Companies Act, 2013

Key highlights and analysis

Significant changes
and implications
Contents
4 | Introduction
6 | Key definitions and concepts
10 | Setting up of a company
16 | Management and administration
18 | Directors
24 | Accounts and audit
30 | Dividend
32 | Compromises, arrangements and amalgamations
34 | Reial and re!a"ilitation of sic# companies
36 | Corporate social responsi"ility
3$ | %mplications on priate companies
40 | Other areas
44 | Sections notified till date and circulars or orders issued
Foreword
&!e long'a(aited Companies )ill 2013 got its assent in t!e *o# Sa"!a
on 1$ +ecem"er 2012 and in t!e Ra,ya Sa"!a on $ -ugust 2013. -fter
!aing o"tained t!e assent of t!e /resident of %ndia on 20 -ugust 2013,
it !as no( "ecome t!e muc! a(aited Companies -ct, 2013 12013 -ct2.
-n attempt !as "een made to reduce t!e content of t!e su"stantie
portion of t!e related la( in t!e Companies -ct, 2013 as compared to
t!e Companies -ct, 1036 11036 -ct2. %n t!e process, muc! of t!e
aforesaid content !as "een left, 4to "e prescri"ed5, in t!e Rules 134062
(!ic! are yet to "e finalised and notified. -s of t!e date of t!is
pu"lication, 00 sections !ae "een notified and a fe( circulars !ae
"een issued clarifying t!e applica"ility of t!ese.
7e are pleased to "ring you our ne( pu"lication, Companies -ct, 20138
Key !ig!lig!ts and analysis. &!is pu"lication "rings out t!e significant
c!anges proposed "y t!e 2013 -ct as compared to t!e 1036 -ct and our
initial analysis t!ereon. %t is pertinent to note t!at for t!e complete
understanding of t!e implications of arious sections of t!e 2013 -ct, t!e
related Rules (ill need to "e read (it!. &!ese Rules !ae "een opened
for pu"lic comments and consultation in tranc!es and are e9pected to "e
notified t!ereafter "y t!e end of t!is fiscal year.
&!e 2013 -ct introduces significant c!anges in t!e proisions related
to goernance, e'management, compliance and enforcement,
disclosure norms, auditors and mergers and ac:uisitions. -lso, ne(
concepts suc! as one'person company, small companies, dormant
company, class action suits, registered aluers and corporate social
responsi"ility !ae "een included.
7e !ope t!is pu"lication clearly e9plains t!e significant c!anges
and t!eir potential implications.
/(C %ndia
30t! ;oem"er, 2013
Introduction
Companies Act, 2013: A statistical snapshot
470
;um"er of sc!edules 8 <
Sections
;um"er of c!apters8 20
7
;um"er of sections8 4<0
29
Schedules
Chapters
&!e 1036 -ct !as "een in need of a
su"stantial reamp for :uite some time
no(, to ma#e it more contemporary and
releant to corporates, regulators and
ot!er sta#e!olders in %ndia.
7!ile seeral unsuccessful attempts
!ae "een made in t!e past to reise t!e
e9isting 1036 -ct, t!ere !ae "een :uite
a fe( c!anges in t!e administratie
portion of t!e 1036 -ct. &!e most recent
attempt to reise t!e 1036 -ct (as t!e
Companies )ill, 2000 (!ic! (as
introduced in t!e *o# Sa"!a, one of t!e
t(o =ouses of /arliament of %ndia, on 3
-ugust 2000. &!is Companies )ill, 2000
(as referred to t!e /arliamentary Standing
Committee on >inance, (!ic! su"mitted its
report on 31 -ugust 2010 and (as
(it!dra(n after
t!e introduction of t!e Companies )ill,
2011. &!e Companies )ill, 2011 (as
also considered "y t!e /arliamentary
Standing Committee on >inance (!ic!
su"mitted its report on 26 ?une 2012.
Su"se:uently, t!e )ill (as considered
and
approed "y t!e *o# Sa"!a on 1$
+ecem"er 2012 as t!e Companies )ill,
2012 1t!e )ill2. &!e )ill (as t!en
considered and approed "y t!e Ra,ya
Sa"!a too on $ -ugust 2013. %t receied
t!e /resident5s assent on 20 -ugust
2013 and !as no( "ecome t!e
Companies -ct, 2013.
&!e c!anges in t!e 2013 -ct !ae far'
reac!ing implications t!at are set to
significantly c!ange t!e manner in (!ic!
corporates operate in %ndia. %n t!is
pu"lication, (e !ae encapsulated t!e
ma,or c!anges as compared to t!e 1036
-ct and t!e potential implications of t!ese
c!anges. 7e !ae also included, (!ere
releant, t!e proisions of t!e draft rules,
(!ic! !ae "een issued "y
t!e Ministry of Corporate -ffairs 1t!e
MC-2 till date for pu"lic comments.
Suc! inclusions !ae "een !ig!lig!ted
(it! an asteri9 at t!e end of t!e
sentence 1@2. =o(eer, please note t!at
t!ese are only draft rules and (ill
undergo c!anges "efore "eing notified.
Key definitions and
concepts
1
6 /(C
The 2013 Act has introduced several new concepts and has also tried to streamline many of the
requirements by introducing new definitions. This chapter covers some of these new concepts
and definitions in brief. A few of these significant aspects have been discussed in detail in
further chapters.
1. Companies
1.1 One-person company: &!e 2013 -ct introduces a ne( type of entity to t!e e9isting list i.e. apart from forming a pu"lic or
priate limited company, t!e 2013 -ct ena"les t!e formation of a ne( entity a 4one'person company5 1A/C2. -n A/C
means a company (it! only one person as its mem"er Bsection 3112 of 2013 -ctC.
1.2.Private company: &!e 2013 -ct introduces a c!ange in t!e definition for a priate company, inter'alia, t!e ne(
re:uirement increases t!e limit of t!e num"er of mem"ers from 30 to 200. Bsection 216$2 of 2013 -ctC.
1.3.Small company: - small company !as "een defined as a company, ot!er t!an a pu"lic company.
(1) /aid'up s!are capital of (!ic! does not e9ceed 30 la#! %;R or suc! !ig!er amount as may "e prescri"ed (!ic! s!all
not "e more t!an fie crore %;R
(2)&urnoer of (!ic! as per its last profit'and'loss account does not e9ceed t(o crore %;R or suc! !ig!er amount as
may "e prescri"ed (!ic! s!all not "e more t!an 20 crore %;R8
-s set out in t!e 2013 -ct, t!is section (ill not "e applica"le to t!e follo(ing8
1 - !olding company or a su"sidiary company
2 - company registered under section $
3 - company or "ody corporate goerned "y any special -ct Bsection 21$32 of 2013 -ctC
1.4.Dormant company: &!e 2013 -ct states t!at a company can "e classified as dormant (!en it is formed and registered
under t!is 2013 -ct for a future pro,ect or to !old an asset or intellectual property and !as no significant accounting
transaction. Suc! a company or an inactie one may apply to t!e RAC in suc! manner as may "e prescri"ed for o"taining
t!e status of a dormant company.BSection 433 of 2013 -ctC
2. Roles and responsibilities
2.1Officer: &!e definition of officer !as "een e9tended to include promoters and #ey managerial personnel Bsection 21302 of
2013 -ctC.
2.2Key manaerial personnel: &!e term 4#ey managerial personnel5 !as "een defined in t!e 2013 -ct and !as "een used in
seeral sections, t!us e9panding t!e scope of persons coered "y suc! sections Bsection 21312 of 2013 -ctC.
2.3.Promoter: &!e term 4promoter5 !as "een defined in t!e follo(ing (ays8D - person (!o !as "een named as suc! in a prospectus or
is identified "y t!e company in t!e annual return referred to in Section 02 of 2013 -ct t!at deals (it! annual returnE or
1 (!o !as control oer t!e affairs of t!e company, directly or indirectly (!et!er as a s!are!older, director or ot!er(iseE or
2 in accordance (it! (!ose adice, directions or instructions t!e )oard of +irectors of t!e company is accustomed to act.
&!e proiso to t!is section states t!at su"'section 1c2 (ould not apply to a person (!o is acting merely in a professional
capacity. Bsection 21602 of 2013 -ctC
2.!: "ndependent Director: &!e term5 %ndependent +irector5 !as no( "een defined in t!e 2013 -ct, along (it! seeral ne(
re:uirements relating to t!eir appointment, role and responsi"ilities. >urt!er some of t!ese re:uirements are not in line (it!
t!e corresponding re:uirements under t!e e:uity listing agreement Bsection 214<2, 140132 of 2013 -ctC.
#. "nvestments
#.1 Subsidiary: &!e definition of su"sidiary as included in t!e 2013 -ct states t!at certain class or classes of !olding company
1as may "e prescri"ed2 s!all not !ae layers of su"sidiaries "eyond suc! num"ers as may "e prescri"ed. 7it! suc! a
restrictie section, it appears t!at a !olding company (ill no longer "e a"le to !old su"sidiaries "eyond a specified
num"erBsection 21$<2 of 2013 -ctC.
!. $inancial statements
4.1.$inancial year: %t !as "een defined as t!e period ending on t!e 31st day of Marc! eery year, and (!ere it !as "een
incorporated on or after t!e 1st day of ?anuary of a , t!e period ending on t!e 31st day of Marc! of t!e follo(ing year, in
respect (!ereof financial statement of t!e company or "ody corporate is made up. Bsection 21412 of 2013 -ctC. 7!ile
t!ere are certain e9ceptions included, t!is section mandates a uniform accounting year for all companies and may create
significant implementation issues.
4.2.Consolidated financial statements: &!e 2013 -ct no( mandates consolidated financial statements 1C>S2 for any
company !aing a su"sidiary or an associate or a ,oint enture, to prepare and present consolidated financial
statements in addition to standalone financial statements.
4.3.Conflicting definitions: &!ere are seeral definitions in t!e 2013 -ct diergent from t!ose used in t!e notified
accounting standards, suc! as a ,oint enture or an associate,, etc., (!ic! may lead to !ards!ips in compliance.
Companies -ct,
2013 7
%. &udit and auditors
5.1'andatory auditor rotation and (oint auditors: &!e 2013 -ct no( mandates t!e rotation of auditors after t!e specified time
period. &!e 2013 -ct also includes an ena"ling proision for ,oint audits.
5.2)on-audit services: &!e 2013 -ct no( states t!at any serices to "e rendered "y t!e auditor s!ould "e approed "y t!e
"oard of directors or t!e audit committee. -dditionally, t!e auditor is also restricted from proiding certain specific serices.
5.3.&uditin standards: &!e Standards on -uditing !ae "een accorded legal sanctity in t!e 2013 -ct and (ould "e su",ect to
notification "y t!e ;>R-. -uditors are no( mandatorily "ound "y t!e 2013 -ct to ensure compliance (it! Standards
on -uditing.
5.4 Conisance to "ndian &ccountin Standards *"nd &S+: &!e 2013 -ct, in seeral sections, !as gien cognisance to t!e
%ndian -ccounting Standards, (!ic! are standards conerged (it! %nternational >inancial Reporting Standards, in ie( of
t!eir "ecoming applica"le in future. >or e9ample, t!e definition of a financial statement includes a 4statement of c!anges
in e:uity5 (!ic! (ould "e re:uired under %nd -S. BSection 21402 of 2013 -ctC
5.5.Secretarial audit ,or bier companies: %n respect of listed companies and ot!er class of companies as may "e prescri"ed, t!e 2013
-ct proides for a mandatory re:uirement to !ae secretarial audit. &!e draft rules ma#e it applica"le to eery pu"lic company (it!
paid'up s!are capital F Rs. 100 crores@. -s specified in t!e 2013 -ct, suc! companies (ould "e re:uired to anne9 a secretarial
audit report gien "y a Company Secretary in practice (it! its )oard5s report. BSection 204 of 2013 -ctC
5.6.Secretarial Standards: &!e 2013 -ct re:uires eery company to o"sere secretarial standards specified "y t!e %nstitute of
Company Secretaries of %ndia (it! respect to general and "oard meetings BSection 11$ 1102 of 2013 -ctC, (!ic! (ere
!it!erto not gien cogniGance under t!e 1036 -ct.
5.7."nternal &udit: &!e importance of internal audit !as "een (ell ac#no(ledged in Companies 1-uditor Report2 Arder, 2003
1t!e 4Arder52, pursuant to (!ic! auditor of a company is re:uired to comment on t!e fact t!at t!e internal audit system of
t!e company is commensurate (it! t!e nature and siGe of t!e company5s operations. =o(eer, t!e Arder did not mandate
t!at an internal audit s!ould "e conducted "y t!e internal auditor of t!e company. &!e Arder ac#no(ledged t!at an
internal audit can "e conducted "y an indiidual (!o is not in appointment "y t!e company.
&!e 2013 -ct no( moes a step for(ard and mandates t!e appointment of an internal auditor (!o s!all eit!er "e a
c!artered accountant or a cost accountant, or suc! ot!er professional as may "e decided "y t!e )oard to conduct
internal audit of t!e functions and actiities of t!e company.
&!e class or classes of companies (!ic! s!all "e re:uired to mandatorily appoint an internal auditor as per t!e draft rules
are as follo(s8 @
1 Hery listed company
2 Hery pu"lic company !aing paid'up s!are capital of more t!an 10 crore %;R
3 Hery ot!er pu"lic company (!ic! !as any outstanding loans or "orro(ings from "an#s or pu"lic financial institutions
more t!an 23 crore %;R or (!ic! !as accepted deposits of more t!an 23 crore %;R at any point of time during t!e last
financial year
5.8.&udit o, items o, cost: &!e central goernment may, "y order, in respect of suc! class of companies engaged in t!e production of
suc! goods or proiding suc! serices as may "e prescri"ed, direct t!at particulars relating to t!e utilisation of material
or la"our or to ot!er items of cost as may "e prescri"ed s!all also "e included in t!e "oo#s of account #ept "y t!at class
of companies. )y irtue of t!is section of t!e 2013 -ct, t!e cost audit (ould "e mandated for certain companies. Bsection
14$ of 2013 -ctC. %t is pertinent to note t!at similar re:uirements !ae recently "een notified "y t!e central goernment.
-. Reulators
6.1.)ational Company .a/ 0ribunal *0ribunal or )C.0+: %n accordance (it! t!e Supreme Court5s 1SC2 ,udgement, on 11
May 2010, on t!e composition and constitution of t!e &ri"unal, modifications relating to :ualification and e9perience, etc.
of t!e mem"ers of t!e &ri"unal !as "een made. -ppeals from t!e &ri"unal s!all lie (it! t!e ;C*&. C!apter IIJ%% of t!e
2013 -ct consisting of section 40< to 434 deals (it! ;C*& and appellate &ri"unal.
6.2.)ational $inancial Reportin &uthority *)$R&+: &!e 2013 -ct re:uires t!e constitution of ;>R-, (!ic! !as "een "esto(ed (it!
significant po(ers not only in issuing t!e aut!oritatie pronouncements, "ut also in regulating t!e audit profession.
6.3. Serious Fraud Investigation Office SFIO!: &!e 2013 -ct !as "esto(ed legal status to S>%A.
8 /(C
1. 'erers and ac2uisitions
&!e 2013 -ct !as streamlined as (ell as introduced concepts suc! as reerse mergers 1merger of foreign companies
(it! %ndian companies2 and s:ueeGe'out proisions, (!ic! are significant. &!e 2013 -ct !as also introduced t!e
re:uirement for aluations in seeral cases, including mergers and ac:uisitions, "y registered aluers.
3. Corporate social responsibility
&!e 2013 -ct ma#es an effort to introduce t!e culture of corporate social responsi"ility 1CSR2 in %ndian corporates "y
re:uiring companies to formulate a corporate social responsi"ility policy and at least incur a gien minimum e9penditure
on social actiities.
4. Class action suits
&!e 2013 -ct introduces a ne( concept of class action suits (!ic! can "e initiated "y s!are!olders against t!e
company and auditors.
15. Prohibition o, association or partnership o, persons e6ceedin certain number
&!e 2013 -ct puts a restriction on t!e num"er of partners t!at can "e admitted to a partners!ip at 100. &o "e specific, t!e
2013 -ct states t!at no association or partners!ip consisting of more t!an t!e gien num"er of persons as may "e
prescri"ed s!all "e formed for t!e purpose of carrying on any "usiness t!at !as for its o",ect t!e ac:uisition of gain "y
t!e association or partners!ip or "y t!e indiidual mem"ers t!ereof, unless it is registered as a company under t!is 1036
-ct or is formed under any ot!er la( for t!e time "eing in force8
-s an e9ception, t!e aforesaid restriction (ould not apply to t!e follo(ing8
1 - =indu undiided family carrying on any "usiness
2 -n association or partners!ip, if it is formed "y professionals (!o are goerned "y special acts li#e t!e
C!artered -ccountants -ct, etc.Bsection 464 of 2013 -ctC
11" #o$er to remove difficulties
&!e central goernment (ill !ae t!e po(er to e9empt or modify proisions of t!e 2013 -ct for a class or classes of
companies in pu"lic interest. Releant notification s!all "e re:uired to "e laid in draft form in /arliament for a period of 30
days. &!e 2013 -ct furt!er states no suc! order s!all "e made after t!e e9piry of a period of fie years from t!e date of
commencement of section 1 of t!e 2013 -ct Bsection 4<0 of 2013 -ctC.
12. "nsider tradin and prohibition on ,or/ard dealins
&!e 2013 -ct for t!e first time defines 4insider trading and price'sensitie information and pro!i"its any person including
t!e director or #ey managerial person from entering into insider trading Bsection 103 of 2013 -ctC. >urt!er, t!e -ct also
pro!i"its directors and #ey managerial personnel from for(ard dealings in t!e company or its !olding, su"sidiary or
associate company Bsection 104 of 2013 -ctC.
Companies -ct,
2013 9
Setting up o a compan!
2
10 /(C
The 2013 Act introduces a new form of entity one!person company" and incorporates certain new
provisions in respect of memorandum and articles of association. #or instance$ the concept of
including entrenchment provisions in the articles of association has been introduced.
Incorporation o a compan!
1. One-person company
&!e 2013 -ct introduces a ne( type of entity to t!e e9isting list i.e. apart from forming a pu"lic or priate limited company, t!e
2013 -ct ena"les t!e formation of a ne( entity 4one'person company5 1A/C2. -n A/C means a company (it! only one person
as its mem"er Bsection 3112 of 2013 -ctC.&!e draft rules state t!at only a natural person (!o is an %ndian citiGen and resident in
%ndia can incorporate an A/C or "e a nominee for t!e sole mem"er of an A/C. @
2. 'emorandum o, association
Content8 &!e 2013 -ct specifies t!e mandatory content for t!e memorandum of association (!ic! is similar to t!e e9isting
proisions of t!e 1036 -ct and refers inter'alia to t!e follo(ing8
1 ;ame of t!e company (it! last (ord as limited or priate limited as t!e case may "e
2 State in (!ic! registered office of t!e company (ill "e situated
3 *ia"ility of t!e mem"ers of t!e company
=o(eer, as against t!e e9isting re:uirement of t!e 1036 -ct, t!e 2013 -ct does not re:uire t!e o",ects clause in t!e
memorandum to "e classified as t!e follo(ing8
(1) &!e main o",ect of t!e company
(2) A",ects incidental or ancillary to t!e attainment of t!e main o",ect
(3) At!er o",ects of t!e company Bsection 4112 of 2013 -ctC
&!e "asic purpose in t!e 1036 -ct for suc! a classification as set out in section 140 of t!e 1036 -ct, is to restrict a company
from commencing any "usiness to pursue 4ot!er o",ects of t!e company5 not incidental or ancillary to t!e main o",ects e9cept
on satisfaction of certain re:uirements as prescri"ed in t!e 1036 -ct li#e passing a special resolution, filing of declaration (it!
t!e RAC to t!e effect of resolution.
Reseration of name8 &!e 2013 -ct incorporates t!e procedural aspects for applying for t!e aaila"ility of a name for a ne(
company or an e9isting company in sections 4142 and 4132 of 2013 -ct.
#. &rticles o, association
&!e 2013 -ct introduces t!e entrenc!ment proisions in respect of t!e articles of association of a company. -n entrenc!ment
proision ena"les a company to follo( a more restrictie procedure t!an passing a special resolution for altering a specific
clause of articles of association. - priate company can include entrenc!ment proisions only if agreed "y all its mem"ers or,
in case of a pu"lic company, if a special resolution is passedBsection 3 of 2013 -ctC.
!. "ncorporation o, company
&!e 2013 -ct mandates inclusion of declaration to t!e effect t!at all proisions of t!e 1036 -ct !ae "een complied (it!, (!ic!
is in line (it! t!e e9isting re:uirement of 1036 -ct.
-dditionally, an affidait from t!e su"scri"ers to t!e memorandum and from t!e first directors !as to "e filed (it! t!e RAC, to
t!e effect t!at t!ey are not conicted of any offence in connection (it! promoting, forming or managing a company or !ae not
"een found guilty of any fraud or misfeasance, etc., under t!e 2013 -ct during t!e last fie years along (it! t!e complete details
of name, address of t!e company, particulars of eery su"scri"er and t!e persons named as first directors.
&!e 2013 -ct furt!er prescri"es t!at if a person furnis!es false information, !e or s!e, along (it! t!e company (ill "e
su",ect to penal proisions as applica"le in respect of fraud i.e. section 44< of 2013 -ct Bsection <142 of 2013 -ctE -lso refer
t!e c!apter on ot!er areasC
%. $ormation o, a company /ith charitable ob(ects
-n A/C (it! c!arita"le o",ects may "e incorporated in accordance (it! t!e proisions of t!e 2013 -ct. ;e( o",ects li#e
enironment protection, education, researc!, social (elfare etc., !ae "een added to t!e e9isting o",ect for (!ic! a
c!arita"le company could "e incorporated.
-s against t!e e9isting proisions under (!ic! a company5s licence could "e reo#ed, t!e 2013 -ct proides t!at t!e licence can "e
reo#ed not only (!ere t!e company contraenes any of t!e re:uirements of t!e section "ut also (!ere t!e affairs of t!e company are
conducted fraudulently or in a manner iolatie of t!e o",ects of t!e company or pre,udicial to pu"lic interest. &!e 2013 -ct t!us
proides for more stringent proisions for companies incorporated (it! c!arita"le o",ectsBsection $ of 2013 -ctC.
Companies -ct, 2013
11
-. Commencement o, business7 etc
&!e e9isting proisions of t!e 1036 -ct as set out in section 140 (!ic! proide for re:uirement (it! respect to t!e
commencement of "usiness for pu"lic companies t!at !ae a s!are capital (ould no( "e applica"le to all companies.
&!e 2013 -ct empo(ers t!e RAC to initiate action for remoal of t!e name of a company in case t!e company5s directors !ae not
filed t!e declaration related to t!e payment of t!e alue of s!ares agreed to "e ta#en "y t!e su"scri"ers to t!e memorandum and
t!at t!e paid'up s!are capital of t!e company is not less t!an t!e prescri"ed limits as per t!e 2013 -ct, (it!in 1$0 days of its
incorporation and if t!e RAC !as reasona"le cause to "eliee t!at t!e company is not carrying on "usiness or operations
Bsection 11 of 2013 -ctC.
%" &egistered office of compan'
7!ere a company !as c!anged its name in t!e last t(o years, t!e company is re:uired to paint, affi9 or print its former names
along (it! t!e ne( name of t!e company on "usiness letters, "ill !eads, etc. =o(eer, t!e 2013 -ct is silent on t!e time limit for
(!ic! t!e former name needs to "e #ept Bsection 12 of 2013 -ctC.
3. &lteration o, memorandum
&!e 2013 -ct imposes additional restriction on t!e alteration of t!e o",ect clause of t!e memorandum for a company (!ic! !ad
raised money from t!e pu"lic for one or more o",ects mentioned in t!e prospectus and !as any unutilised money. &!e 2013 -ct
specifies t!at along (it! o"taining an approal "y (ay of a special resolution, a company (ould "e re:uired to ensure follo(ing
if it intends to alter its o",ect clause8
1 /u"lis!ing t!e notice of t!e aforesaid resolution stating t!e ,ustification of ariation in t(o ne(spapers
2 H9it option can "e gien to dissenting s!are!olders "y t!e promoters and s!are!olders !aing control in accordance
(it! t!e regulations to "e specified "y t!e Securities and H9c!ange )oard of %ndia 1SH)%2 Bsection 13 of 2013 -ctC.
4. Subsidiary company not to hold shares in its holdin company
&!e e9isting proision of section 42 of t!e 1036 -ct (!ic! pro!i"its a su"sidiary company to !old s!ares in its !olding company
continues to get ac#no(ledged in t!e 2013 -ct. &!us, t!e earlier concern t!at if a su"sidiary is a "ody corporate, it may !old s!ares in
anot!er "ody corporate (!ic! is t!e su"sidiary5s !olding company continues to applyBsection 10 of 2013 -ctC.
"rospectus and pu#$ic oer
&!e 2013 -ct !as introduced a ne( section Bsection 23C to e9plicitly proide t!e (ays in (!ic! a pu"lic company or priate company
may issue securities. &!is section e9plains t!at a pu"lic company may issue securities in any of t!e follo(ing manners8
1 &o pu"lic t!roug! prospectus
2 &!roug! priate placement
3 &!roug! rig!ts issue or a "onus issue.
>or priate companies, t!is section proides t!at it may issue securities t!roug! priate placement, "y (ay of rig!ts
issue or "onus issue.
Section 23 also proides t!at compliance (it! proisions of part % of c!apter %%% is re:uired for t!e issue of securities to pu"lic
t!roug! prospectus. >or priate placement compliance, (it! t!e proisions of part %% of c!apter %%% are re:uired.
&!e 2013 -ct also introduces certain c!anges (it! respect to prospectus and pu"lic offers aimed at en!ancing
disclosure re:uirements as (ell as streamlining t!e process of issuance of securities.
1. "ssue o, prospectus
Currently, t!e matters and reports to "e included in t!e prospectus are specified in parts % and %% of Sc!edule %% of t!e 1036 -ct.
%n t!e 2013 -ct, t!e information to "e included in t!e prospectus is specified in section 26 of 2013 -ct. &!e 2013 -ct mandates
certain additional disclosures8
1 -ny litigation or legal action pending or ta#en "y a goernment department or a statutory "ody during t!e last fie
years immediately preceding t!e year of t!e issue of prospectus against t!e promoter of t!e company
12 /(C
1 Sources of promoter5s contri"ution
&!e 2013 -ct !as also rela9ed t!e disclosure re:uirements in some areas. H9amples of certain disclosures not included in
t!e 2013 -ct are as follo(s. /articulars regarding t!e company and ot!er listed companies under t!e same management,
(!ic! made any capital issues during t!e last t!ree years
-- H9port possi"ilities and e9port o"ligations
-- Details regarding collaboration
&!e 2013 -ct states t!at t!e report "y t!e auditors on t!e assets and lia"ilities of "usiness s!all not "e earlier t!an 1$0 days
"efore t!e issue of t!e prospectus Bsection 26 112 1"21iii2 of 2013 -ctC. &!e 1036 -ct currently re:uires t!at t!e report (ill not "e
earlier t!an 120 days "efore t!e issue of t!e prospectus.
2. 8ariation in terms o, contract or ob(ects
&!e 2013 -ct states t!at a special resolution is re:uired to ary t!e terms of a contract referred to in t!e prospectus or o",ects for
(!ic! t!e prospectus (as issued Bsection 2< 112 of 2013 -ctC. &!e 1036 -ct currently re:uires approal in a general meeting "y
(ay of an ordinary resolution. &!e 2013 -ct also re:uires t!at dissenting s!are!olders s!all "e gien an e9it offer "y promoters or
controlling s!are!olders Bsection 2< 122 of 2013 -ctC.
#. O,,er o, sale o, shares by certain members o, the company
&!e 2013 -ct includes a ne( section under (!ic! mem"ers of a company, in consultation (it! t!e "oard of directors, may offer a part of
t!eir !olding of s!ares to t!e pu"lic. &!e document "y (!ic! t!e offer of sale to t!e pu"lic is made (ill "e treated as t!e prospectus
issued "y t!e company. &!e mem"ers s!all reim"urse t!e company all e9penses incurred "y it Bsection 2$ of 2013 -ctC.
!. Shel, prospectus
&!e 2013 -ct e9tends t!e facility of s!elf prospectus "y ena"ling SH)% to prescri"e t!e classes of companies t!at may file
a s!elf prospectus. &!e 1036 -ct currently limits t!e facility of s!elf prospectus to pu"lic financial institutions, pu"lic sector
"an#s or sc!eduled "an#s Bsection 31 112 of 2013 -ctC.
-. 9lobal depository receipts *9DRs+
&!e 2013 -ct includes a ne( section to ena"le t!e issue of depository receipts in any foreign country su",ect to prescri"ed conditions
Bsection 41 of 2013 -ctC. Currently, t!e proisions of section $1 of t!e 1036 -ct relating to furt!er issue of s!ares are "eing used in
con,unction (it! t!e re:uirements mandated "y SH)% for t!e issuance of depository receipts. %n seeral aspects across t!e 2013 -ct, it
appears t!at t!e 2013 -ct supplements t!e po(ers of SH)% "y incorporating re:uirements already mandated "y SH)%.
1. Private placement
&!e 2013 -ct re:uires t!at certain specified conditions are complied (it! in order to ma#e an offer or initation of offer "y (ay
of priate placement or t!roug! t!e issue of a prospectus.
1 &!e offer of securities or initation to su"scri"e securities in a financial year s!all "e made to suc! num"er of persons not
e9ceeding 30 or suc! !ig!er num"er as may "e prescri"ed Ke9cluding :ualified institutional "uyers, and employees of t!e
company "eing offered securities under a sc!eme of employees stoc# option in a financial year and on suc! conditions
1including t!e form and manner of priate placement2 as may "e prescri"edL. &!is proision of t!e 2013 -ct is in line (it! t!e
e9isting proision of t!e 1036 -ct.
2 &!e allotments (it! respect to any earlier offer or initation may !ae "een completed.
3 -ll t!e money paya"le to(ards t!e su"scription of securities s!all "e paid t!roug! c!e:ue, demand draft or any ot!er
"an#ing c!annels "ut not "y cas!.
4 &!e offers s!all "e made only to suc! persons (!ose names are recorded "y t!e company prior to t!e initation to
su"scri"e, and t!at suc! persons s!all receie t!e offer "y name.
5 &!e company offering securities s!all not release any adertisements or utilise any media, mar#eting or distri"ution
c!annels or agents to inform t!e pu"lic at large a"out suc! an offer Bsection 42 of 2013 -ctC.
Companies -ct, 2013
13
S%are capita$ and de#entures
&!e c!apter on s!are capital and de"entures introduces some #ey c!anges in t!e 2013 -ct. &o illustrate, t!e 2013 -ct does
not gie any cognisance to t!e e9isting re:uirement of section 00 of t!e 1036 -ct t!at proided some saing grace to priate
companies. &!erefore, t!e applica"ility of follo(ing sections of t!e 2013 -ct is no longer restricted to pu"lic companies and
priate companies (!ic! are su"sidiaries of a pu"lic company and are no( applica"le to priate companies also.
1 &(o #inds of s!ares capital
2 ;e( issue of s!ares capital to "e only of t(o #inds
3 Joting rig!ts
1. 8otin rihts
&!e proisions of 2013 -ct regarding oting rig!ts are similar to t!e e9isting section $< of t!e 1036 -ct. &!e only c!ange noted
in t!e 2013 -ct is t!e remoal of distinction proided "y t!e 1036 -ct (it! respect to t!e entitlement to ote in case t!e company
fails to pay diidend to its cumulatie and non'cumulatie preference s!are !olders Bsection 4< of 2013 -ctC
The provisions regarding private placement and additional disclosures in prospectus will also
help to strengthen the capital mar%ets.
The 2013 Act proposes to re!instate the e&isting concept of shares with differential voting
rights. 'ursuant to this section the company may face hardship with regards to computation of
proportionate voting rights.
2. 8ariation o, shareholder:s rihts
Similar to t!e ot!er proisions of t!e 1036 -ct, t!e 2013 -ct ac#no(ledges t!e re:uirements of section 106 of t!e 1036 -ct (it!
an additional re:uirement in respect of t!ose classes of s!are !olders (!ose rig!ts are affected pursuant to any ariation. &!e
proiso to section 4$112 of 2013 -ct states t!at if t!e ariation "y one class of s!are!olders affects t!e rig!ts of any ot!er class of
s!are!olders, t!e consent of t!ree'fourt!s of suc! ot!er class of s!are!olders s!all also "e o"tained and t!e proisions of t!is
section s!all apply to suc! ariation.
#. &pplication o, premiums received on issue o, shares
&!e 2013 -ct lays do(n a similar re:uirement in section 32 as t!at of t!e section <$ of t!e 1036 -ct in respect of application of
premiums receied on issue of s!aresE !o(eer, t!e section of 2013 -ct !as a non'o"stante proision in respect of certain
class of companies (!ic! (ould "e prescri"ed at a later date. &!e 2013 -ct states t!at t!ese classes of companies (ould not
"e a"le to apply t!e securities premium to(ards t!e "elo( specified purposes, unless t!e financial statements are in
compliance (it! t!e accounting standards issued under section 133 of 2013 -ct8
1 /aying up unissued e:uity s!ares of t!e company as fully paid "onus s!ares
2 7riting off t!e e9penses of or t!e commission paid or discount allo(ed on any issue of e:uity s!ares of t!e company
3 /urc!ase of its o(n s!ares or ot!er securities
The 2013 Act restricts the application of securities premium for a certain class of companies if they fail
to comply with the accounting standards. The 2013 Act continues to state that securities premium
amount can be utilised for purpose of writing off preliminary e&penses. (owever$ in view of the
requirements of accounting standard 2)$ intangible asset$ the requirement of this sub!section
appears to be superfluous.
!. Prohibition on issue o, shares at a discount
Companies (ould no longer "e permitted to issue s!ares at a discount. &!e only s!ares t!at could "e issued at a discount are
s(eat e:uity (!erein s!ares are issued to employees in lieu of t!eir sericesBsection 33 and Section 34 of 2013 -ctC.
>urt!er, e9planations % and %% to t!e e9isting section <0- of t!e 1036 -ct t!at prescri"e t!e proisions in respect of s(eat
e:uity !ae not "een included in t!e 2013 -ct. H9planation % defined company for t!e purpose of t!is section and
e9planation %% defined s(eat e:uity.
%. "ssue and redemption o, pre,erence shares
&!e e9isting re:uirement of sections $0 and $0- of t!e 1036 -ct (it! respect to t!e issue and redemption of preference s!ares
continues to "e ac#no(ledged "y t!e 2013 -ct. &!e 2013 -ct reiterates t!e e9isting re:uirement t!at a company cannot issue
preference s!ares (it! a redemption date of "eyond 20 years. =o(eer, it gies an e9emption for cases (!ere preference s!ares
14 /(C
!ae "een issued in respect of infrastructure pro,ects. %nfrastructure pro,ects !ae "een defined in Sc!edule J% of t!e 2013
-ct and t!ese s!ares (ould "e su",ect to redemption at suc! percentage as prescri"ed on an annual "asis at t!e option of
suc! preference s!are!olders.
>urt!er, t!e 2013 -ct adds anot!er administratie re:uirement of o"taining special resolution (it! respect to t!e preference s!ares
(!ic! could not "e redeemed "y a company. &!e 2013 -ct states t!at (!ere a company is not in a position to redeem any preference
s!ares or to pay diidend, if any, on suc! s!ares in accordance (it! t!e terms of issue, it may, (it! t!e consent of t!e !olders of t!ree'
fourt!s in alue of suc! preference s!ares and (it! t!e approal of t!e &ri"unal issue furt!er redeema"le preference s!ares e:ual to
t!e amount due, including t!e diidend t!ereon, (it! respect to t!e unredeemed preference s!ares. An t!e issue of suc! furt!er
redeema"le preference s!ares, t!e unredeemed preference s!ares s!all "e deemed to !ae "een redeemed.
&!e 2013 -ct does not enisage any penalty in respect of non'compliance (it! t!e proision of t!is section, as (as prescri"ed
in su"'section 162 and 132 of section $0 and $0- of t!e 1036 -ct respectiely Bsection 33 of 2013 -ctC.
-. Re,usal o, reistration and appeal aainst reistration
&!e proision relating to refusal of registration of transfer or transmission of securities "y priate and pu"lic companies !as
"een separately clarified in t!e 2013 -ct. &!e priate and pu"lic companies are re:uired to send notice of refusal (it!in 30
days of t!e receipt of instrument of transfer, and aggrieed party may appeal to t!e &ri"unal against t!e refusal (it!in t!e
specified num"er of days Bsection 3$122 of 2013 -ctC.
1. $urther issue o, share capital
&!e e9isting re:uirement of section $1 of t!e 1036 -ct in regard to furt!er issue of capital (ould no longer "e restricted to
pu"lic companies and (ould "e applica"le to priate companies also, since su"'section 3 of section $1 of t!e 1036 -ct !as
not "een ac#no(ledged in t!e 2013 -ct.
>urt!er, t!e 2013 -ct proides t!at a rig!ts issue can also "e made to t!e employees of t!e company (!o are under a sc!eme
of employees5 stoc# option, su",ect to a special resolution and su",ect to conditions as prescri"ed. >urt!er, t!e price of suc!
s!ares s!ould "e determined using t!e aluation report of a registered aluer, (!ic! (ould "e su",ect to conditions as
prescri"ed Bsection 62 of 2013 -ctC.
3. "ssue o, bonus shares
&!e e9isting 1036 -ct does not !ae any specific proision dealing (it! issue of "onus s!ares alt!oug! it !as referred to t!e concept of
"onus s!ares at many places. &!e 2013 -ct includes a ne( section t!at proides for issue of fully paid'up "onus s!ares out of its free
reseres or t!e securities premium account or t!e capital redemption resere account, su",ect to t!e compliance (it! certain
conditions suc! as aut!orisation "y t!e articles, approal in t!e general meeting and so on Bsection 63 of 2013 -ctC.
4. ;nlimited company to provide ,or reserve share capital on conversion into limited company
&!is section corresponds to section 32 of t!e 1036 -ct and see#s to proide t!at an unlimited company !aing a s!are capital
may "e re'registered as a limited company "y increasing t!e nominal amount of eac! s!are, su",ect to t!e condition t!at no
part of t!e increased capital s!all "e capa"le of "eing called up, e9cept in t!e eent and for t!e purposes of t!e company
"eing (ound up. &!e 2013 -ct furt!er proides t!at a specified portion of its uncalled s!are capital s!all not "e capa"le of
"eing called up e9cept in t!e eent and for t!e purposes of t!e company "eing (ound upBsection 63 of 2013 -ctC.
15. Reduction o, share capital
&!e 2013 -ct gies cognisance to one of t!e amendments made in t!e listing agreement "y SH)%. - ne( clause 241i2 (as inserted to
t!e listing agreement (!ic! proided t!at a sc!eme of amalgamation or merger or reconstruction, s!ould comply (it! t!e
re:uirements of section 21113C2 of t!e 1036 -ct. - similar re:uirement !as "een introduced in section 66 of 2013 -ct, (!ic! states
t!at no an application for reduction of s!are capital s!all "e sanctioned "y t!e &ri"unal unless t!e accounting treatment, proposed "y
t!e company for suc! a reduction is in conformity (it! t!e accounting standards specified in section 133 or any ot!er proision of t!e
2013 -ct and a certificate to t!at effect "y t!e company5s auditor !as "een filed (it! t!e &ri"unal.
>urt!er, t!e 2013 -ct clarifies t!at no suc! reduction s!all "e made if t!e company is in arrears in repayment of any
deposits accepted "y it, eit!er "efore or after t!e commencement of t!e 2013 -ct, or t!e interest paya"le t!ereon.
11. Po/er o, the company to purchase its o/n securities
&!e e9isting proision of section <<- of t!e 1036 -ct !as "een ac#no(ledged "y t!e 2013 -ct. &!e only difference is t!at t!e
option aaila"le to company for a "uy'"ac# from odd lots is no longer aaila"le Bsection 6$C.
&!e 2013 -ct proides fle9i"ility in management and administration "y recognising t!e electronic mode for notices and
oting, (!ic! is in line (it! t!e MC-5s efforts to gie cognisance to use of electronic media as eident from a num"er of
green initiaties5 introduced recently, maintenance of registers and returns at a place ot!er t!an t!e registered office.
Companies -ct, 2013
1&
'anagement and
administration
3
16 /(C
The 2013 Act also intends to improve corporate governance by requiring disclosure of nature of
concern or interest of every director$ manager$ any other %ey managerial personnel and relatives of
such a director$ manager or any other %ey managerial personnel and reduction in threshold of
disclosure from 20* to 2*. The term %ey managerial personnel" has now been defined in the 2013
Act and means the chief e&ecutive officer$ managing director$ manager$ company secretary$ whole!
time director$ chief financial officer and any such other officer as may be prescribed.
1. &nnual return
&!e 2013 -ct states t!at re:uirement of certification "y a company secretary in practice of annual return (ill "e e9tended to
companies !aing paid up capital of fie crore %;R or more and turnoer of 23 crore %;R or more@ 1section 02122 of 2013 -ct and
t!e 1036 -ct re:uires certification only for listed companies2.
&!e information t!at needs to "e included in t!e annual return !as "een increased. &!e additional information re:uired,
includes particulars of !olding, su"sidiary and associate companies, remuneration of directors and #ey managerial personnel,
penalty or punis!ment imposed on t!e company, its directors or officers Bsection 02112 of 2013 -ctC.
2. Place o, <eepin reisters and returns
&!e 2013 -ct allo(s registers of mem"ers, de"enture'!olders, any ot!er security !olders or copies of return, to "e #ept at any
ot!er place in %ndia in (!ic! more t!an one'tent! of mem"ers reside Bsection 04112 of 2013 -ctC. &!e fle9i"ility in t!e 1036 -ct
is limited to a place (it!in t!e city, to(n or illage in (!ic! t!e registered office is situated.
#. 9eneral meetins
&!e 2013 -ct states t!at t!e first annual general meeting s!ould "e !eld (it!in nine mont!s from t!e date of closing of t!e first
financial year of t!e company Bsection 06112 of 2013 -ctC, (!ereas t!e 1036 -ct re:uires t!e first annual general meeting to "e
!eld (it!in 1$ mont!s from t!e date of incorporation.
Currently, t!e 1036 -ct does not define "usiness !ours, (!ic! t!e 2013 -ct no( defines as "et(een 0 am and 6 pm. &!e 2013 -ct
states t!at annual general meeting cannot "e !eld on a national !oliday (!ereas t!e annual general meeting cannot "e !eld on a
pu"lic !oliday as per t!e e9isting proisions of section 166122 of t!e 1036 -ct Bsection 06122 of 2013 -ctC.
%n order to call an annual general meeting at s!orter notice, t!e 2013 -ct re:uires consent of 03M of t!e mem"ers as
against t!e current re:uirement in t!e 1036 -ct (!ic! re:uires consent of all t!e mem"ers Bsection 101112 of 2013 -ctC.
&!e 2013 -ct states t!at "esides director and manager, t!e nature of concern or interest of eery director, manager, any ot!er
#ey managerial personnel and relaties of suc! director, manager or any ot!er #ey managerial personnel in eac! item of special
"usiness (ill also need to "e mentioned in t!e notice of t!e meeting Bsection 102 112 of 2013 -ctC. -lso, t!e t!res!old of
disclosure of s!are !olding interest in t!e company to (!ic! t!e "usiness relates of eery promoter, director, manager and #ey
managerial personnel !as "een reduced from 20M to 2M Bsection 102 122 of 2013 -ctC.
&!e 2013 -ct states t!at in case of a pu"lic company, t!e :uorum (ill depend on num"er of mem"ers as on t!e date of
meeting. &!e re:uired :uorum is as follo(s8
1 >ie mem"ers if num"er of mem"ers is not more t!an one t!ousand
2 >ifteen mem"ers if num"er of mem"ers is more t!an one t!ousand "ut up to fie t!ousand
3 &!irty mem"ers if num"er of mem"ers is more t!an fie t!ousand Bsection 103 112 of 2013 -ctC
- limit !as "een introduced on t!e num"er of mem"ers (!ic! a pro9y can represent. &!e 2013 -ct !as introduced a dual limit in
terms of num"er of mem"ers, (!ic! is prescri"ed as 30 mem"ers and also sets a limit in terms of num"er of s!ares !olding in t!e
aggregate not more t!an 10 M of t!e total s!are capital of t!e company carrying oting rig!ts@ Bsection 103 112 of 2013 -ctC.
>urt!er, it is releant to note t!at priate companies cannot impose restrictions on oting rig!ts of mem"ers ot!er t!an due
to unpaid calls or sums or lien Bsection 106 112 of 2013 -ctC.
*isted companies (ill "e re:uired to file (it! t!e RAC a report in t!e manner prescri"ed in t!e rules on eac! annual general
meeting including a confirmation t!at t!e meeting (as conened, !eld and conducted as per t!e proisions of t!e 2013 -ct and
t!e releant rules Bsection 121 of 2013 -ctC.
!. Other matters
*isted companies (ill "e re:uired to file a return (it! t!e RAC (it! respect to t!e c!ange in t!e num"er of s!ares !eld "y
promoters and top ten s!are!olders (it!in 13 days of suc! a c!angeBsection 03 of 2013 -ctC. &!is re:uirement again
demonstrates t!e effort made to(ards sync!ronising t!e re:uirements under t!e 2013 -ct and t!e re:uirements under SH)%.
-dditionally, on an annual "asis, companies are also currently re:uired to ma#e t!e disclosures (it! respect to top s!are!olders
under t!e Reised Sc!edule J% t!e 1036 -ct.
&!e 2013 -ct re:uires eery company to o"sere secretarial standards specified "y t!e %nstitute of Company Secretaries of %ndia (it!
respect to general and "oard meetings Bsection 11$ 1102 of 2013 -ctC, (!ic! (ere !it!erto not gien cognisance under t!e 1036 -ct.
-dditionally, it is also pertinent to note t!at t!ese standards do not !ae a mandatory status for t!e practicing company secretaries.
Companies -ct, 2013
17
(irectors
4
18 /(C
)enera$
1. =oman director
&!e category of companies (!ic! need to comply (it! t!e re:uirement of !aing at least of one (oman director are as
follo(s8 @ Bsection 140112 of 2013 -ctC
(1) Hery listed company, (it!in one year from t!e commencement of second proiso to su"'section 112 of section 140
(2)Hery ot!er pu"lic company t!at !as paidNup s!are capital of one !undred crore rupees or more, or a turnoer of t!ree
!undred crore rupees or more (it!in t!ree years from t!e commencement of second proiso to su"'section 112 of section 140
7!ile t!is ne( re:uirement (ill go a long (ay in encouraging gender diersity, it !as already created :uite a stir in t!e
manner in (!ic! companies (ill ensure compliance.
2. )umber o, directorship
&!e 2013 -ct increases t!e limit for num"er of directors!ips t!at can "e !eld "y an indiidual from 12 to 13 Bsection 140112 of
2013 -ctC.3. Ane director to "e resident in %ndia
- ne( re:uirement (it! respect to directors is t!at at least one director to !ae stayed in %ndia for at least 1$2 days in t!e preious
calendar year Bsection 140132 of 2013 -ctC. &!is re:uirement appears to "e a departure from t!e focus gien in t!e 2013 -ct to(ards
use of electronic mode suc! as use of ideo conferences for meetings and electronic oting. 7it! t!e increasing use of electronic
media, t!e need, for a director to "e resident in %ndia for a minimum amount of time, "ecomes redundant.
!. "ndependent directors
Ane of t!e significant aspects of t!e 2013 -ct is t!e effort made to(ards incorporating some of t!e salient re:uirements
mandated "y t!e SH)% in clause 40 of t!e listing agreement in t!e 2013 -ct itself. &o t!is effect, t!e 2013 -ct re:uires eery
listed pu"lic company to !ae at least one't!ird of t!e total num"er of directors as independent directors. >urt!er, t!e central
goernment in t!e draft rules !as prescri"ed t!e minimum num"er of independent directors in case of t!e follo(ing classes of
pu"lic companies@ Bsection 140142 of 2013 -ctC.
(1) /u"lic companies !aing paid up s!are capital of 100 crore %;R or moreE or
(2)/u"lic companies !aing turnoer of 300 crore %;R or more
(3) /u"lic companies (!ic! !ae, in aggregate, outstanding loans or "orro(ings or de"entures or deposits, e9ceeding 200 crore
IN
&!e 2013 -ct also states t!at companies (ill !ae a period of one year to ensure compliance (it! t!e 2013 -ct and t!e
Rules t!at are framed.
("1 Conflicting re)uirements
7!ile t!ere !ae "een attempts to !armonise t!e re:uirements of SH)% and t!e 2013 -ct (as made, t!ere are seeral aspects
relating to independent directors (!ere t!e re:uirements of t!e 2013 -ct differ from t!at of clause 40 of t!e e:uity listing
agreement. &!e re:uirements of t!e 2013 -ct and t!e manner in (!ic! t!ey differ from t!ose under t!e clause 40 of t!e e:uity
listing agreement include t!e definition itself. &!e ot!er main differences are as follo(s8
1 Clause 40 does not re:uire t!e "oard to e9ercise its ,udgment and opine on (!et!er t!e independent director is a person
of integrity or !as releant e9pertise or e9perience. &!is re:uirement poses difficultly in terms of t!e manner in (!ic!
integrity of an indiidual can "e assessed "y t!e "oard.
2 Clause 40 does not re:uire e9amination of t!e independence of t!e relaties of independent directors. H9tending t!e
dis:ualification of t!e independent directors to consider t!e pecuniary relations!ip of t!e relaties (ould pose
unnecessary !ards!ip for t!e independent directors.
3 &!e :ualification of t!e independent director !as "een left to "e specified later.
4 &!e 2013 -ct "rings t!e constitution of t!e "oard in %ndia at par (it! ot!er international capital mar#ets i.e., "y mandating at
least one't!ird of t!e "oard to "e independent directors in case of listed companies. 7!ereas, t!e SH)% re:uirements are
(!ere t!e c!airman of t!e "oard is a non'e9ecutie director, at least one't!ird of t!e "oard s!ould comprise of independent
directors and (!ere t!e non'e9ecutie c!airman is a promoter of t!e company or is related to any promoter or person
occupying management positions at t!e "oard leel or at one leel "elo( t!e "oard, at least one'!alf of t!e "oard of t!e
company s!all consist of independent directors.
+iffering compliance requirements with respect to the appointment of independent
directors$ remuneration thereto$ imposed by multiple regulators will lead to hardship as well
increased cost of compliance for companies.
Companies -ct, 2013
19
&!e 2013 -ct limits t!e tenure of office of an independent director to a ma9imum of t(o tenures of fie consecutie years, (it! a cooling'
off period of t!ree years "et(een t!e t(o tenures. +uring t!e cooling'off period of t!ree years, s!ould not "e appointed in or "e
associated (it! t!e company in any ot!er capacity, eit!er directly or indirectly Bproiso to section 1401112 of 2013 -ctC.
%t is also releant to note t!at t!e MC- !ad released t!e corporate goernance oluntary guidelines in 2000, (!ic! permitted
t!ree tenures 1(it! ot!er conditions similar to t!ose discussed a"oe2 for an independent director (!ile as per t!e clause 40 of
t!e e:uity listing agreement, an independent director cannot sere for more t!an nine consecutie years.
Stoc# options8 -s per t!e 2013 -ct, an independent director (ill not "e eligi"le to get stoc# options "ut may get payment of fees
and profit lin#ed commission su",ect to limits specified or to "e specified in t!e rules Bsection 140 102 of 2013 -ctC. &!is again, is
in contradiction (it! SH)%5s re:uirements, (!ere"y for t!e purpose of granting stoc# options, t!e term employee includes
independent directors also.
!.2 Databan< o, independent directors
&!e 2013 -ct ma#es t!e appointment process of t!e independent directors, independent of t!e company5s management "y constituting
a panel or a data "an# to "e maintained "y t!e MC-, out of (!ic! companies may c!oose t!eir independent directors. &!e proposal
!as its origins in t!e report of t!e 21st Standing Committee on finance, (!erein it (as ac#no(ledged t!at preparation of a data"an# of
independent directors (ould est (it! a regulatory "ody t!at may comprise of representaties of MC-, SH)%, Resere )an# of %ndia,
professional institutions, C!am"ers of Commerce and %ndustry etc Bsection 130 of 2013 -ctC.
- dra("ac# of constituting a panel of independent directors is t!at it may discourage people from registering (it! t!e panel
and in t!at sense limit t!e options aaila"le to a company for appointment of independent directors.
!.# Code ,or independent director
&!e 2013 -ct includes Sc!edule %J 4Code for %ndependent +irectors5 1Code2 (!ic! "roadly prescri"es t!e follo(ing for
independent directors8
1 /rofessional conduct
2 Role and functions
3 Duties
4 Manner of appointment
5 Reappointment
6 Resignation or remoal
7 =olding separate meetings
8 Haluation mec!anism
&!e code appears to "e mandatory (!ic! (ould lead to some of t!e follo(ing concerns8
1 &!e code states t!at an independent director s!all up!old et!ical standards of integrity and pro"ity, !o(eer (!at
(ould constitute et!ical "e!aiour is not defined and is open to interpretation.
2 &!e code does not gie any cognisance to t!e need for training for t!e independent directors.
3 &!e code refers to appointment of independent directors "y t!e "oard after ealuating certain attri"utes. &!e concern
t!at remains unaddressed is t!e manner in (!ic! companies need to carry out an assessment of t!e attri"utes of an
independent director as specified under 4manner of appointment5 in t!e code from t!e data"an# maintained "y t!e MC-.
!.! .iability o, independent directors
&!e 2013 -ct ma#es an attempt to distinguis! "et(een t!e lia"ility of an independent director and non'e9ecutie director from t!e
rest of t!e "oard and !as accordingly inserted a proision to proide immunity from any ciil or criminal action against t!e
independent directors. &!e intention and effort to limit lia"ility of independent directors is demonstrated from t!e section 1401122
of t!e 2013 -ct (!ic! inter'alia proides t!at lia"ility for independent directors (ould "e as under8
OAnly in respect of suc! acts of omission or commission "y a company (!ic! !ad occurred (it! !is #no(ledge, attri"uta"le
t!roug! "oard processes, (it! !is consent or conniance or (!ere !e !ad not acted diligently.P
&!e section see#s to proide immunity from ciil or criminal action against independent directors in certain cases. >urt!er, in
accordance (it! t!e re:uirement of section 166 122 of 2013 -ct, (!ole of t!e "oard is re:uired to act in good fait! in order to
promote t!e o",ects of t!e company for t!e "enefit of its mem"ers as a (!ole, and in t!e "est interest of t!e company, its
employees, t!e s!are!olders, t!e community and for t!e protection of t!e enironment. )y irtue of t!is section t!e duty of
independent directors actually goes "eyond its normal definition and is not restricted to e9ecutie directors only.
%t is amply clear t!at independent directors !ae little or no defence and t!eir o"ligations continues to remain a de"ata"le topic since
t!ey (ould still "e treated e:uialent to t!e ot!er directors "y !olding t!em responsi"le for decisions made t!roug! "oard processes.
20 /(C
%. &ppointment o, an additional director
%t is pertinent to note t!at, in order to discourage inappropriate practices, t!e 2013 -ct states t!at any person (!o fails to get
elected as a director in t!e general meeting can no longer "e appointed as an additional director "y t!e "oard of directors
Bsection 161 of 2013 -ctC.
-. &dditional compliance re2uirements ,or private companies
&!ere are certain increased compliance re:uirements mandated for priate companies (!ic!, till no(, (ere mandated only
for pu"lic companies and priate companies (!ic! are su"sidiaries of pu"lic companies. &!ese include t!e follo(ing8
1 -ppointment of director to "e oted indiidually
2 Aption to adopt principle of proportional representation for appointment of directors
3 %neligi"ility on account of non'compliance (it! section 2<41122 1g2 no( e9tended for appointment or reappointment as
a director in a priate limited company also.
'eetings o t%e #oard and its powers
&!ere !ae "een significant inroads made "y t!e MC- in t!e recent past (it! respect to giing cognisance to use of electronic
media in day'to'day operations of corporates. &!e 2013 -ct ta#es t!is furt!er "y allo(ing use of electronic mode for sending
notice of meetings Bsection 1<3132 of 2013 -ctC, passing of resolution "y circulation Bsection 1<3 of 2013 -ctC and ot!er areas.
Some of t!e ot!er significant c!anges in relation to t!e "oard and its functioning include8
1. &udit committee
&!e re:uirements relating to audit committees (as first introduced "y t!e Companies 1-mendment2 -ct, 2000. -udit committees
are a measure of ensuring self discipline, constituted (it! t!e o",ect to strengt!en and oersee management in pu"lic
companies and to ensure t!at t!e "oard of directors disc!arge t!eir functions effectiely. &!e 2013 -ct ac#no(ledges t!e
importance of an audit committee and entrusts it (it! additional roles and responsi"ilities Bsection 1<< of 2013 -ctC.
=o(eer, t!e fact t!at t!e 2013 -ct is not entirely in !armony (it! t!e re:uirements of clause 40 of t!e e:uity listing
agreement, cannot "e ignored. 7!ile most of t!e re:uirements including esta"lis!ment of a 4igil mec!anism5 for directors and
employees to report genuine concerns, t!at are similar to t!e re:uirements of clause40 of t!e e:uity listing agreement !ae
"een incorporated in t!e 2013 -ct, t!e differences are as follo(s8
1 -s per t!e 2013 -ct, t!e audit committee s!ould !ae ma,ority of independent directors.
2 C!airman of t!e audit committee need not "e an independent director.
3 - ma,ority of t!e mem"ers of t!e audit committee s!ould "e financially literate, i,e. s!ould !ae t!e a"ility to read
and understand t!e financial statements.
4 Hery listed company and t!e follo(ing class 1es2 of companies as prescri"ed in t!e draft rules s!ould esta"lis! a
igil mec!anism for directors and employees to report genuine concerns suc! as 8@
1- Companies (!ic! accept deposits from t!e pu"lic
2- Companies (!ic! !ae "orro(ed money from "an#s and pu"lic financial institutions in e9cess of fifty crore rupees
2. )omination and remuneration committee and sta<eholders relationship committee
&!e 2013 -ct includes t!is ne( section re:uiring constituting t!e nomination and remuneration committee "y eery listed
company and t!e follo(ing classes of companies as prescri"ed in t!e draft rules8@
(1) Hery listed company
(2) Hery ot!er pu"lic company t!at !as a paid'up capital of 100 crore %;R or more or (!ic! !as, in aggregate, outstanding
loans or "orro(ings or de"entures or deposits e9ceeding 200 crore %;R.
&!e ;omination and Remuneration Committee is re:uired to formulate and recommend to t!e )oard of +irectors, t!e
company5s policies, relating to t!e remuneration for t!e directors, #ey managerial personnel and ot!er employees, criteria for
determining :ualifications, positie attri"utes and independence of a director Bsection 1<$112 of 2013 -ctC.
>urt!er, a "oard of a company t!at !as more t!an 1000 s!are!olders, de"enture'!olders, deposit'!olders and any ot!er
security !olders at any time during a financial year is re:uired to constitute a Sta#e!olders Relations!ip Committee Bsection
1<$132 of 2013 -ctC.
Companies -ct, 2013 21
#. Contributions to charitable ,unds and political parties
-s per t!e 2013 -ct t!e po(er of ma#ing contri"ution to 4"ona fide5 c!arita"le and ot!er funds is proposed to "e aaila"le to t!e "oard
su",ect to certain limits Bsection 1$1 of 2013 -ctC.-s per t!e e9isting re:uirement of section 203 of t!e 1036 -ct, suc! po(er could only "e
e9ercised in t!e general meeting in case of pu"lic companies and su"sidiaries of pu"lic companies as per t!e 1036 -ct.
>urt!er, t!e limits of contri"ution to political parties is proposed to "e increased to <.3M of t!e aerage net profits during t!e
t!ree immediately preceding financial years Bsection 1$2 of 2013 -ctC from t!e e9isting limit of 3M under t!e 1036 -ct.
!. Disclosure o, interest by director
&!e 2013 -ct prescri"es similar re:uirements (it! respect to t!e disclosure of interest "y t!e director as contained in t!e e9isting
section 200 of t!e 1036 -ct. &!e only c!ange t!at could "e identified is (!ere a contract or arrangement entered into "y t!e company
(it!out disclosure of interest "y director or (it! participation "y a director (!o is concerned or interested in any (ay, directly or
indirectly, in t!e contract or arrangement, s!all "e oida"le at t!e option of t!e company Bsection 1$4 of 2013 -ctC.
%. .oans and investments by a company
&!e 2013 -ct states t!at companies can ma#e inestments only t!roug! t(o layers of inestment companies su",ect to
e9ceptions (!ic! includes company incorporated outside %ndia Bsection 1$6 of 2013 -ctC. &!ere are no suc! restrictions (!ic!
are currently imposed under t!e 1036 -ct.
>urt!er, t!e e9emption aaila"le from t!e proisions of section 3<2- of t!e 1036 -ct to priate companies as (ell as loans or
inestment gien or made "y a !olding company to its su"sidiary company are no longer aaila"le under t!e 2013 -ct.
-. Related party transactions
Most of t!e proisions under Section 1$$ of 2013 -ct are :uite similar to t!e re:uirements under sections 20< and 314 of t!e
1036 -ct. Some of #ey c!anges enisaged in t!e 2013 -ct include t!e follo(ing8
1 ;eed for central goernment approal !as "een done a(ay (it!.
2 &!e 2013 -ct !as (idened t!e am"it of transactions suc! as leasing of property of any #ind, appointment of any agent for
purc!ase and sale of goods, material, serices or property.
3 Cas! at preailing mar#et price !as no( "een su"stituted (it! 4arm5s lengt! transaction5 (!ic! !as "een defined in t!e section.
4 &ransactions entered into (it! related parties no( to "e included in t!e "oard5s report along (it! ,ustification for entering
into suc! contracts and arrangements.
5 /enalty for contraention of t!e proisions of section 20< (as coered in general proisions in t!e 1036 -ct. =o(eer,
t!is is no( coered specifically in t!e section itself (!ic! no( e9tends to imprisonment.
6 Central goernment may prescri"e additional conditions.
Appointment and remuneration o manageria$ personne$
&!e 2013 -ct "rings significant c!anges to t!e e9isting re:uirement of t!e 1036 -ct (it! respect to appointment and
remuneration of managerial personnel. Ane of t!e ma,or c!anges t!at could "e identified is in respect of t!e applica"ility of
t!ese proisions. &!e proisions for appointment of managing director, (!ole time director or manager are no longer restricted
to t!e pu"lic companies and t!e priate companies (!ic! are su"sidiaries of pu"lic companies and no( applica"le to all
companies. &!e oerall ceiling in respect of payment of managerial remuneration "y a pu"lic company remains at 11M of t!e
profit for t!e financial year computed in t!e manner laid do(n in t!e 2013 -ct.
1. &ppointment o, manain director7 /hole time director or manaer >section 14- o, 251# &ct?.
1 &!e re'appointment of a managerial person cannot "e made earlier t!an one year "efore t!e e9piry of t!e term instead of t(o
years as per t!e e9isting proision of section 31< of t!e 1036 -ct, !o(eer, t!e term for (!ic! managerial personnel can "e
appointed remains as fie years.
2 &!e eligi"ility criteria for t!e age limit !as "een reised to 21 years as against t!e e9isting re:uirement of 23 years.
>urt!er, t!e 2013 -ct lifts t!e upper "ar for age limit and t!us an indiidual a"oe t!e age of <0 years can "e appointed as
#ey managerial personnel "y passing a special resolution.
3 /roisions in respect of appointment of t!e managerial personnel !as "een specified in section 106 and Sc!edule J to t!e 2013 -ct.
22 /(C
2. Overall ma6imum manaerial remuneration and manaerial remuneration in case o, absence or
inade)uac' of profits *section 1+% of 2013 Act,"
1 -s against t!e e9isting re:uirement of section 10$ of t!e 1036 -ct, (!ic! specifically proides t!at t!e proisions of
managerial remuneration (ould "e applica"le to "ot! pu"lic companies and priate companies (!ic! are su"sidiaries of
pu"lic companiesE t!e 2013 -ct states t!at suc! proisions (ould "e applica"le only to pu"lic limited companies.
2 *isted companies !ae "een mandated to disclose in t!eir "oard report, t!e ratio of remuneration of eac! director to median
employee5s remuneration and suc! ot!er details (!ic! are :uite e9tensie as proposed in t!e draft rules@.
3 &!e e9isting 1036 -ct under section 300 proides t!at a managing director or a (!ole time director of a su"sidiary
company (!o is in receipt of commission from t!e !olding company cannot receie any commission or remuneration from
t!e su"sidiary company. &!e said restriction !as "een remoed "y t!e 2013 -ct, !o(eer, suc! receipt !as to "e disclosed
in t!e )oard5s report Bsection 10<1142 of 2013 -ctC.
4 &!e proisions of e9isting Sc!edule I%%% of t!e 1036 -ct !ae "een incorporated in Sc!edule J of t!e 2013 -ct and t!e re:uirements
!ae "een structured around t!e same rules, (it! reised remuneration limits and certain additional re:uirements, for e9ample, t!e
managerial personnel s!ould not !ae "een conicted of an offence under t!e /reention of Money *aundering -ct, 2002.
5 &!e 2013 -ct !as li"eralised t!e administratie procedures "y rela9ing t!e re:uirement of o"taining t!e central goernment
approal proided t!e company complies (it! certain re:uirements including see#ing approal "y (ay of special resolution
for payment of managerial remuneration. Similar rela9ation norms as enisaged in t!e 2013 -ct !ad "een incorporated in
Sc!edule I%%% of t!e 1036 -ct "y irtue of t!e recent circulars issued "y MC-.
6 +efinition of remuneration !as undergone fe( c!anges in t!e 2013 -ct. &!e 2013 -ct in section 21<$2, defines remuneration as any
money or its e:uialent gien or passed to any person for serices rendered "y !im and includes per:uisites as defined under t!e
income'ta9 -ct, 1061. &!e remuneration t!us defined includes reim"ursement of any direct ta9es to managerial personnel. &!e 1036
-ct defined remuneration under section 10$ "y (ay of an e9planation and proided for t!e certain specific inclusions t!at (ould "e
construed as remuneration. Section 200 of t!e 1036 -ct specifically pro!i"ited ta9 free payments. &!e 2013 -ct !as indirectly
incorporated t!e same re:uirement "y clarifying t!at t!e term remuneration includes any reim"ursement of direct ta9es.
7 &!e 2013 -ct clarifies t!at premium paid "y a company for any insurance ta#en "y a company on "e!alf of its managing director,
(!ole time director, manager, c!ief e9ecutie officer, c!ief financial officer or company secretary for indemnifying any of t!em
against any lia"ility in respect of any negligence, default, misfeasance, "reac! of duty or "reac! of trust for (!ic! t!ey may "e guilty
in relation to t!e company (ould not "e treated as part of remuneration e9cept for t!e cases (!ere person is proed to "e guilty.
&!e proisions cited a"oe are similar to t!at of t!e e9isting proisions of section 201 of t!e 1036 -ct.
3" Calculation of profits *section 1+- of 2013 Act,
&!e 2013 -ct sets out in detail a"out t!e allo(ances and deductions t!at a company s!ould include (!ile computing t!e profits
for t!e purpose of determining t!e managerial remuneration. &o illustrate, t!e 2013 -ct states t!at (!ile computing its profits,
credit s!ould not "e gien for any c!ange in t!e carrying amount of an asset or of a lia"ility recognised in e:uity reseres
including surplus in profit and loss account on measurement of t!e asset or t!e lia"ility at fair alue.
!. Recovery o, remuneration in certain cases >section 144 o, 251# &ct?
&!e 2013 -ct contains stringent proisions in case t!e company is re:uired to restate its financial statements pursuant to fraud or non'
compliance (it! any re:uirement under t!e 2013 -ct and t!e Rules made t!ere under. -s against t!e e9isting re:uirement of section 300
of t!e 1036 -ct (!ic! only refers to t!e fact t!at e9cess remuneration paid to managerial personnel cannot "e (aied e9cept (it! t!e
preious approal of t!e central goernment, t!e 2013 -ct moes a step for(ard and ena"les t!e company to recoer t!e e9cess
remuneration paid 1including stoc# options2 from any past or present managing director or (!ole time director or manager or c!ief
e9ecutie officer (!o, during t!e period for (!ic! t!e financial statements !ae "een restated, !as acted in suc! capacity.
!. &ppointment o, <ey manaerial personnel >section 25#?
&!e 2013 -ct proides for mandatory appointment of follo(ing (!ole time #ey managerial personnel for eery listed company
and eery ot!er company !aing a paid'up s!are capital of fie crore %;R or more@8
(1) Managing director, or c!ief e9ecutie officer or manager and in t!eir a"sence, a (!ole'time director
(2) Company secretary
(3) C!ief financial officer
>urt!er, t!e 2013 -ct also states t!at an indiidual cannot "e appointed or reappointed as t!e c!airperson of t!e company, as
(ell as t!e managing director or c!ief e9ecutie officer of t!e company at t!e same time e9cept (!ere t!e articles of suc! a
company proide ot!er(ise or t!e company does not carry multiple "usinesses.
Companies -ct, 2013
23
Accounts and audit
&
24 /(C
Accounts
&!e 2013 -ct !as introduced certain significant amendments in t!is c!apter. %t !as also introduced seeral additional re:uirements
suc! as preparation of consolidated financial statements, additional reporting re:uirements for t!e directors in t!eir report suc! as
t!e deelopment and implementation of t!e ris# management policy, disclosures in respect of oting rig!ts not e9ercised directly
"y t!e employees in respect of s!ares to (!ic! t!e sc!eme relates, etc., in comparison (it! t!e re:uirements of t!e 1036 -ct.
1. @oo<s o, accounts
Hery company, similar to t!e re:uirement of t!e e9isting 1036 -ct, is re:uired to maintain "oo#s of accounts at its registered
office. Bsection 12$112 of t!e 2013 -ctC. 4)oo#s of accounts5 are re:uired to s!o( 1a2 all money receied and spent and details
t!ereof, 1"2 sales and purc!ases of goods, 1c2 assets and lia"ilities and 1d2 items of cost as may "e prescri"ed. &!e "oo#s of
accounts of a company essentially proide t!e complete financial information of a company.
>urt!er, (it! respect to "ranc!es, (!ile t!e e9isting 1036 -ct proides t!at (!ere company !as a "ranc! office1s2 proper
summariGed returns, made up to date at interal of not more t!an t!ree mont!s (as supposed to "e sent "y "ranc! to t!e
company at its registered office or anot!er place etc., suc! a re:uirement !as no( "een done a(ay (it! and only returns are to
"e periodically sent "y t!e "ranc! to t!e registered office Bsection 12$122 of 2013 -ctC.
-lso, in #eeping (it! t!e times, "oo#s of accounts and releant papers can no( "e maintained in electronic mode Bsection
12$112 of 2013 -ctC.
2. Conisance o, accountin standards
%n seeral instances across t!e 2013 -ct, t!ere are proisions (!ic! are also coered (it!in t!e accounting standards currently
notified under section 21113C2 of t!e 1036 -ct and t!e Companies 1accounting standards2 Rules, 2006 t!ere under.
&!ere are certain differences in t!e manner in (!ic! a fe( terms !ae "een defined under t!e 1036 -ct. 7!ile t!e differences in
some of t!ese terms may not !ae any aderse impact, in certain cases, t!ese differences may create implementation issues.
+ifferences in definitions e9ist in t!e follo(ing cases8
1 -ssociate company
2 !ontrol
3 Su"sidiary company
4 Related party
&ssociate company: &!e definition of an associate company poses certain c!allenges since8
1 %t includes ,oint entures
2 Significant influence is defined to mean 4control Q of "usiness decisions under an agreement5
3 %t differs from t!e definition of an associate as per t!e -ccounting Standard 238 -ccounting for %nestments in
-ssociates in Consolidated >inancial Statements
4 &!e status of an associate and a ,oint enture cannot "e e:uated since, t!e degree of control t!at a company can e9ercise
in suc! entities, aries significantly. 7!ile 4,oint control5 is t!e driing factor in case of ,oint entures, a company can at t!e
most only 4participate5 in t!e operating or financing decisions in case of an associate company.
5 7it! regard to t!e e9planation to t!e section in t!e 2013 -ct, (!ic! defines t!e term 4significant influence, it is to "e noted
t!at if a company !as 4control5 Bcontrol !as "een defined in section 212<2 of t!e 2013 -ctC (it! respect to "usiness decisions
of anot!er company, suc! ot!er company (ill in fact "e tantamount to a su"sidiary and not an associate company. =ence,
t!e use of t!e term 4control5 (it!in t!e definition of significant influence leads to a conflict "et(een t!e t(o definitions
1associate company and su"sidiary company2.
,e believe that the terms which have been defined in the accounting standards$ which also form a
part of the -ompanies Act$ 1./)$ must not been defined again in the case of an associate$ control and
subsidiary company$ in order to eliminate contradictions and ambiguity in compliance requirements.
The concept of definitions of the accounting standards having primary significance has already been
given cogni0ance in the 1evised Schedule 23 to the -ompanies 1./) Act$1./)$ as well.
>urt!er, t!e definitions of t!e terms 4associate5 and 4significant influence5 are also not consistent (it! t!e definitions proided
(it!in t!e -ccounting Standard 1$8 Related /arty &ransactions, and -ccounting Standard 238 -ccounting for %nestments in
-ssociates in Consolidated >inancial Statements 1-S 232.
Companies -ct, 2013
2&
Subsidiaries: &!e term 4control5, (!ic! is releant (it! respect to identifying su"sidiaries, !as "een defined in section 212<2 of t!e 2013
-ct. 7!ile t!is definition mandates consideration of 4s!are !olding5 as one of t!e factors, t!e corresponding definition in -S 218
Consolidated >inancial Statements 1-S 212, refers to 4oting po(er5. &!is issue is an e9isting one since a similar difference e9ists
"et(een t!e definition of 4su"sidiary5, (!ere t!e term 4control5 is releant under t!e e9isting 1036 -ct Bsection 4112 of t!e 1036 -ctC.
-ccordingly, (!ile for consideration of an entity as a su"sidiary for t!e purpose of consolidated financial statements 1C>S2,
reference is made to -S 21, for t!e purpose of any compliance (it! t!e 1036 -ct, reference is made to section 4112 of 1036 -ct.
;o( t!at t!e re:uirement of preparing consolidated financial statements !as "een included (it!in t!e 2013 -ct itself, a conflict
arises as to (!et!er t!e definition as per t!e 2013 -ct s!ould "e considered for identifying a su"sidiary or t!e definition as per t!e
-S 21. %n any case, t!e company (ill "e non'compliant (it! t!e re:uirement of eit!er t!e 2013 -ct or t!e -S.
7it! regard to related party, (!ile t!ere is a su"stantial difference "et(een t!e definition under t!e 2013 -ct and -S 1$, t!e difference
does not impact t!e financial statements, since t!e disclosures in t!e financial statements (ill "e continued to "e made as per -S 1$.
3" Consolidated financial statements
&!e 2013 -ct no( mandates C>S for any company !aing a su"sidiary, associate or a ,oint enture Bsection 120132C. &!e manner of
consolidation is re:uired to "e in line (it! t!e re:uirements of -S 21 as per t!e draft rules.@ >urt!er, t!e 2013 -ct re:uires adoption and
audit of C>S in t!e same manner as standalone financial statements of t!e !olding company Bsection 120142C.
-part from C>S, t!e 2013 -ct also re:uires a separate statement, containing t!e salient features of financial statements of its
su"sidiary 1ies2 in a form as prescri"ed in t!e draft rules@ B>irst proiso to section 120 132C. >urt!er, section 13<112, also re:uires an
entity to file accounts of su"sidiaries outside of %ndia, along (it! t!e financial statements 1including C>S2.
7!ile section 120 of t!e 2013 -ct, re:uires all companies to file a statement containing salient features of t!e su"sidiaries financial
statements, in addition to t!e C>S, section 13< of t!e 2013 -ct furt!er re:uires entities (it! foreign su"sidiaries to su"mit indiidual
financial statements of suc! foreign su"sidiaries along (it! its o(n standalone and consolidated financial statements. &!ere seems to "e
significant amount of oerlap and additional "urden on companies (it! respect to t!ese compliances.
&o illustrate t!is point, in order to comply (it! t!ese re:uirements, a company (!ic! !as a glo"al presence, (it! su"sidiaries
"ot! (it!in as (ell as outside %ndia (ill need to comply to t!e follo(ing8
1 /repare its standalone financial statements Bsection 120112 of t!e 2013 -ctC
2 /repare a C>S, including all su"sidiaries, associates and ,oint entures 1(!et!er in %ndia or outside2 Bsection 120132 of t!e
2013 -ctC
3 /repare a summary statement for all its su"sidiaries, associates and ,oint entures of t!e salient features of t!eir
respectie financial statements B/roiso to section 120132 of t!e 2013 -ctC
4 Su"mit t!e standalone financial statements of su"sidiary1ies2 outside %ndia to t!e Registrar of Companies 1RoC2 Bsection
13<112 of t!e 2013 -ctC.
&!is situation clearly indicates t!e e9tent of duplication and additional costs (!ic! (ill "e incurred "y entities in order to proide
t!e same information in multiple forms or formats.
+iffering compliance requirements imposed by multiple regulators will lead to hardship as well
increased cost of compliance for companies.
Also$ the requirement for unlisted entities to prepare a -#S$ would substantially increase the
cost of compliance. #urther$ it does not serve a similar purpose as in the case of a listed entity.
Since there is already a requirement to attach a statement containing salient features of the
financial statements of the subsidiary$ associate and 4oint venture$ preparation of a -#S will
would lead to duplication of preparing and presenting the same information in different forms.
(" &e.opening of accounts and voluntar' revision of financial statements or the /oard0s report
- company (ould "e a"le to re'open its "oo#s of accounts and recast its financial statements after ma#ing an application in t!is
regard to t!e central goernment, t!e income ta9 aut!orities, t!e SH)%, or any ot!er statutory regulatory "ody or aut!ority or any
ot!er person concerned, and an order is made "y a court of competent ,urisdiction or t!e &ri"unal under t!e follo(ing
circumstances 1section 130 of t!e 2013 -ct28
1 Releant earlier accounts (ere prepared in a fraudulent manner
26 /(C
1 &!e affairs of t!e company (ere mismanaged during t!e releant period, casting a dou"t on t!e relia"ility of t!e
financial statements
>urt!er, a company (ould "e a"le to underta#e oluntary reision of financial statements or )oard5s report if it appears to t!e
director of a company t!at t!e financial statement of t!e company or t!e "oard report does not comply (it! t!e proisions of
section 1201financial statement2 and section 134 of t!e 2013 -ct 1financial statements and "oard reports2 in respect of any of t!ree
preceding financial years, after o"taining approal from t!e &ri"unal. &!e &ri"unal s!all gie notice to t!e central goernment and
t!e income ta9 aut!orities and s!all ta#e into consideration t!e representations, if any, made "y t!e goernment or t!e aut!orities
"efore passing any suc! order.
&o preent misuse of t!ese specific proisions, t!e section contains a proiso (!ic! states t!at suc! a reised financial
statement or report s!all not "e prepared or filed more t!an once (it!in a financial year and t!e detailed reasons for reision of
suc! financial statement or report s!all also "e disclosed in t!e "oard5s report in t!e releant financial year in (!ic! suc! a
reision is "eing made 1section 131 of 2013 -ct2.
The provisions envisaged by the 2013 Act in respect of re!opening and voluntary revision of the
financial statements and board report is yet to be ac%nowledged by S563 in the equity listing
agreement and thus$ pending similar amendment in the equity listing agreement$ listed
companies may face unnecessary hardships.
%. $inancial year
&!e 2013 -ct !as introduced a significant difference in t!e definition of t!e term, 4financial year5, (!ic! !as "een defined in
section 21412 of t!e 2013 -ct to mean -pril to Marc!.
&!ere are seeral reasons for a company to use a year'end (!ic! is different from -pril to Marc!. &!ese include companies (!ic!
are su"sidiaries of foreign companies (!ic! follo( a different year'end or entities (!ic! !ae significant su"sidiaries outside %ndia
(!ic! need to follo( a different year'end, etc. -ccordingly, it (ould not "e appropriate to mandate a single year'end for all
companies. Since t!e 2013 -ct does not mandate any specific rules or re:uirements on t!e "asis of a specific year, as in t!e case
of ta9 la(s, t!e reason for re:uiring a uniform year'end under t!e 2013 -ct, seems to "e unclear.
>urt!er, recent notifications or circulars of t!e Ministry seem to indicate rela9ation in t!e norms for re:uiring approals from t!e
&ri"unal or t!e central goernment, etc for matters (!ic! are administratie or procedural in nature. -ccordingly, t!e option
aaila"le (it! companies to see# an e9emption from t!e &ri"unal (ill create additional administratie and procedural
road"loc#s, (it! no "enefits to t!e companies. Rat!er, t!ey (ill need to e9pend additional costs as (ell as time eit!er "y (ay of
see#ing an e9emption or preparing multiple sets of financial statements.
Audit and auditors
&!e 2013 -ct features e9tensie c!anges (it!in t!e area of audit and auditors (it! a ie( to en!ance audit effectieness and
accounta"ility of t!e auditors. &!ese c!anges undou"tedly, !ae a considera"le impact on t!e audit profession. =o(eer, it
needs to "e noted t!at t!ese c!anges (ill also !ae a considera"le impact on t!e company in terms of time, efforts and
e9pectations inoled. -part from introducing ne( concepts suc! as rotation of audit firms and class action suits, t!e 2013 -ct
also increases t!e auditor5s lia"ility su"stantially in comparison (it! t!e 1036 -ct.
1. &ppointment o, auditors
Rnli#e t!e appointment process at eac! annual general meeting under t!e 1036 -ct, t!e auditor (ill no( "e appointed for a period of fie
years, (it! a re:uirement to ratify suc! an appointment at eac! annual general meeting Bsection 130112 of 2013 -ctC.
>urt!er, t!e 2013 -ct proides t!at in respect of appointment of a firm as t!e auditor of a company, t!e firm s!all include a limited
lia"ility partners!ip incorporated under t!e *imited *ia"ility /artners!ip -ct, 200$ BH9planation to section 130142 of 2013 -ctC.
-lso, t!e 2013 -ct specifies t!at (!ere a firm, including a limited lia"ility partners!ip is appointed as an auditor of a company, only
t!ose partners (!o are c!artered accountants s!all "e aut!orised to act and sign on "e!alf of t!e firm Bsection 141 of 2013 -ctC.
Section 141 of t!e 2013 -ct furt!er prescri"es an additional list of dis:ualifications, and e9tends t!e dis:ualification to also include
relaties. &!e Section of t!e 2013 -ct states t!at a person (!o, or !is relatie or partner is !olding any security of or interest in t!e
company or its su"sidiary, or of its !olding or associate company or a su"sidiary of suc! !olding company of face alue e9ceeding one
t!ousand rupees or suc! sum as may "e prescri"edE is inde"ted to t!e company, or its su"sidiary, or its !olding or associate company or
a su"sidiary of suc! !olding company, in e9cess of Rs.1,00,000@ E or !as gien a guarantee or proided any security in connection (it!
t!e inde"tedness of any t!ird person to t!e company, or its su"sidiary, or its !olding or associate company or a su"sidiary of suc! !olding
company, for Rs.1,00,000@, (ill not "e eligi"le to "e appointed as an auditor. -dditionally, a person or a firm (!o, (!et!er directly or
indirectly, !as "usiness relations!ip (it! t!e company, or its su"sidiary, or its !olding or associate company or su"sidiary
Companies -ct, 2013
27
of suc! !olding company or associate company of suc! nature as may "e prescri"ed, (ill "e dis:ualified from "eing appointed
as an auditor.
%t (ould "e releant to note t!at t!e draft rules include 13 relations!ips in t!e list of relaties including step sonSdaug!ter and
step "rot!erSsister.
&!e ineligi"ility also e9tends to person or a partner of a firm (!o !olds appointment as an auditor in more t!an t(enty companies
as (ell as a person (!o is in full time employment else(!ere. Bsection 141 1321g2 of t!e 2013 -ctC.
&!e definition of a relatie does not gie cognisance to t!e Code of Ht!ics prescri"ed "y t!e %nstitute of C!artered -ccountants1 %C-%2
and t!us, t!ere are li#ely to "e interpretational issues. -lso, t!e 2013 -ct does not specify as to (!at (ould constitute as indirect interest
and t!us in a"sence of guidance it (ould "e difficult to assess t!e e9tent of implication on t!e audit profession.
2" 1andator' firm rotation
&!e 2013 -ct !as introduced t!e concept of rotation of auditors as (ell as audit firms. %t states t!at in case of listed companies 1and
ot!er class1es2 of companies as may "e prescri"ed2 it (ould "e mandatory to rotate auditors eery fie years in case of t!e
appointment of an indiidual as an auditor and eery 10 years in case of t!e appointment of an audit firm (it! a uniform cooling off
period of fie years in "ot! t!e cases. >urt!er, firms (it! common partners in t!e outgoing audit firm (ill also "e ineligi"le for
appointment as auditor during t!e cooling off period. &!e 2013 -ct !as allo(ed a transition period of t!ree years for complying (it!
t!e re:uirements of t!e rotation of auditors Bsection 130122 of t!e 2013 -ctC. >urt!er, t!e 2013 -ct also grants an option to
s!are!olders to furt!er re:uire rotation of t!e audit partner and staff at suc! interals as t!ey may c!oose Bsection 130132 of t!e
2013 -ctC.
Currently, (!ile t!e 1036 -ct does not !ae any re:uirements relating to t!e auditor or audit firm rotation, t!e Code of Ht!ics issued
"y t!e %C-% !as a re:uirement to rotate audit partners, in case of listed companies, after eery seen years (it! a cooling'off period
of t(o years.
#. )on-audit services to audit clients
&!e 2013 -ct states t!at any serice to "e rendered "y t!e auditor needs to "e approed "y t!e "oard of directors or t!e
audit committee. -dditionally, t!e auditor is restricted from proiding specific serices, (!ic! include t!e follo(ing8
1 -ccounting and "oo# #eeping serices
2 Internal audit
3 +esign and implementation of any financial information system
4 Actuarial services
5 %nestment adisory serices
6 %nestment "an#ing serices
7 Rendering of outsourced financial serices
8 Management serices, and any ot!er serice (!ic! may "e prescri"ed 1no ot!er serice !as "een prescri"ed@2
>urt!er, t!e 2013 -ct proides t!at suc! serices cannot "e rendered "y t!e audit firm eit!er directly or indirectly t!roug! itself or
any of its partners, its parent or su"sidiary or t!roug! any ot!er entity (!atsoeer, in (!ic! t!e firm or any ot!er partner from t!e
firm !as significant influence or control or (!ose name or trademar# or "rand is "eing used "y t!e firm or any of its partners
Bsection 144 of t!e 2013 -ctC. &!e 1036 -ct currently does not specify any re:uirements relating to non'audit serices.
&!ese restrictions are aimed at ac!ieing auditor independence. -uditor independence is fundamental to pu"lic confidence on t!e
relia"ility of t!e auditors5 reports. &!is concept adds credi"ility to t!e pu"lis!ed financial information and alue to inestors, creditors,
companies, employees as (ell as ot!er sta#e!olders. %ndependence is t!e audit profession5s primary means of demonstrating to
t!e pu"lic as (ell as t!e regulators t!at auditors and audit firms are performing in line (it! esta"lis!ed principles of integrity and
o",ectiity. &o comply (it! t!ese independence norms, t!e 2013 -ct proides for a transitional period of one year, t!at is, an
auditor or an audit firm (!o or (!ic! !as "een performing any non'audit serices on or "efore t!e commencement of t!e 1036
-ct s!all comply (it! t!ese proisions "efore closure of t!e first financial year after t!e date of commencement.
28 /(C
!. Aoint audits
&!e 2013 -ct proides t!at mem"ers of t!e company may re:uire t!e audit process to "e conducted "y more t!an one auditor
Bsection 130132 of t!e 2013 -ctC.
%. &uditors liability
&!e scope and e9tent of t!e auditor5s lia"ility, !as "een su"stantially en!anced under t!e 2013 -ct. ;o(, t!e auditor is not only
e9posed to arious ne( forms of lia"ilities, !o(eer, t!ese lia"ilities prescri"ed in t!e e9isting 1036 -ct !ae "een made more
stringent. &!e auditor is no( su",ect to oersig!t "y multiple regulators apart from t!e %C-% suc! as &!e ;ational >inancial
Reporting -ut!ority 1;>R-, and t!e "ody replacing t!e ;-C-S2 is no( aut!orised to inestigate matters inoling professional or
ot!er misconduct of t!e auditors. &!e penalty proisions and ot!er repercussions t!at an auditor may no( "e su",ect to as per
t!e 2013 -ct includes monetary penalties, imprisonment, de"aring of t!e auditor and t!e firm, and in case of frauds, can een "e
su",ect to class action suits.
-. &dditional responsibilities o, the auditor
&!e 2013 -ct re:uires certain ne( aspects (!ic! need to "e coered in an auditors5 report. &!ese include t!e follo(ing8
1 &!e o"serations or comments of t!e auditors on financial transactions or matters (!ic! !ae any aderse effect on t!e
functioning of t!e company Bsection 1431321f2 of t!e 2013 -ctC
2 -ny :ualification, reseration or aderse remar# relating to t!e maintenance of accounts and ot!er matters connected
t!ere(it! Bsection 1431321!2 of t!e 2013 -ctC
3 7!et!er t!e company !as ade:uate internal financial controls system in place and t!e operating effectieness of suc!
controls Bsection 1431321i2 of t!e 2013 -ctC
&!ere are ot!er reporting re:uirements specified in t!e draft rules (!ic! include reporting on pending litigations, etc (!ic!
are already coered eit!er "y t!e accounting standards or guidance from t!e %C-%, and t!us result in duplication@.
&!e 2013 -ct re:uires an auditor to report to t!e central goernment (it!in 30 days in a format prescri"ed (it!in t!e draft rules, if
!e or s!e !as any reasons to "eliee t!at any offence inoling fraud is "eing committed or !as "een committed against t!e
company "y its officers or employees @ Bsection 1431122 of t!e 2013 -ctC. >urt!er, (!ere any auditor does not comply (it! t!e
a"oe re:uirements, !e or s!e s!all "e punis!a"le (it! a fine (!ic! s!all not "e less t!an 1 la#! %;R, "ut (!ic! may e9tend to 23
la#! %;R Bsection 1431132 of t!e 2013 -ctC. &!e a"oe re:uirements are in addition to t!e e9isting re:uirements under t!e 1036 -ct.
Companies -ct, 2013
29
(i*idend
6
30 /(C
The 2013 Act proposes to introduce significant changes to the e&isting provisions of the
1./) Act in respect of declaration of dividend. The changes are li%ely to affect the e&isting
practices followed by companies with regard to the declaration of dividend.
The existing provisions of the 1956 Act in relation to the transfer of a specified
percentage of profit to reserve is no longer applicable and thus, companies will be free
to transfer any or no amount to its reserves
!chedule "" of the #$1% Act, relating to depreciation defines the useful life of assets as
against the depreciation rates specified in the 1956 Act
1. Declaration o, dividend
1 &!e e9isting re:uirement of t!e 1036 -ct (it! regard to t!e transfer of a specified percentage of profits not e9ceeding
10M to resere Bt!at is, Companies 1&ransfer of /rofits to Resere2 Rules, 10<3C !as not "een ac#no(ledged in t!e 2013
-ct and t!us companies are free to transfer any or no amount of profits to reseres Bsection 123 112 of t!e 2013 -ctC.
2 Similar to t!e e9isting proisions of t!e 1036 -ct, t!e 2013 -ct also proides t!at no diidend s!all "e declared or paid in case
of inade:uate profits "y a company su",ect to t!e Rules yet to "e notified. &!e company also cannot declare or pay diidend
from its reseres ot!er t!an free reseres Bsection 123112 of t!e 2013 -ctC. &!is could mean t!at t!e re:uirements proided in
Companies 1+eclaration of +iidend out of Reseres2 Rules, 10<3 !ae "een retained.
3 -s per t!e e9isting proisions of t!e 1036 -ct, diidend includes interim diidend and all proisions of t!e 1036 -ct (!ic!
applies to t!e final diidend e:ually apply to interim diidend. &!e 2013 -ct, !o(eer, imposes a furt!er restriction on t!e
declaration of interim diidend. &!e 2013 -ct specifically proides t!at in case a company !as incurred loss during t!e current
financial year, up to t!e end of t!e :uarter immediately preceding t!e date of declaration of t!e interim diidend, t!en t!e
interim diidend cannot "e declared at a rate !ig!er t!an t!e aerage diidends declared "y t!e company during t!e
immediately preceding t!ree financial years Bsection 123132 of t!e 2013 -ctC.
4 &!e 2013 -ct states t!at if a company fails to comply (it! t!e proisions of acceptance of deposits and repayment of deposits
accepted prior to t!e commencement of t!is 1036 -ct, it (ill not "e a"le to declare any diidend on e:uity s!ares, as against
t!e non'compliance of section $0- of t!e 1036 -ct regarding redemption of irredeema"le preference s!ares, etc Bsection
123162 of t!e 2013 -ctC.
5 &!e proisions of t!e e9isting Sc!edule I%J of t!e 1036 -ct !as "een ac#no(ledged under Sc!edule %% of t!e 2013 -ct.
%mportant !ig!lig!ts from t!e Sc!edule %% are as follo(s8
-- &!e useful life or residual alue of an asset !ae "een specified in /art C of t!e Sc!edule. Companies (ill "e re:uired to
gie disclosure for cases (!ere t!e useful life or residual alue is different from t!e useful life or residual alue as
specified in /art C of t!e Sc!edule.
-- %t is clarified in t!e 2013 -ct t!at t!e re:uirements of /art C (ill not "e applica"le for companies in respect of (!ic! t!e
useful life or residual alue is notified "y a regulatory aut!ority.
6 &!e 2013 -ct does not gie cognisance to t!e e9isting re:uirements of section 20$ of t!e 1036 -ct t!at deals (it! t!e
po(er of a company to pay interest out of capital in certain cases.
2. 0rans,er o, shares to the investor education and protection ,und *"BP$+
-s against t!e e9isting re:uirement of section 203C of t!e 1036 -ct, t!e 2013 -ct proposes t!at all s!ares in respect of (!ic!
unpaid or unclaimed diidend !as "een transferred to t!e %H/> s!all also "e transferred "y t!e company in name of t!e fund
along (it! a statement (it! certain specified details Bsection 124 of t!e 2013 -ctC.
%n addition to a"oe, follo(ing amounts also need to "e transferred "y t!e company to t!e %H/> Bsection 123 122 of t!e 2013 -ctC8
1 Tain t!roug! t!e seiGure and disposal of securities in possession of a person (!o fictitiously ac:uires or su"scri"es
for a company5s securities
2 Sale proceeds of fractional s!ares arising out of issuance of "onus s!ares, merger and amalgamation for seen or more years
3 Redemption amount of preference s!ares remaining unpaid or unclaimed for seen or more years
-dditionally, t!e 2013 -ct specifies t!e follo(ing modes of utilisation of amounts aaila"le in t!e %H/>8
1 &!e refund of unclaimed diidends, matured deposits, matured de"entures, application money due for refund and
interest thereon
2 +istri"ution of any disgorged amount among inestors (!o !ae suffered losses due to (rong actions "y any person in
accordance (it! t!e order of t!e Court t!at !ad decided for suc! disgorgement. %n order to preent misuse of underlying
securities, inestors can claim t!em "ac# from t!e %H/> t!roug! t!e proisions in t!e rules.
3 Reim"ursement of legal e9penses incurred in pursuing class action suits under sections 3< 1misleading prospectus2 and 243 of
t!e 2013 -ct 1management or conduct of affairs of t!e company "eing oerseen in a manner pre,udicial to t!e interests of t!e
company or its mem"ers or depositors2 "y mem"ers, de"enture !olders or depositors as sanctioned "y t!e &ri"unal
4 -ny ot!er purpose incidental t!ereto, in accordance (it! suc! rules as prescri"ed
Companies -ct, 2013
31
Compromises,
arrangements and
ama$gamations
7
32 /(C
The 2013 Act features some new provisions in the area of mergers and acquisitions$ apart from
ma%ing certain changes from the e&isting provisions. ,hile the changes are aimed at simplifying
and rationalising the procedures involved$ the new provisions are also aimed at ensuring higher
accountability for the company and ma4ority shareholders and increasing fle&ibility for corporates.
The changes proposed would re&uire companies to consider the scale and extent of compliance
re&uirements while formulating their restructuring plans once the #$1% Act is enacted These
changes are &uite constructive and could go a long way in streamlining the manner in which
mergers and other corporate scheme of arrangements are structured and implemented in "ndia
1. Streamlinin re2uirements
&!e section dealing (it! compromises and arrangements, deals compre!ensiely (it! all forms of compromises as (ell as arrangements, and
e9tends to t!e reduction of s!are capital, "uy'"ac#, ta#eoers and corporate de"t restructuring as (ell. -not!er positie inclusion (it!in t!is section is
t!at o",ection to any compromise or arrangement can no( "e made only "y persons !olding not less t!an 10M of s!are !olding or !aing an
outstanding de"t amounting to not less t!an 3M of t!e total outstanding de"t as per t!e latest audited financial statements. Bsection 230 of t!e 2013
-ctC >urt!er, currently, under t!e 1036 -ct, an order does not !ae any effect until t!e same is filed (it! t!e RAC. =o(eer, suc! re:uirement !as
"een done a(ay (it! under t!e 2013 -ct. &!e 2013 -ct merely re:uires filing of t!e order (it! t!e RAC.
2. 'erers or division o, companies
&!ere are certain additional documents mandated to "e circulated for t!e meeting to "e !eld of creditors or a class of mem"ers
1section 232 of t!e 2013 -ct2. &!ese include t!e follo(ing8
1 +raft of t!e proposed terms of t!e sc!eme dra(n'up and adopted "y t!e directors of t!e merging company
2 Confirmation t!at a copy of t!e draft sc!eme !as "een filed (it! t!e RAC
3 Report adopted "y t!e directors of t!e merging companies e9plaining t!e effect of t!e compromise
4 Report of t!e e9pert (it! regard to aluation
5 Supplementary accounting statement if t!e last annual accounts of any of t!e merging company relate to a financial year
ending more t!an si9 mont!s "efore t!e first meeting of t!e company summoned for t!e purpose of approing t!e sc!eme
#. Certi,yin the accountin treatment
Currently, under t!e 1036 -ct, , t!ere is no mandate re:uiring companies to ensure compliance (it! accounting standards or generally
accepted accounting principles (!ile proposing t!e accounting treatment in a sc!eme. =o(eer, listed companies are re:uired to ensure
suc! compliance as t!e H:uity *isting -greement mandates suc! companies to o"tain an auditor5s certificate regarding appropriateness of
t!e accounting treatment proposed in t!e sc!eme of arrangement. &!e 2013 -ct re:uires all companies underta#ing any compromise or
arrangement to o"tain an auditor5s certificate 1section 230 and 232 of t!e 2013 -ct2. &!is re:uirement (ill !elp in streamlining t!e aried
practices as (ell as ensuring appropriate accounting treatment. =o(eer, anot!er aspect t!at is yet to "e addressed is t!at t!e applica"le
notified accounting standards in %ndia, currently, address only amalgamations and not any ot!er form of restructuring arrangements.
!. Simpli,yin procedures
&!e current procedural re:uirements in case of a merger and ac:uisition in any form are :uite cum"ersome and comple9. &!ere
are no e9emptions een in t!e case of mergers "et(een a company and its (!olly o(ned su"sidiaries. &!e 2013 -ct no(
introduces simplification of procedures in t(o areas, firstly, for !olding (!olly o(ned su"sidiaries and secondly, for arrangements
"et(een small companies 1section 233 of t!e 2013 -ct2. Small companies is a ne( category of companies, introduced (it!in t!e
2013 -ct, (it! defined capital and turnoer t!res!olds, (!ic! !as "een gien certain "enefits, including simplified procedures.
Ane of t!e significant restrictions proposed in case of t!ese situations is t!e restriction on t!e transferee company to !old any s!ares eit!er in its o(n
name or in t!e name of a trust, su"sidiary or associate, since all s!ares (ill need to "e cancelled or e9tinguis!ed on merger or amalgamation. &!is
re:uirement (ill stem t!e practice follo(ed "y seeral companies (!ic! !ae in t!e past follo(ed t!is route. >urt!er, in certain cases, it !as also
rationalised t!e re:uirements, for e9ample in t!e case of t!e reduction of t!e s!are capital, (!ic! is part of compromise or arrangement, t!e company
(ill need to comply (it! t!e proisions of t!is section only, as against t!e e9isting re:uirement under t!e 1036 -ct, (!ere t!e company is re:uired to
comply (it! t!e proision of section 10$ in case of reduction of s!are capital as (ell t!ose relating compromise.
%. Cross-border merers
&!e 1036 -ct, allo(s t!e merger of a foreign company (it! an %ndian company, "ut does not allo( t!e reerse situation of merger of an %ndian
company (it! a foreign company. &!e 2013 -ct no( allo(s t!is fle9i"ility, (it! a rider t!at any suc! mergers can "e effected only (it! respect to
companies incorporated (it!in specific countries, t!e names of (!ic! (ill "e notified "y t!e central goernment. 7it! prior approal of t!e central
goernment, companies are no( allo(ed to pay t!e consideration for suc! mergers eit!er in cas! or in depository receipts or partly in cas! and
partly in depository receipts as agreed upon in t!e sc!eme of arrangement. 1section 234 of t!e 2013 -ct2. &!ese ne( proisions can "e greatly
"eneficial to %ndian companies (!ic! !ae a glo"al presence "y proiding t!em structuring options (!ic! do not e9ist currently.
-. S2ueeCe out provisions
&!e 2013 -ct !as introduced ne( proisions for ena"ling t!e ac:uirer of a company 1!olding 00M or more s!ares2 "y (ay of
amalgamation, s!are e9c!ange, etc to ac:uire s!ares from t!e minority !olders su",ect to compliance (it! certain conditions.
&!is !as also introduced t!e re:uirement for 4registered aluers5, since t!e price to "e offered "y ma,ority s!are!older needs to
"e determined on t!e "asis of aluation "y a registered aluer 1section 236 of t!e 2013 -ct2.
Companies -ct, 2013
33
+e*i*a$ and
re%a#i$itation o sic,
companies
8
34 /(C
-hapter 737 of the 2013 Act lays down the provisions for the revival and rehabilitation of sic%
companies. The chapter describes the circumstances which determine the declaration of a
company as a sic% company$ and also includes the rehabilitation process of the same.
Although it aims to provide comprehensive provisions for the revival and rehabilitation of sic%
companies$ the fact that several provisions such as particulars$ documents as well as
content of the draft scheme in respect of application for revival and rehabilitation$ etc. have
been left to substantive enactment$ leaves scope for interpretation.
The coverage of this chapter is no longer restricted to industrial companies, and the
determination of the net worth would not be relevant for assessing whether a company is
a sic' company
&!e coerage of Sic# %ndustrial Companies -ct, 10$3 1S%C-2 is limited to only industrial companies, (!ile t!e 2013 -ct
coers t!e reial and re!a"ilitation of all companies, irrespectie of t!eir sector.
&!e determination of (!et!er a company is sic#, (ould no longer "e "ased on a situation (!ere accumulated losses e9ceed t!e
net (ort!. Rat!er it (ould "e determined on t!e "asis (!et!er t!e company is a"le to pay its de"ts. %n ot!er (ords, t!e
determining factor of a sic# company !as no( "een s!ifted to t!e secured creditors or "an#s and financial institutions (it! regard
to t!e assessment of a company as a sic# company.
&!e 2013 -ct does not recognise t!e role of all sta#e!olders in t!e reial and re!a"ilitation of a sic# company, and proisions
predominantly reole around secured creditors. &!e fact t!at t!e 2013 -ct recognises t!e presence of unsecured creditors, is felt
only at t!e time of t!e approal of t!e sc!eme of reial and re!a"ilitation. %n accordance (it! t!e re:uirement of section 233 of
t!e 2013 -ct, a company is assessed to "e sic# on a demand "y t!e secured creditors of a company representing 30M or more of
its outstanding amount of de"t under t!e follo(ing circumstances8
1 &!e company !as failed to pay t!e de"t (it!in a period of 30 days of t!e serice of t!e notice of demand
2 &!e company !as failed to secure or compound t!e de"t to t!e reasona"le satisfaction of t!e creditors
&o speed up t!e reial and re!a"ilitation process, t!e 2013 -ct proides a one year time period for t!e finalisation of t!e
re!a"ilitation plan.
Overvie/ o, the process
1 %n response to t!e application made "y eit!er t!e secured creditor or "y t!e company itself, if t!e &ri"unal is satisfied t!at a
company !as "ecome a sic# company, it s!all gie time to t!e company to settle its outstanding de"ts if &ri"unal "eliees
t!at it is practical for t!e company to ma#e t!e repayment of its de"ts (it!in a reasona"le period of time.
2 Ance a company is assessed to "e a sic# company , an application could "e made to t!e &ri"unal under section 234 of t!e
2013 -ct for t!e determination of t!e measures t!at may "e adopted (it! respect to t!e reial and re!a"ilitation of t!e
identified sic# company eit!er "y a secured creditor of t!at company or "y t!e company itself. &!e application t!us made
must "e accompanied "y audited financial statements of t!e company relating to t!e immediately preceding financial year, a
draft sc!eme of reial and re!a"ilitation of t!e company, and (it! suc! ot!er document as may "e prescri"ed.
Su"se:uent to t!e receipt of t!e application, for t!e purpose of reial and re!a"ilitation, t!e &ri"unal, not later t!an seen
(ould "e re:uired to fi9 a date for !earing and (ould "e appointing an interim administrator under Section 236 of 2013 -ct to
conene a meeting of creditors of t!e company in accordance (it! t!e proisions of section 23< of t!e 2013 -ct. %n certain
circumstances, t!e &ri"unal may appoint an interim administrator as t!e company administrator to perform suc! functions as
t!e &ri"unal may direct.
3 &!e administrator t!us appointed (ould "e re:uired to prepare a report specifying t!e measures for reial and
re!a"ilitation of t!e identified sic# industry. &!e measures t!at !ae "een identified under t!e section 261 of t!e 2013 -ct
for t!e purpose of reial and re!a"ilitation of a sic# company proides for t!e follo(ing options8
-- >inancial reconstruction
-- C!ange in or ta#eoer of t!e management
-- -malgamation of t!e sic# company (it! any ot!er company, or anot!er company5s amalgamation (it! t!e sic# company
1 &!e sc!eme t!us prepared, (ill need to "e approed "y t!e secured and unsecured creditors representing t!ree'fourt!
and one'fourt! of t!e total representation in amounts outstanding respectiely, "efore su"mission to t!e &ri"unal for
sanctioning t!e sc!eme pursuant to t!e re:uirement of section 262 of t!e 2013 -ct. &!e &ri"unal, after e9amining t!e
sc!eme (ill gie its approal (it! or (it!out any modification. &!e sc!eme, t!us approed (ill "e communicated to t!e
sic# company and t!e company administrator, and in t!e case of amalgamation, also to any ot!er company concerned.
1 &!e sanction accorded "y t!e &ri"unal (ill "e construed as conclusie eidence t!at all t!e re:uirements of t!e sc!eme
relating to t!e reconstruction or amalgamation or any ot!er measure specified t!erein !ae "een complied (it!. - copy of t!e
sanctioned sc!eme (ill "e filed (it! t!e RAC "y t!e sic# company (it!in a period of 30 days from t!e date of its receipt.
2 =o(eer, if t!e sc!eme is not approed "y t!e creditors, t!e company administrator s!all su"mit a report to t!e &ri"unal
(it!in 13 days, and t!e &ri"unal s!all order for t!e (inding up of t!e sic# company. An passing of an order, t!e &ri"unal
s!all conduct t!e proceedings for (inding up of t!e sic# company in accordance (it! t!e proisions of C!apter II,.
Companies -ct, 2013 3&
Corporate socia$
responsi#i$it!
9
36 /(C
&!e Ministry of Corporate -ffairs 1MC-2 !ad introduced t!e Corporate Social Responsi"ility Joluntary Tuidelines in 2000. &!ese
guidelines !ae no( "een incorporated (it!in t!e 2013 -ct and !ae o"tained legal sanctity. Section 133 of t!e 2013 -ct, see#s to
proide t!at eery company !aing a net (ort! of 300 crore %;R, or more or a turnoer of 1000 crore %;R or more, or a net profit of fie
crore %;R or more, during any financial year s!all constitute t!e corporate social responsi"ility committee of t!e "oard.
&!is committee needs to comprise of t!ree or more directors, out of (!ic!, at least one director s!ould "e an independent director.
&!e composition of t!e committee s!all "e included in t!e "oard5s report. &!e committee s!all formulate t!e policy, including
actiities specified in Sc!edule J%%, (!ic! are as follo(s8
1 Hradicating e9treme !unger and poerty
2 /romotion of education
3 /romoting gender e:uality and empo(ering (omen
4 Reducing c!ild mortality and improing maternal !ealt!
5 Com"ating !uman immunodeficiency irus, ac:uired immune deficiency syndrome, malaria and ot!er diseases
6 Hnsuring enironmental sustaina"ility
7 Hmployment en!ancing ocational s#ills
8 Social "usiness pro,ects
9 Contri"ution to t!e /rime Minister5s ;ational Relief >und or any ot!er fund set'up "y t!e central goernment or t!e state
goernments for socio'economic deelopment and relief, and funds for t!e (elfare of t!e sc!eduled castes and &ri"es,
ot!er "ac#(ard classes, minorities and (omen
10 Suc! ot!er matters as may "e prescri"ed
There have been mi&ed reactions to the introduction of the spend or e&plain" approach ta%en by the
8-A with respect to -S1. 3t may ta%e a while before all of -orporate 3ndia imbibes -S1 as a culture.
=o(eer, actiities specified in t!e Sc!edule are not ela"orate or detailed enoug! to indicate t!e #ind of pro,ects t!at could "e
underta#en, for e9ample, enironment sustaina"ility or social "usiness pro,ects could encompass a (ide range of actiities.
&!e committee (ill also need to recommend t!e amount of e9penditure to "e incurred and monitor t!e policy from a time'to'time.
&!e "oard s!all disclose t!e contents of t!e policy in its report, and place it on t!e (e"site, if any, of t!e company. &!e 2013 -ct
mandates t!at t!ese companies (ould "e re:uired to spend at least 2M of t!e aerage net'profits of t!e immediately preceding
t!ree years on CSR actiities, and if not spent, e9planation for t!e reasons t!ereof (ould need to "e gien in t!e director5s
report1section 133 of t!e 2013 -ct2.
Companies -ct, 2013
37
Imp$ications on
pri*ate companies
1
0
38 /(C
&!e main c!ange in t!e definition of a priate company is in t!e increase in t!e limit of t!e num"er of mem"ers from 30 to 200 .
Secondly, t!e definition does not state t!at a company initing or accepting deposits from persons ot!er t!an its mem"ers,
directors or t!eir relaties cannot "e a priate company. 1section 216$2 of t!e 2013 -ct2.
Certain re:uirements (!ic! (ere till no( applica"le to pu"lic companies or su"sidiaries of pu"lic companies !ae no( "een
also e9tended to priate companies . Some suc! re:uirements include t!e follo(ing8
1 Section 00 of t!e 1036 -ct, (!ic! (as a saing section for priate companies, !as not "een incorporated in t!e 2013 -ct,
t!us ma#ing t!e proisions relating to t!e arious #ind of s!are capital and oting rig!ts applica"le to priate companies.
Also refer -hapter9 Setting up of a -ompany :share capital and debentures;
2 /roisions for t!e appointment of managerial personnel, in section 106 of t!e 2013 -ct, are also applica"le to priate
companies. &!erefore, t!e follo(ing re:uirements are no( applica"le to priate companies8
-- &!e re'appointment of a managerial person cannot "e made earlier t!an one year "efore t!e e9piry of t!e term.
=o(eer, t!e term for (!ic! t!e managerial personnel can "e appointed is fie years
-- &!e eligi"ility criteria for t!e age limit !as "een set "et(een 21 to <0 years. -n indiidual a"oe t!e age of <0 years can
also "e appointed as t!e #ey managerial personnel "y passing a special resolution.
-- %n addition, priate companies !ae t!e option to adopt principle of proportional representation for appointment of directors
1section 163 of t!e 2013 -ct2.
1 &!e 2013 -ct restricts certain po(ers of t!e "oard of priate companies, (!ic! can "e e9ercised only (it! t!e company5s
consent "y a special resolution. Some po(ers t!us restricted are as follo(s 8
-- &o sell, lease or ot!er(ise dispose of t!e (!ole or su"stantially t!e (!ole of t!e company5s underta#ing -- &o
"orro( money in e9cess of t!e aggregate of its paid'up s!are capital and free reseres
1 &!e re:uirements relating to corporate social responsi"ilities are also applica"le to priate companies since t!e criteria is
"ased on specified leels of t!e net (ort!, turnoer and net profit. =o(eer, it is of releance to note, t!at (!ile priate
companies are not re:uired to appoint independent directors as per section 140 of t!e 2013 -ct, t!e section on CSR, re:uires
companies (it!in t!e specified t!res!olds to constitute a corporate social responsi"ility committee consisting of t!ree or more
directors, out of (!ic! at least one director must "e an independent director. &!is re:uirement appears to "e contradictory to
t!e e9tent t!at t!e section applies to priate companies. Also refer -hapter9 -orporate Social 1esponsibilities
2 /riate companies (ould no( "e re:uired to comply (it! t!e re:uirements for inter'corporate loans as (ell as inestments, (!ic! (ere
!it!erto not applica"le. Also refer -hapter 9 +irectors :8eetings of the 6oard and its 'owers ! <oans and investments by a company;
3 &!e proisions relating to t!e appointment of t!e managing director, (!ole'time director or manager are also applica"le to
priate companies. 1efer -hapter 9 +irectors :Appointment and remuneration of managerial personnel ! 3ntroduction;
4 >or certain ot!er compliance re:uirements, refer to C!apter8 +irectors 1Teneral ' -dditional compliance re:uirements for
priate companies2
There is a mar%ed increase in the compliance requirements mandated for private companies
under the 2013 Act. ,hile some of these will go a long way in increasing the accountability of
private companies$ there are also concerns as to the need for increasing the comple&ities in
private companies in which the public at large is not interested.
Companies -ct, 2013
39
-t%er areas
11
40 /(C
Acceptance o deposits
%t is pertinent to note t!at t!e re:uirements relating to acceptance of deposits are already :uite stringent under t!e 1036 -ct and t!e
Rules made t!ereunder. &!e 2013 -ct furt!er strengt!ens t!ese proisions. - significant impact of t!e 2013 -ct is t!at only t!ose
pu"lic companies (!ic! meet t!e prescri"ed net (ort! or turnoer criteria may accept deposits from persons ot!er t!an its
mem"ers. At!er companies can accept deposits only from its mem"ers.
The proposed provisions will enhance the protection of the deposit holders.
-ompanies will have to incur additional costs due to requirements related to credit rating$
maintenance of additional liquid funds$ deposit insurance$ etc.
1. &cceptance o, deposits
&!e 2013 -ct states, t!at only t!ose companies (!ic! meet suc! net (ort! or turnoer criteria as may "e prescri"ed (ill "e
eligi"le to accept deposits from indiiduals ot!er t!an its mem"ers. Suc! companies (ill also "e re:uired to o"tain t!e rating
1including its net (ort!, li:uidity and a"ility to pay its deposits on due date2 from a recognised credit rating agency (!ic!
ensures ade:uate safety Bsection <6112 of t!e 2013 -ctC.
Companies (!ic! do not meet t!e net (ort! or turnoer criteria (ill only "e a"le to accept deposits from its mem"ers Bsection
<3122 of t!e 2013 -ctC.
-ll companies (ill "e re:uired to comply (it! t!e prescri"ed conditions (!ic! includes issuance of a circular to its mem"ers, o"taining
credit rating, proiding deposit insurance, maintaining deposit repayment resere account, etc. Bsection <3122 of t!e 2013 -ctC.
2. Outstandin deposits
&!e 2013 -ct states t!at deposits accepted "efore t!e 2013 -ct comes into force (ill need to "e repaid (it!in one year from t!e
commencement of t!e 2013 -ct or (!en suc! payments are due, (!ic!eer is earlier Bsection <4112 of t!e 2013 -ctC. &!is is li#ely
to create significant financial impact on companies (!ic! !ae currently accepted deposits and (ill not meet t!e eligi"ility criteria
under t!e 2013 -ct.
#. Protection o, depositors
-n amount e:uialent to a minimum 13M of deposits maturing during t!e financial year as (ell as t!e follo(ing financial year
(ill need to "e #ept in a separate "an# account (it! a sc!eduled "an#. &!e Companies 1-cceptance of +eposits2 Rules, 10<3
currently re:uires t!at 13M of deposits maturing during t!e financial year needs to "e #ept in "an# or inested in specified
securities Bsection <3122 of t!e 2013 -ctC.
-dditionally, t!e 2013 -ct also states t!at t!e deposit insurance as prescri"ed (ill also "e re:uired to "e proided Bsection <3122 of
t!e 2013 -ctC.
+egistered *a$uers
&!e 2013 -ct !as introduced a ne( concept of registered aluers (!o are re:uired for proiding aluation reports mandated
under arious sections. &!ese include t!e follo(ing8
1 >urt!er issue of s!are'capital 1section 62 of t!e 2013 -ct2
2 Restriction on non'cas! transactions inoling directors 1section 102 of t!e 2013 -ct2
3 Compromises, arrangements and amalgamations Bsection 230 of t!e 2013 -ctC
4 /urc!ase of minority s!are !olding 1section 236 of t!e 2013 -ct2
5 Su"mission of a report "y t!e company li:uidator 1section 2$1 of t!e 2013 -ct2
6 +eclaration of solency in case of proposal to (ind up oluntarily 1section 303 of t!e 2013 -ct2
7 /o(er of t!e company li:uidator to accept s!ares, etc., as consideration for t!e sale of property of t!e
company 1section 310 of t!e 2013 -ctC2
8 &!e :ualification, e9perience as (ell as t!e process of registration as a aluer !ae "een prescri"ed in t!e draft
rules@ 1section 24< of t!e 2013 -ct2.
Companies -ct, 2013
41
.inding/up
1 C!apter II of t!e 2013 -ct consisting of sections 2<0 to 363, deals (it! t!e proisions of (inding'up of companies. &!e 1036
-ct prescri"es t!ree modes of (inding'up. &!is includes t!e follo(ing8
--)y t!e court
--Rnder t!e superision of t!e court
--Joluntary
-s against t!e e9isting modes of (inding'up as prescri"ed "y t!e 1036 -ct, t!e 2013 -ct prescri"es t!e follo(ing t(o
modes8 --)y t!e &ri"unal
--Joluntary
&!e 2013 -ct does not ac#no(ledge t!e distinction "et(een mem"ers oluntarily (inding'up and creditors oluntarily (inding'
up. -dditionally, t!e ne( grounds for (inding'up "y &ri"unal are as follo(s8
-- %n a situation (!en t!e company !as acted against t!e interests of soereignty and integrity of %ndia, t!e security of t!e
state, friendly relations (it! foreign states, pu"lic order, decency or morality
-- Arder !as "een made under C!apter I%I 1Reial and Re!a"ilitation of Sic# Companies2.
-- -n application !as "een made "y t!e RAC or any ot!er person aut!orised "y t!e central goernment "y a notification
under t!e 2013 -ct.
-- &!e tri"unal is of t!e opinion t!at t!e affairs of t!e company !ae "een conducted in a fraudulent manner or t!e company
(as formed for fraudulent and unla(ful purposes or t!e persons concerned in t!e formation or management of its
affairs !ae "een found guilty of fraud, misfeasance or misconduct in connection t!ere(it!, and t!at it is proper t!at t!e
company "e (ound up
-- &!e company !as made a default in filing (it! t!e RAC, its financial statements or annual returns for immediately
preceding fie consecutie financial years
(ea$ing wit% raud
&!e 2013 -ct deals e9tensiely on t!e issue of fraud 1section 44< of t!e 2013 -ct2 and !as for t!e first time defined
fraud specifically as8
"#raud in relation to affairs of a company or any body corporate$ includes 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 in4ure 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=
&!e term, 4(rongful gain5 means gain "y unla(ful means of property to (!ic! t!e person gaining is not legally entitled and 4(rongful
loss5 means t!e loss "y unla(ful means of property to (!ic! t!e person losing is legally entitled BH9planation to section 44< of t!e
2013 -ctC.
1 >urt!er, t!e penalties as prescri"ed under t!is section are as follo(s8
-- %mprisonment for a term of not less t!an si9 mont!s, "ut (!ic! may e9tend to 10 years
-- >ine not less t!an t!e amount inoled in t!e fraud, "ut (!ic! may e9tend to t!ree times t!e amount inoled in t!e fraud -- -lso,
(!ere t!e fraud in :uestion inoles pu"lic interest, t!e term of imprisonment s!all not "e less t!an t!ree years
&!e proisions of t!is section !ae a significant impact and t!ere are arious areas across t!e 2013 -ct, (!ic! (ill lead a person
to "e lia"le under t!is section. Some of t!ese areas are as follo(s8
-- 7!ere a person furnis!es any false or incorrect particulars of any information or suppresses any material information
in relation to incorporation of a company filed (it! t!e RAC Bsection <132 and 162 of t!e 2013 -ctC
-- %n case of t!e formation of t!e company (it! c!arita"le purpose, (!ere it is proed t!at t!e affairs of t!e company
(ere conducted fraudulently ' eery officer in default Bsection $1112 of t!e 2013 -ctC
-- 7!ere a prospectus, issued, circulated or distri"uted includes any statement (!ic! is untrue or misleading in form or
conte9t in (!ic! it is included or (!ere any inclusion or omission of any matter is li#ely to mislead, eery person (!o
aut!orises t!e issue of suc! prospectus Bsection 34 of t!e 2013 -ctC
-- >raudulently inducing persons to inest money 1section 36 of 2013 -ct2 --
/ersonation for ac:uisition, etc. of securities 1section 3$ of t!e 2013 -ct2
-- 7!ere any depository or depository participant, !as transferred s!ares (it! an intention to defraud a person 1section 46162
of t!e 2013 -ct2
-- >ailure to repay t!e deposit or a part t!ereof or any interest t!ereon, (it!in t!e time limits as applica"le, and (!ere it is
proed t!at suc! deposits (ere accepted (it! intent to defraud t!e depositors or for any fraudulent purpose 1section
<3 of the 2013 Act#
42 /(C
-- 7!ere t!e &ri"unal is satisfied t!at t!e auditor of a company !as, (!et!er directly or indirectly, acted in a fraudulent manner
or a"etted or colluded in any fraud "y, or in relation to, t!e company or its directors or officers Bsection 140132 of t!e 2013
-ctC
-- 7!ere it is proed t!at t!e partner or partners of t!e audit firm !as or !ae acted in a fraudulent manner or a"etted or
colluded in any fraud "y, or in relation to or "y, t!e company or its directors or officers Bsection 14<142 of t!e 2013 -ctC
-- /enalty for furnis!ing false statement, mutilation, destruction of documents 1section 220 of t!e 2013 -ct2
S%are%o$der democrac!
-c#no(ledging t!e concept of s!are!older democracy, arious proisions !ae "een incorporated in t!e 2013 -ct. &!ese
proisions can "e "roadly classified as under8
1 S!are!older rig!ts or protection
2 Special consideration to small s!are!olders
1. Shareholder rihts or protection
Class action suits: - class action is a legal form of la(suit (!ere a large group of indiiduals collectiely "ring a claim to court or in
(!ic! a particular class of defendants is "eing sued. &!e concept of collectie la(suit finds its roots in t!e RS , (!ere it is still
(idely prealent. %n seeral Huropean countries, c!anges !ae "een made recently in t!eir ciil la(, to allo( consumer
organisations to "ring claims on "e!alf of large groups of consumers.
-c#no(ledging t!e need to "e at par (it! glo"al standards, for class action la(suit, t!e 2013 -ct !as empo(ered s!are!olders
associations or group of s!are!olders to ta#e legal action in case of any fraudulent action on t!e part of company and to ta#e
part in inestor protection actiities and class action suits1section 243 of t!e 2013 -ct2.
-dditionally, in response to t!e Standing Committee5s recommendation in its &(enty >irst Report for ensuring protection of
interests of minority s!are!olders and small inestors, t!e MC- suggested t!at during ad,udication on class action suits, t!e
&ri"unal (ill ensure t!at t!e interests of s!are!olders are protected and (rongdoers, including auditors and audit firms, are
re:uired to compensate t!e ictims on suita"le orders "y &ri"unal.
-lso, as stated in t!e 2013 -ct, t!e central goernment (ill !ae po(er to prescri"e class or classes of companies (!ic! s!all
not "e permitted to allo( use of pro9ies. &!e 2013 -ct also to !ae proisions to proide t!at a person s!all !ae pro9ies for
suc! num"er of mem"ers or suc! s!ares as may "e prescri"ed.
2. Special consideration to small shareholders
&!e 2013 -ct ac#no(ledges t!e e9isting rig!ts of small s!are!olders enisaged in section 232- of t!e 1036 -ct under t!e
follo(ing sections8
1 - listed company may !ae one director elected "y suc! small s!are!olders in t!e manner and (it! t!e terms and conditions as may
"e prescri"ed. =ere t!e term, 4small s!are!olders5 means a s!are!older !olding s!ares of nominal alue of not more t!an 20, 000 %;R
or suc! ot!er sum as may "e prescri"ed 1section 166 of 2013 -ct2. Also refer to shareholder democracy$ chapter on >ther Areas"
2 &!e "oard of directors of a company (!ic! consists of more t!an 1,000 s!are!olders, de"enture'!olders, deposit'!olders and
any ot!er security !olders at any time during a financial year s!all constitute a sta#e!olders relations!ip committee consisting
of a c!airperson (!o s!all "e a non'e9ecutie director and suc! ot!er mem"ers as may "e decided "y t!e "oard. >urt!er, t!e
section under su"'section si9, recognises t!e concept of t!e sta#e!olders relations!ip committee (!ic! is re:uired to
consider and resole t!e grieances of security !olders of t!e company1section 1<$ of t!e 2013 -ct2.
3 Specific disclosure under t!e sc!eme of mergers or amalgamation regarding t!e effect of merger on minority s!are!olders is
to "e proided.
4 Rnder arious sections in t!e 2013 -ct, for e9ample, ariation in terms of contract or o",ect in prospectus, t!e dissenting
s!are!olders !ae "een proided (it! an option to e9it (!ic! act as a protection of t!e interests of small s!are!olders.
The concept of class action suits$ considering the best interests of the shareholders$ is a welcome provision.
(owever$ the fact that there are always possibilities of misuse cannot be ignored
Additionally$ it is important to note that 3ndia$ being a developing economy$ may find it
difficult to appreciate the concept of class action suits" and implement it successfully.
Companies -ct, 2013
43
1# !ections notified till date
and circu$ars or orders issued
C!apter $ection %itle
I 1 S!ort title, e9tent, commencement and application
2&1# -"ridged prospectus
2&3# Alter or alteration
2&4# -ppellate &ri"unal
2132 Articles
2&'# -ssociate company
2&8# -ut!orised or nominal capital
2102 )an#ing company
2&10# )oard of directors or t!e "oard
2&11# )ody corporate or corporation
2&12# )oo# and paper and "oo# or paper
2&14# )ranc! office
21132 Called'up capital
2&1'# !harge
211<2 !hartered accountant
2&18# C!ief e9ecutie officer
21102 C!ief financial officer
2&20# Company
2&21# Company limited "y guarantee
2&22# Company limited "y s!ares
2&24# Company secretary or secretary
2&28# !ost accountant
21202 Be9cept for su"'clause 1i2C !ourt
2&30# Debenture
2&32# +epository
2&33# Derivative
2&34# Director
21332 Dividend
2&3'# +ocument
213<2 Hmployees5 stoc# option
2&38# H9pert
21302 >inancial institution
2&40# >inancial statement
2&43# >ree resere
2&44# Tlo"al depository receipt
21432 Toernment company
2&4'# =olding company
21402 %ndependent director
21302 %ssued capital
21312 Key managerial personnel
21322 *isted company
21332 (anager
21342 (anaging director
44 /(C
C!apter $ection
21332
21362
213<2
213$2
21302
2&'0#
2&'1#
2&'3#
2&'4#
21632
2&''#
216<2
2&'8#
21602
21<02
21<12
21<22
21<32
21<42
21<32
21<62
21<<2
21<$2
21<02
2&80#
2&81#
2&82#
2&84#
2&8'#
21$<2 Be9cept t!e proiso and H9pla)nation 1d2C
2&88#
21$02
21002
21012
21022
21032
21042
21032
%itle
Mem"er Memorandum
Net *orth
;otification Afficer
Afficer (!o is in default Afficial
li:uidator
Ardinary or special resolution
/aid'up s!are capital or s!are capital paid'up /ostal
"allot
/rescri"ed
/reious company la( /riate
company /romoter
/rospectus /u"lic company
/u"lic financial institution Recognised stoc#
e9c!ange Register of companies
egistrar
Related party
elative
Remuneration
$chedule
Sc!eduled "an#
$ecurities
$ecurities and e+change board $hare
Su"scri"ed capital
Su"sidiary company or su"sidiary
S(eat e:uity s!ares &otal oting
po(er
%ribunal
%urnover
Rnlimited company Joting rig!t
7!ole'time director
7ords and e9pressions used and not defined in t!is -ct
Companies -ct, 2013 4&
C!apter $ection %itle
II 10 Su"sidiary company not to !old s!ares in its !olding company
21 -ut!entication of documents, proceedings and contracts
22 H9ecution of "ills of e9c!ange, etc.
III 23 Be9cept 231121"2 and 23122C /u"lic offer and priate placement
24 /o(er of securities and e9c!ange "oard to regulate t!e issue and transfer of
securities, etc.
23 Be9cept 23132C +ocument containing t!e offer of securities for sale to "e deemed prospectus
20 /u"lic offer of securities to "e in dematerialised form
30 -dertisement of prospectus
31 S!elf prospectus
32 Red !erring prospectus
33 Be9cept 33132C %ssue of application forms for securities
34 Criminal lia"ility for misstatements in prospectus
33 Be9cept 331121e2C Ciil lia"ility for misstatements in prospectus
3' /unis!ment for fraudulently, inducing persons to inest money
3< -ction "y t!e affected persons
38 /unis!ment for personation for ac:uisition, etc., of securities
30 Be9cept 30142C -llotment of securities "y company
40 Be9cept 40162C Securities to "e dealt (it! in stoc# e9c!anges
%J 44 ;ature of s!ares or de"entures
43 ;um"ering of s!ares
40 Calls on s!ares of same class to "e made on uniform "asis
30 Company to accept unpaid s!are capital, alt!oug! not called'up
31 /ayment of diidend in proportion to t!e amount paid'up
3< /unis!ment for personation of t!e s!are!older
3$ Refusal of registration and appeal against refusal
30 Rectification of register of mem"ers
'0 /u"lication of aut!orised, su"scri"ed and paid'up capital
63 Rnlimited company to proide for resere s!are capital on conersion into
limited company
60 &ransfer of certain sums to capital redemption resere account
<0 Be9cept <0122C /ro!i"ition for "uy'"ac# in certain circumstances
J% 8' /unis!ment for contraention
J%% 01 /o(er to close register of mem"ers or de"enture !olders or ot!er security
holders
100 Be9cept 100 162C Calling of e9traordinary general meeting
102 Statement to "e anne9ed to notice
103 Uuorum for meetings
104 C!airman of meetings
103 Be9cept t!e t!ird and fourt! /ro9ies
proiso of 103112 and 1031<2C
10' estriction on voting rights
10< Joting "y s!o( of !ands
111 Circulation of mem"ers5 resolution
112 Representation of /resident and goernors in meetings
113 Be9cept 1131121"2C Representation of corporations at meeting of companies and of creditors
114 Ardinary and special resolutions
11' Resolutions passed at ad,ourned meeting
46 /(C
C!apter $ection %itle
J%%% 12< /unis!ment for failure to distri"ute diidends
%I 133 Central goernment to prescri"e accounting standards
I% 161 Be9cept 161122C -ppointment of additional director, alternate director and nominee director
1'2 -ppointment of directors to "e oted indiidually
1'3 Aption to adopt principle of proportional representation for appointment of
directors
I%% 1<6 +efects in appointment of directors not to inalidate actions ta#en
180 Restrictions on po(ers of t!e "oard
181 Company to contri"ute to "ona fide and c!arita"le funds, etc.
182 /ro!i"itions and restrictions regarding political contri"utions
183 /o(er of t!e "oard and ot!er persons to ma#e contri"utions to t!e national
defence fund, etc.
1$3 *oan to directors, etc.
102 estriction on non)cash transactions involving directors
104 /ro!i"ition on for(ard dealings in securities of company "y director or #ey
managerial personnel
103 /ro!i"ition on insider trading of securities
I%%% 202 Compensation for loss of office of managing or (!ole'time director or man)
ager
II%% 3<0 -pplication of t!e -ct to foreign companies
382 +isplay of name, etc., of t!e foreign company
383 Serice on t!e foreign company
3$6 Be9cept clause 1a2C %nterpretation
II%%% 304 -nnual reports on goernment companies
IIJ 403 /o(er of t!e central goernment to direct companies to furnis! information
or statistics
IIJ%% 40< +efinitions
408 Constitution of t!e ;ational Company *a( &ri"unal
400 Uualification of t!e /resident and mem"ers of t!e &ri"unal
410 Constitution of t!e -ppellate &ri"unal
411 Uualifications of t!e c!airperson and mem"ers of t!e -ppellate &ri"unal
412 Selection of mem"ers of t!e &ri"unal and t!e -ppellate &ri"unal
413 &erm of office of t!e /resident, c!airperson and ot!er mem"ers
414 Salary, allo(ances and ot!er terms and conditions of serice of t!e mem"ers
IIJ%%% 430 Affences to "e non'cognisa"le.
443 /o(er of t!e central goernment to appoint company prosecutors
444 -ppeal against ac:uittal
443 Compensation for accusation (it!out reasona"le cause
44' -pplication of fines
II%I 44< /unis!ment for fraud
448 /unis!ment for a false statement
440 /unis!ment for false eidence
430 /unis!ment (!ere no specific penalty or punis!ment is proided
431 /unis!ment in case of repeated default
432 /unis!ment for (rongful (it!!olding of property
Companies -ct, 2013
47
C!apter $ection %itle
433 /unis!ment for t!e improper use of 4limited5 or 4priate
limited5
436 /rotection of action ta#en in good fait!
43< ;on'disclosure of information in certain cases
43$ +elegation "y t!e central goernment of its po(ers and functions
430 /o(ers of t!e central goernment or &ri"unal to accord approal, etc., su",ect
to conditions and to prescri"e fees on applications
4'0 Condonation of delay in certain cases
4'1 -nnual report "y t!e central goernment
4'2 /o(er to e9empt class or classes of companies from
t!e proisions of t!is -ct
4'3 /o(er of court to grant relief in certain cases
46< /o(er of central goernment to amend t!e Sc!edules
4'8 /o(ers of t!e central goernment to ma#e rules relating to (inding'up
460 /o(er of t!e central goernment to ma#e rules
4<0 /o(er to remoe difficulties
48 /(C
(irculars or orders issued clarifying the notified sections)
1+ 9eneral Circular )o1%D251# dated 1# September 251#: %his proides clarifications on t!e implementation of sections 216$2, 102,
133 and 1$0. &!e clarifications gien are as follo(s8
1 Sub-section *%3+ o, section 28 &!e Registrar of Companies may register t!ose memorandum and articles of association receied
till 11 Septem"er 2013 as per t!e definition clause of t!e priate company, under t!e Companies -ct, 1036 (it!out referring to
t!e definition of 4priate company5 under t!e said -ct.
2 Section 152: -ll companies (!ic! !ae issued notices of t!e general meeting on or after 12 Septem"er 2o13, t!e statement to
"e anne9ed to t!e notice s!all comply (it! additional re:uirements as prescri"ed in section 102 of t!e said -ct.
3 Section 1##: &ill t!e standards of accounting or any addendum t!ereto are prescri"ed "y t!e central goernment in
consultation and recommendation of t!e ;ational >inancial Reporting -ut!ority, t!e e9isting accounting standards notified
under t!e Companies -ct, 1036 s!all continue to apply.
4 Section 135: %n respect of re:uirements of special resolution under section 1$0 of t!e said -ct as against t!e ordinary
resolution re:uired "y t!e Companies -ct, 1036, if a notice for any suc! general meeting (as issued prior to 12 Septem"er
2013, t!en suc! resolution may "e passed in accordance (it! t!e re:uirement of t!e Companies -ct, 1036.
2) 0he eneral circular )o1-D251# dated 13 September 251#: &!is clarifies t!at (it! effect from 12 Septem"er 2o13, t!e releant
proisions of t!e Companies -ct, 1036, (!ic! correspond to t!e proisions of 0$ sections of t!e Companies -ct, 2013, "roug!t into
force on 12 Septem"er .2013, cease to !ae effect from t!at date.
3) 0he eneral circular )o 13D251# dated 14 )ovember 251#: &!is clarifies t!at section 3<2- of t!e 1036 -ct continues to remain in
force till section 1$6 is notified.
4) 2he Companies &emoval of 3ifficulties! Order, 2013: &!e MC- !as issued t!e Companies 1Remoal of +ifficulties2 Arder, 2013 1t!e
4Arder52, (!ic! see#s to remoe t!e difficulty (!ic! arises on account of notifying t!e applica"ility of sections 24, 3$ and 30 of t!e 2013 -ct (it!out
constituting t!e ;ational Company *a( &ri"unal as per C!apter IIJ%% of t!e 2013 -ct. Conse:uently, t!is order clarifies t!at Ountil a date is notified
by the central government under sub!section :l; of section ?3? of the -ompanies Act$ 2013 :1@ of 2013; for transfer of all matters$ proceedings or
cases to the Tribunal constituted under -hapter 77233 of the said Act$ the 6oard of -ompany <aw Administration shall e&ercise the powers of the
Tribunal under sections 2?$/@ and section /. in pursuance of the second proviso to sub!section
:l; of section ?)/ of the said Act.=
Companies -ct, 2013
49