bill requires every company to observe Secretarial

Standards specified by ICSI in respect of Board

and General Meeting

[Oxford Dictionary defines “Observe - fulfill or

comply with”]

[Secretarial Standards were recommendatory for


[Secretarial Standards were recommendatory for

CS]

Dividend [123]Dividend [123]

� No requirement of transfer to General Reserve

� If Co. has failed to comply with provi. of

acceptance / re-payment of Deposits, Co. cant

declare dividend


Depreciation [123(2)]Depreciation [123(2)]

� Depreciation concept has changed from Rates to

Useful Life

� Old Sch. XIV used to give minimum rate of

depreciation which every corporate was suppose

to provide

New Sch. II has concept of Useful Life. Bill only


� New Sch. II has concept of Useful Life. Bill only

provides Useful Life of various class of Assets

� Separate rates for Double / Triple Shift done away

� For Double Shift, Dep. to be increased by 50%

� ForTriple Shift, Dep.To be increased by 100%

Depreciation [123 (2)]Depreciation [123 (2)]

Co. divided into three categories

� :Companies which comply with specifiedframework of accounting standards which canapply different useful life estimates than given inSchedule with appropriate disclosures

� Companies which are regulated under some


� Companies which are regulated under someAuthority set up under an Act of Parliament or byCentral Government – to use the rates ofdepreciation as specified by respective regulatorand

� other companies – which require to follow theuseful lives not greater than schedule II

Investor Education and Protection Fund [125]Investor Education and Protection Fund [125]

� So far, Co., was required to transfer inter alia,

Unpaid Dividend after 7 years to IEPF

� Now shares pertaining to such dividend also to be

transfer to IEPF


Financial Statement [2(40)]Financial Statement [2(40)]

� In addition to BS, Statement of P & L, Bill has

defined following additional things in definition of

FS

� Cash flow now covered in definition of FS

� Statement of change in Equity, if any


� Any explanatory note annexed to or forming part

of aforesaid statement

[OPC, Small Co. and Dormant Co. need not prepare

Cash Flow]

Uniform Accounting Year [2(41)]Uniform Accounting Year [2(41)]

� All companies to have uniform Accounting Year, i.

e. Financial Year ending on 31st March

� Companies having foreign holding / subsidiary

companies REQUIRED TO FOLLOW DIFFERENT

FY can apply to Tribunal. No exemption for

Foreign JV or Associate


Foreign JV or Associate

� Co. has to either prepare two set or apply to

Tribunal

� Tribunal if satisfied, can give exemption from

following aforesaid requirement

Uniform Accounting Year [2(41)]Uniform Accounting Year [2(41)]

� These requirement may seem to be simplified,

would create pressure on Chartered Accountants,

Independent Directors and Practising Company

Secretaries

� AS 21, 23 and 27 used to give relief to companies,

for separate financial year which now has been


for separate financial year which now has been

taken away

Accounts [128]Accounts [128]

� Books to be kept on accrual basis

� Double entry system of accounting

� Books can be in Electronic form

� In case, Server of Co. is o/s. India, but co is able to

access, modify and manage data from India [MCA


access, modify and manage data from India [MCA

should consider the same as compliance of

requirement]

CFS [129(3)]CFS [129(3)]

� Earlier, Act didn’t required Consolidated Financial

Statement (CFS); only listing agreement required

CFS

� But Bill mandates CFS for ALL companies

� In contrast to AS 21, Bill requires CFS even if Co.

doesn’t have any subsidiary but only Associate or


doesn’t have any subsidiary but only Associate or

JV

Associate [2(6)]Associate [2(6)]

� Bill has definedAssociate overriding AS 23

� Both define Associate as Co. in which other Co.

has Significant Influence

AS 23 Bill

Significant influence is the power to

participate in the financial and/or

“significant influence” means

control of at least twenty per cent.


[Associate where one can control 20% of business

decisions; will change many equations]

participate in the financial and/or

operating policy decisions of the

investee but not control over those

policies.

control of at least twenty per cent.

of total share capital, or of business

decisions under an agreement;

Subsidiary [2(87)]Subsidiary [2(87)]

� Definition of “subsidiary company”

� to cover company wherein ‘control’ can be

exercised by holding more than 50% of the total

share capital

� unlike present control of equity or voting power.


� This will need change of capital structures by any

companies which have issued preference shares or

shares with differential votes.

CFS and other requirements [129]CFS and other requirements [129]

� Co. which has subsidiary / JV / Associate has to

◦ Prepare its stand-alone financial statements [Clause129(1)]

◦ Prepare CFS including all subsidiaries, associates andjoint ventures (whether in India or outside) [Clause129(3)]

◦ Prepare a summary statement for all its subsidiaries,


◦ Prepare a summary statement for all its subsidiaries,associates and joint ventures of the salient featuresof their respective financial statements [Proviso toclause 129(3)]

◦ Submit the standalone financial statements ofsubsidiary(ies) outside India to the Registrar[Clause 137(1)]

CFS and other requirements [129]CFS and other requirements [129]

� Authorities should check need for Summary

Statement and copies of individual subsidiaries

when Individual as well as CFS are given


CFS CFS –– Other Issues [129]Other Issues [129]

� AS 21, 23 and 27 prescribe manner of

consolidation

� However provisio to 129 (3) states that manner

of consolidation will be prescribed [Unless these

methods are in line with already existing AS, will

add to confusion]


add to confusion]

� CFS even at Intermediate Holding Level will lead

to increased cost of compliance

[Global practise is that if ultimate parent Co.

consolidates, the intermediate holding Co. should

not consolidate]

ReRe--opening of FS / Board’s Report [130]opening of FS / Board’s Report [130]

� Learning from mistakes of certain big accounting

fraud unearthed, Bill allows to re-open / revise FS

and Board’s Report

� On application by CG, IT Authorities, SEBI and

other statutory regulatory body; in following

circumstances, re-opening of books permitted:


circumstances, re-opening of books permitted:

◦ (i) the relevant earlier accounts were prepared in a

fraudulent manner; or

◦ (ii) the affairs of the company were mismanaged

during the relevant period, casting a doubt on the

reliability of financial statements

Revision of FS / Board’s Report by Co. [131]Revision of FS / Board’s Report by Co. [131]

� If it appears to the directors of a company that—

◦ (a) the financial statement of the company; or

◦ (b) the report of the Board,

� do not comply with the provisions of section 129

or section 134


or section 134

� Co. can make application to Tribunal [in such form

and manner as may be prescribed]

� Before passing order, Tribunal shall consider

representation by SEBI and other authorities

NFRA [132]NFRA [132]

� Wide powers to National Financial ReportingAuthority [NFRA]

� Formulation / laying down of Accounting andAuditing policies and standards

� Monitor and enforce compliance of AS

� Oversee quality of services of professional (only


� Oversee quality of services of professional (onlychartered accountant in purview of NFRA)

� NFRA to investigate suo moto or on ref. by CG

� No other Institute would proceed with any action,once NFRA has initiated proceedings

� NFRA not body of professional; may insist CheckBoxTypeAudit

Board’s Report [134 (3)]Board’s Report [134 (3)]

To include

� Extract of Annual Return; No. of Board Meetings;

� Director’s Responsibility Statement

� Declaration by ID;

� Listed Co. and Specified Co. to give company’s policy on directors’ appointment and


policy on directors’ appointment and remuneration including criteria for determining qualifications, positive attributes, independence of a director

� Explanation to every qualification of CA / CS

� Details of Loan, Guarantee, Investment in 186

Board’s Report to include [134 (3)]Board’s Report to include [134 (3)]

� State of Co.’s Affairs

� Proposed transfer to Reserves; Dividendrecommended

� Material changes / Commitment affecting financialposition of Co.

� Conservation of Energy;


� Conservation of Energy;

� Statement on development / implementation ofRisk Management Policy

� Policy developed / implemented for CSR

� Listed and Specified Co. to give formal annualevaluation of Board’s own performance

CSR [135]CSR [135]

� Corporate Social Responsibility (CSR)

� every company having

◦ net worth of Rs. 500 Crore or more or

◦ turnover of Rs. 1000 Crore or more or

◦ net profit of Rs. 5 Crore or more


◦ net profit of Rs. 5 Crore or more

◦ during any financial year shall constitute the

Corporate Social Responsibility Committee

� Bill mandates that Co. to spend at least 2% of

average net profit of immediately preceding 3

years

Internal Audit [138]Internal Audit [138]

� Prescribed class of Co. to appoint an Internal

Auditor to conduct internal audit of function and

activities of Co.

� CG may by rules prescribe manner and interval

in which internal audit shall be reported to Board

Generally it is Audit Committee who decides and


� Generally it is Audit Committee who decides and

to whom Internal Auditor report

� Can be External Professional or Internal

Department

Auditors [139]Auditors [139]

� Auditor to be appointed for a term of 5 years, tobe ratified in AGM each year

� Cooling off period of 5 years for

◦ Individual CA after 1 such term of 5 years

◦ Firm of CA after 2 such term of 5 years

� Earlier Appointment was from conclusion of AGM


� Earlier Appointment was from conclusion of AGMto conclusion of next AGM

� Incoming Firm and Outgoing Firm which hascompleted 2 terms of 5 years, should not have anycommon partner

� Co. may specify by way of AoA for rotation ofauditing partner


� Banking sector already had such rotation, every 5

years

� Code of Ethics of ICAI specified rotation of audit

partner after 7 years with cooling period of 2 year

� Rotation of Audit Firm to increase Cost of

Compliance


Compliance

� Each new firm to spend more time to understand

business, controls, systems and process of Co.

� Globally, various studies have shown that Rotation

of Auditor doesn’t serve purpose for which it is

framed


� Generally it is Audit Committee which considers

and appoints Auditor

� Due to this rotation, freedom of Audit Committee

to decide which audit firm suits them best is taken

away

Rotation would change equations of Audit FIrms


� Rotation would change equations of Audit FIrms

� Limit of Statutory Audit of 20 Co. per person

� No Special Resolution when new Auditor in place

of Auditor whose term has got over

Eligibility of Auditor [141]Eligibility of Auditor [141]

� Till the time, term “Relative” is not defined, no

clarity

� Certain eligibility criteria also extend to “Relative”

◦ Not being Indebted to Co. or holding or

subsidiary


◦ Not being shareholder of Co. or holding or

subsidiary

◦ Not in employment of any director or KMP of

Co.

◦ Not having any business relationship with Co.

Remuneration of Auditor [142]Remuneration of Auditor [142]

� The remuneration under sub-section (1) shall, in

addition to the fee payable to an auditor, include the

expenses, if any, incurred by the auditor in

connection with the audit of the company and

any facility extended to him.


Duties of Auditor [143]Duties of Auditor [143]

� Bill proposes that Auditor should report to CG if

he has any reason to believe that fraud committed

by officer or employees against Co.

� It seems, this is out of scope duty casted on

auditor without adequate right or power

Even materiality concept is not added to this


� Even materiality concept is not added to this

requirement, which means each and every fraud

by officer / employee has to be reported to CG

Auditor Others Services [144]Auditor Others Services [144]

� Auditor of Co., directly or indirectly, to Co. or itsholding or subsidiary shall not provide followingservices

� (a) accounting and book keeping services;

� (b) internal audit;

� (c) design and implementation of any financial information system;


system;

� (d) actuarial services;

� (e) investment advisory services;

� (f) investment banking services;

� (g) rendering of outsourced financial services;

� (h) management services; and

� (i) any other kind of services as may be prescribed:

Auditor [143 Auditor [143 -- 145]145]

� Scope of Auditor’s duties and reporting has

increased

� Now auditor is required give his observations or

comments on financial transactions or matters

which have any adverse effect on the functioning

of the company [143 (3) (f)]


of the company [143 (3) (f)]

� Giving comments / observations on financial

transaction and their propriety

� Qualification, observations or comments on FS

shall be read before the Co. in GM

Duties of Auditor [146]Duties of Auditor [146]

� Attending AGM was right of Auditor; now duty of

Auditor unless exempted by Company

Auditor can attend AGM through any

representative who should be qualified to be

appointed as an Auditor


Liability of Auditor [147]Liability of Auditor [147]

� Entire firm is liable for Misconduct of any audit

partner.

� Even LLP structure doesn’t absolve other partners

from Liabilities

� Bill allows class of shareholders to claim damages

or compensation through Class Action Suit


or compensation through Class Action Suit

� Penalties seem to be too heavy as against

deterrent

Directors [149]Directors [149]

� Prescribed Co. to have at least one woman

director

� Maximum no. of directors increased from 12 to15

� One director of Co. should have stay in India for

at least 182 days


� Every listed Co. to have 1/3rd Independent

Directors (ID)

� For prescribed class of Co. CG may prescribe

minimum no. of ID

� Director who cant be elected can no longer be

appointed as additional director

Independent Directors [149 (6) ]Independent Directors [149 (6) ]

� Some difference in definition of ID as comparedto clause 49 of listing agreement

◦ Board to opine on whether ID is a person ofintegrity or has relevant expertise orexperience

◦ ID may not remain independent, if his / her


◦ ID may not remain independent, if his / herrelative have pecuniary relationship with Co.

◦ ID possesses such other qualifications as may beprescribed

� ID not liable to retire by rotation

� ID not counted for Total No. of Directors liable toretire by Rotation

ID ID –– Other Issues [149 (9)]Other Issues [149 (9)]

� SEBI on one hand considers ID as employee for

ESOP; Bill says No to ESOP to ID;

� No clarity on ESOP already granted

� As per data available in public domain, some of the

large corporate have granted ESOP to ID as

under:


under:

Company

Total number of options granted to

IDs

ITC 50,000

Larsen & Toubro 60,000

Dr Reddy’s 16,800

HDFC 200,000

M&M 175,000

Tenure of office of ID [149 (11)]Tenure of office of ID [149 (11)]

� Tenure of office of ID restricted to 2 terms of 5consecutive years

� Cooling off period of three years

� During Cooling off period, ID not to be associatedwith Co. in any other capacity, directly orindirectly


indirectly

� Bill also includes Code of Conduct in Sch. IV

◦ Schedule IV – “Code for IndependentDirectors”

◦ Code states that ID shall uphold ethicalstandards of integrity and probity (toojudgemental)

Liability of ID / NED [149 (12)]Liability of ID / NED [149 (12)]

� Liability of ID and NED is distinguished from rest

of the board and bill states that

� ID and NED shall be held liable, only in respect of

such acts of omission or commission by a company

which had occurred with his knowledge, attributable

through Board processes, and with his consent or


through Board processes, and with his consent or

connivance or where he had not acted diligently

[ID / NED should explore getting insurance cover,

which covers them from Liabilities]

Director [165 Director [165 -- 167]167]

� Not more than 20 Co.

� Out of which No. of Public Co. cant exceed 10

[For this clause, Private Co. which is subsidiary of

Public Co. would be counted as Public]

� Members may by special resolution reduce


� Members may by special resolution reduce

Maximum No. of Co. where their Director can

become Director

� Office of a director shall become vacant in case

(b) he absents himself from all meetings of Board held

during a period of twelve months with or without

seeking leave of absence of the Board [167]

Resignation of Director [168]Resignation of Director [168]

� Director may resign by giving a notice in writing

to Co.

� Board shall on receipt of such notice take note

� Co. shall intimate the Registrar

� Provided that a director shall also forward a copy


� Provided that a director shall also forward a copy

of his resignation along with detailed reasons for

the resignation to the Registrar within thirty days

of resignation

� Resignation shall take effect from date on which

notice is received by Co. or date, if any, specified

in the notice, whichever is later:

Audit Committee (AC) [177 (1)]Audit Committee (AC) [177 (1)]

� Earlier listed Co. (clause 49 of listing agreement)

and public Co. having paid-up capital not less than

5 Crores (Section 292A of the Act) were required

to constitute AC

� Now bill requires all listed Co. and class of Co. as

may be prescribed to have AC


may be prescribed to have AC

� Bill is in conflict to clause 49, specifies as under:

◦ AC to have majority of ID

◦ Chairman of AC need not be ID

◦ Majority of members of AC should be financially

literate

Nomination and Remu. Comm. [178(1)]Nomination and Remu. Comm. [178(1)]

� Nomination and Remuneration Committee

(NRC) to be constituted by each listed Co. and

class of Co. as may be prescribed

� Scope of NRC

◦ Formulate policy and recommend to Board on

Co.’s policies pertaining to remuneration of


Co.’s policies pertaining to remuneration of

directors, KMP, other employees, criteria for

determining qualifications, positive attributes

and independence of directors

Loan / Investment by Co. [186]Loan / Investment by Co. [186]

� Co. can give loan, guarantee, security or invest notexceeding higher of

◦ 60% of its paid-up share capital, free reservesand securities premium or

◦ 100% of its free reserves and securitiespremium


premium

� Where aforesaid limits are exceeding, Co. to takeprior approval by Sp. Resolution

� Private Company also included; No exemptioneven to Holding – Subsidiary

� No Loan or Inv. or guarantee to be given If defaultin Deposit or Interest thereon

Loan / Investment by Co. [186]Loan / Investment by Co. [186]

� In FS, Co. has to give full particulars of loans given,investments made, guarantees given or security providedand PURPOSE for which it was made, given or provided

� Consent of all Board members who are present inmeeting

� If such loan, Inv., guarantee or security is exceeding 60% or100 % limit, Prior Approval of PFI, if there is default in


100 % limit, Prior Approval of PFI, if there is default inpayment of Principal / Interest

� Co. has to charge interest not lower than prevailing yieldof 1, 3, 5 or 10 year Govt. Security closet to tenure of loan

� Clarity needed for Existing Interest Free Loans given

� This would create issue in Domestic / InternationalTransfer Pricing

Investment by Company [186 (1)]Investment by Company [186 (1)]

� Bill mandates that Co. can invest only through twolayers of investment companies, except

◦ Where Co. acquires a foreign Co. which hasinvestment subsidiaries beyond two layers

◦ Investment Subsidiaries which are required to meetrequirements of any other law, rules or regulation

This clause is anti investment and too much of


� This clause is anti investment and too much ofpolicing type

� No clarity in Bill for existing corporate structureswhich are multi level

� If mandatory for even old Co. structures, no transitionperiod is defined

Example of Multi Layer Corp. StructureExample of Multi Layer Corp. Structure

IDFC

IDFC Securities

IDFC-SSKI

Stock

Broking

IDFC Asset

Management

IDFC

Investment

Advisors

IDFC Project

Equity

IDFC

Project

IDFC

Capital

Dheeru

Powergen

IDFC

Finance IDFC PE

100%100% 100% 100%

51% 100% 100% 100% 100%

100%

IDFC pension

fund Mgmt

IDFC Inv

Advisors

(Mauritius)

100%


Broking Advisors

IDFC

Funds of

Funds

IDFC

General

Partner

s

Emerging

Mkt PE

Fund LP

IDFC

Capital

(Singapor

e)

IDFC Trustee Co

JVs

IDC Karnataka Uttaranchal

Infra

Developmen

t

Delhi

Integrated

Multi Modal

Transit

Systems

49.5%

50.44%

50%

100%100%100%

Other WoS

Subsidiary

IDFC PPP Trustee.shp

IDFC AMC Trustee

100%

100%

100%

IDFC

Capital

USA

100%

Related Party [2(76)]Related Party [2(76)]

� Related Party definition to cover

◦ a public company in which a director or

manager is a director or holds along with his

relatives, more than two per cent. of its paid-up

share capital [2(76)(5)]

◦ (ix) such other person as may be prescribed


◦ (ix) such other person as may be prescribed

[2(76)(ix)]

Relative [2(77)]Relative [2(77)]

� ‘‘relative’’, with reference to any person, means

any one who is related to another, if—

◦ (i) they are members of a Hindu Undivided Family;

◦ (ii) they are husband and wife; or

◦ (iii) one person is related to the other in such


◦ (iii) one person is related to the other in such

manner as may be prescribed

� Too many implications of definition of “Relative”

on eligibility of Auditor as well as ID

Related Party [188]Related Party [188]Without board consent and conditions as may be prescribed, Co.

shall not enter into any transaction with Related Party for

� (a) sale, purchase or supply of any goods or materials;

� (b) selling or disposing of, or buying, property of any kind;

� (c) leasing of property of any kind;

� (d) availing or rendering of any services;

� (e) appointment of any agent for purchase or sale of goods, materials, services or property;


materials, services or property;

� (f) such related party's appointment to any office or place of profit in the company, its subsidiary company or associate company; and

� (g) underwriting the subscription of any securities or derivatives thereof, of the company:

[Act did not cover “Leasing “ as transaction in Immovable Properties were not covered u/s. 297 of the Act]

Related Party [188]Related Party [188]

� Central Government approval done away

� “Cash at prevailing market price” is now suitably replaced for “Arm’s Length Transaction”

� Related Party Transactions are to be detailed in Board’s Report along with justification

� Penalty now extends to even Imprisonment


� Penalty now extends to even Imprisonment

� Related Party definition in conflict with AS 18

� Term “Relative” yet to be defined / prescribed

[Standing committee report has discussed that objective of AS is only Accounting whereas Bill has to ensure that person in control don’t take undue advantage]

Related Party [188]Related Party [188]

� Co. having paid up capital of not less than such

amount or transaction not exceeding such sums,

as may be prescribed

� Shall be entered after Prior Approval by Special

Resolution

[Not exceeding such sums, seems to be typo error.


[Not exceeding such sums, seems to be typo error.

Should have been “not less than amount as may be

specified”]

Managerial Personnel [196]Managerial Personnel [196]

� Applicable to ALL companies

� Maximum term to be appointed capped at 5 years

� Re-appointment cant be more than 1 year inadvance

� Age limit revised; Minimum age reduced from 25to 21 years and Maximum age increased to 70


to 21 years and Maximum age increased to 70years [GM can by Sp. Reso. Approve even whenage has exceeded 70 years]

� Board Report to disclose ratio of remunerationto each director to the median employee’sremuneration and such other details as may beprescribed [197 (12)]

Managerial Personnel [197]Managerial Personnel [197]

� Insurance taken by Co. on behalf of

� MD,WTD,CEO, CFO or CS

� for indemnifying any of them against any liability in

respect of

� negligence, default, misfeasance, breach of duty or


� negligence, default, misfeasance, breach of duty or

trust

� Premium of such insurance shall not be

considered as Remuneration payable to them

� If they are proved to be guilty, then shall be

treated as Remuneration

KMP [203]KMP [203]

� For class of Co., as may be prescribed shall have

following whole time KMP

◦ (i) managing director, or Chief Executive Officer or

manager and in their absence, a whole-time

director;

◦ (ii) company secretary; and


◦ (ii) company secretary; and

◦ (iii) Chief Financial Officer

� Whole time KMP shall not hold office in more

than one company except in its subsidiary Co.

� But whole time KMP can be director of other Co.

with permission of Board [203(3)]

Functions of CS [205]Functions of CS [205]

Functions of company secretary

� (a) to report to the Board about compliance with the

provisions of this Act, the rules made there under

and other laws applicable to the company;

� (b) to ensure that the company complies with the

applicable secretarial standards [SS];


applicable secretarial standards [SS];

� (c) to discharge such other duties as may be

prescribed.

Search and Seizure [209]Search and Seizure [209]

� Section 209 of Act prescribes Books of Accounts.Now Clause 209 of Bill has power to seize thosebooks

� Search and Seizure powers given to Registrars /Inspectors

� Search can be carried on


� Search can be carried on

◦ Company

◦ KMP

◦ Director,

◦ Auditor

◦ CS in practise (if Co. has not appointed CS)

SFIO [211]SFIO [211]

� Serious Fraud Investigation Office (SFIO) now

given statutory status by Bill

� SFIO is empowered to initiate investigation at

direction of CG

� SFIO has power to arrest


Investigations [213]Investigations [213]

Investigation into Company’s Affairs [213]

� On application toTribunal by

◦ Not less than 100 members of Co.

◦ Or members holding not less than 1/10th of

total voting power


total voting power

◦ Tribunal after considering case and giving Co., an

opportunity of being heard, can initiate

Investigation of affairs of Co.

Compromise, Arrangement, Amalgamation [230 Compromise, Arrangement, Amalgamation [230 –– 240]240]

� Compromises, Arrangements and Amalgamations arenow streamlined removing procedural issues

� Cross Border Merger permitted

� Holding of Treasury Shares pursuant to Court Ordernow prohibited

� Postal Ballot permitted mode of voting on Scheme

� On merging of Listed Co. with Unlisted Co.; exit


� On merging of Listed Co. with Unlisted Co.; exitoption to be provided to members of Listed Co.

� Persons holding 90% or more of the issued equityshare capital of a company by virtue of anamalgamation, share exchange, conversion ofsecurities or for any other reason, may now purchasethe minority shareholding of the company at a pricedetermined by a registered valuer


� Objection to any scheme can be raised by

◦ Shareholder with 10% or more shareholding or

◦ Person having o/s. debt of more than 5% of total

debt

� Additional documents to be submitted


� Additional documents to be submitted

◦ Valuation Report

◦ Compliance with AS

Simple procedure for Holding – WOS; Small Co.

without approval from NCLT


� Notification of Scheme to CG, IT, SEBI, Stock

Exchanges, CCI and other relevant regulators

� Within 30 days of receipt of notice, these agencies

to make representation; failing which to be

presumed that they don’t have any representation


SICA 1985 [230 (7)]SICA 1985 [230 (7)]

� The Sick Industrial Companies Act, 1985 (SICA)

which was earlier applicable only to Industrial Co.

is now made applicable to ALL Co.

� Criteria shifted for erosion of Net Worth to

capacity to repay Secured Creditors

Application can be done by Secured Creditor or


� Application can be done by Secured Creditor or

Co. itself

Rights of Shareholder [241 Rights of Shareholder [241 –– 245]245]

� Class Action Suit [collective lawsuit] can be filed

by group of shareholder in case of fraudulent

action by Co.

� Listed Co. may have one director elected by small

shareholders [small shareholder means one

holding shares not more than nominal value of Rs.


holding shares not more than nominal value of Rs.

20,000/-]

� Co. having more than 1,000 shareholders,

debenture holders or deposit holders shall form

Stakeholder’s Relationship Committee

Registered Valuers [247]Registered Valuers [247]Bill refers to Registered Valuers in various clauses like

� Further issue of share capital [Clause 62]

� Restriction on non-cash transactions involving directors [192]

� Compromises, arrangements and amalgamations [230]

� Purchase of minority shareholding [236]

� Submission of report by Company liquidator [281]


� Submission of report by Company liquidator [281]

� Declaration of solvency in case of proposal to wind up voluntarily [305]

� Power of Company liquidator to accept shares, etc., as consideration for sale of property of company [319]

However qualification, experience and process ofregistration of RV are yet to be prescribed

AGM Annual General Meeting MCA Ministry of Corporate Affairs

AOA Articles of Association MD Managing Director

BOD Board of Directors MOA Memorandum of Association

CA Chartered Accountant NBFC Non-Banking Finance Companies

CEO Chief Executive Officer NCLAT National Company Law Appellate Tribunal

CFO Chief Finance Officer NCLT National Company Law Tribunal

CG Central Government NED Non-Executive Director

Co. Company NFRA National Financial Reporting Authority

CS Company Secretary OPC One Person Company

CSR Corporate Social Responsibility PFI Public Financial Institution


CSR Corporate Social Responsibility PFI Public Financial Institution

DRR Debenture Redemption Reserve PSB Public Sector Bank

EGM Extra-Ordinary General Meeting RBI Reserve Bank of India

FY Financial Year ROC Registrar of Companies

GOI Government of India RV Registered Valuer

HUF Hindu Undivided Family SEBI Securities and Exchange Board of India

ID Independent Director SFIO Serious Fraud Investigation Office

IEPF Investor Education and Protection Fund SRC Stakeholders Relationship Committee

KMP Key Managerial Personnel WOS Wholly Owned Subsidiary

LLP Limited Liability Partnership WTD Whole Time Director

Thank You

P. RAJ & CO.Chartered Accountants

3/1218, Navjivan Society,


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3/1218, Navjivan Society,Lamington road,Mumbai 400 008

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