Companies Act, 2013

Impact on subsidiaries of foreign

companies
Organiser

CCI
September 13, 2013

presented by

Sundeep Gupta

FCA, DISA(ICA)

Parveen Kumar

- Director

FCA - Director

Corporate Catalyst India

www.cci.in

FLOW OF THE PRESENTATION

Enactment and background

Framework
F
k
Significant Changes

ENACTMENT AND BACKGROUND

ENACTMENT
August 29, 2013 would be remembered as a historic day for
Corporate India. For, on this very day the Honourable President of
India gave his assent on the much-awaited, the much-needed, a
modern
ode a
and
d co
contemporary
te po a y co
company
pa y law.
a
This
s was
as notified
ot ed in Ga
Gazette
ette
of India on August 30, 2013 and replaces the Companies Act, 1956
Rules are now in p
public domain for opinion.
p
To be notified later
Applicability of the Act to be from a notified date in future

THE NEED
Transformed national and international
economic environment

Why was
there a
need for
new Law ?

Lessons from bad corporate

governance

Changes in stakeholders expectation

Manifold increase in number of

companies
Year
No. of Companies
1956
30,000 approx
2013
1,100,000 approx

THE JOURNEY
Report of SCF on
Companies Bill, 2009 was
introduced in Lok Sabha
on 31.08.2010

Companies Bill,
2008 introduced
on 23.10.2008

2008

2009

2010

Lapsed due to dissolution of Lok

S bh
Sabha;
reintroduced on 03.08.2009 as
Companies Bill, 2009.
Bill referred to SCF*

*[SCF]StandingCommitteeonFinance

2011

Companies Bill, 2012 as

amended was approved
by
Lok
Sabha
on
18.12.2012

2012

Companies
C
i
Bill 2011
Bill,
introduced
in
Lok
Sabha on 14.12.2011

2013

Passed by Rajya Sabha

on 08.08.2013
Presidents assent on
29.8.2013

FRAMEWORK

THE FRAMEWORK

Companies Act,
1956

Companies Act,
2013

Parts 13
Sections 658
Schedules 15
Definitions - 67

Chapters 29
Sections 470
Schedules 7
Definitions - 95

The Companies Act, 2013 give substantial powers to the Government & hence
major prescriptions would be in the form of Rules to be notified separately

SIGNIFICANT CHANGES

SIGNIFICANT CHANGES
Definitions increased
New classifications - One Person Company, Small
Company, Dormant Company
Governance - Women Directors, Resident Directors,
limits, Key Managerial Persons
Financial statements
Related
R l
dP
Parties
i
scope widened
id
d

SIGNIFICANT CHANGES
Foreign Company deemed to be Indian Company
Corporate Social Responsibility
New regulatory bodies to be set up
Stricter governance for private companies,
companies listed
companies
Mergers
M
& Acquistions
A
i i
- methodology
h d l

DEFINITIONS

KEY NEW INSERTIONS

Section/
Clause
2 (6)

Particulars
Associate Company Control of 20% or more of total share
capital or business decisions

2 (13)

Books of account to include electronic form

2 (18)

Chief Executive Officer designated as such by Board

2 (19)

Chief Financial Officer appointed as CFO

2 (27)

Control inclusive definition ; right to appoint majority directors,

control the management or policy decisions; directly or indirectly

2 (42)

Foreign company existing definition expanded; has a business

place in India itself or through an agent and business activity in
India

2 (51)

Key Managerial personnel specifically defined; CEO, CS, Whole

time director, CFO and any other prescribed person

KEY NEW INSERTIONS

Section/
Clause

Particulars

2 (52)

Listed company listing of any security

2 (60)

Officer in default significantly expanded to include persons

under the immediate authority of Board or KMP*

2 (62)

O
One
P
Person company

2 (69)

Promoter specifically defined now

2 (85)

S
Small
ll C
Company

* Key Managerial Personnel

NEW CLASSIFICATIONS

ONE PERSON COMPANY

To be mentioned as such under the company name

Private company formed with only one shareholder
Shareholder to be a natural person and Indian citizen
Shareholder to also nominate another natural person ;
written consent of such nominated person
Such a company provided relief from various provisions

ONE PERSON COMPANY

Not required to hold AGM
Board meeting:

1 per calendar half year

gap between meetings to be at least 90 days
If only 1 director, then no meeting required ; merely
intimation to company by the director

Such a company provided relief from various provisions

SMALL COMPANY
Should not be a public company
Paid up share capital of <= INR 5 million or such amount
as may be prescribed but <= INR 50 million ; or
Turnover <= INR 20 million or such amount as may be
prescribed but <= INR 200 million
Does not apply to holding / subsidiary company
Such a company provided relief from various provisions

ASSOCIATE COMPANY

Company in which that company has a significant influence

influence*, but which
is not a subsidiary company of the company having such influence. It
also includes a joint venture company.

*control of at the least twenty

y p
per cent of total share capital,
p
, or of
business decisions under an agreement;

DORMANT COMPANY
Formed for the purpose of:

Future project or holding an asset or intellectual property ;

and
Has no significant accounting transactions

Inactive company:

Not been carrying on any business or operation ; or

No significant accounting transaction in last 2 years ; or
Not filed financial statements and annual returns in last 2
years

Significant accounting transactions defined and includes

payments for maintenance of office and records

PRIVATE COMPANY MEMBERS LIMIT

Limit of members now increased to 200

Certain relaxations available earlier, now withdrawn

GOVERNANCE

DIRECTORS
At least one director to be resident in India 182 days or
more
*

Presence of woman director to prescribed class of

companies
Maximum 15 in any company ; can be increased by
special
p
resolution
Minimum

1 in case of OPC
2 in case of Private company
3 in case of Public company

A person to be a director in maximum 20 companies ; only

10 public companies

DIRECTORS
Independent directors for listed companies
Power to prescribe class of public companies to have
independent directors
Code of conduct for independent directors laid down
Duties of directors now specifically include exercise his
duties with due and reasonable care, skill and diligence
and independent
independent judgment
judgment
Resignation by director to be filed with authorities

KEY MANAGERIAL PERSONNEL

Specifically defined under the new Act

Chieff E
Chi
Executive
ti
Offi
Officer, Chief
Chi f Fi
Financial
i l Offi
Officer, C
Company
Secretary, Managing Director, Manager, Whole time director

Power to notify
f any other
h officer
ff
as KMP
Included in definition of officer in default

FINANCIAL STATEMENTS

FINANCIAL STATEMENTS
mandatory for all companies, except OPC, Small company,
dormant company:
Cash flow statement
Statement of changes in equity

Consolidated financial statements ; statement of salient

features of subsidiary, including associate company / JV
Depreciation methodology now on useful life of assets
instead of SLM / WDV rates ; concept of low value items
dispensed with

FINANCIAL STATEMENTS
Financial year be March 31 for all companies:

holding / subsidiaries of foreign companies may follow a

different year with permission of National Company Law
Tribunal

Alignment with financial year to be done within 2 years

Provisions for voluntary re-opening of financial statements:
Prior approval of Tribunal
Maximum upto 3 preceding years

Re
Re-opening
opening by court / Tribunal order if mismanagement or
fraudulent accounts

RELATED PARTIES

RELATED PARTIES
Scope widened to include:

KMP or their relatives

Private company in which the manager is a member
/director
Firm in which manager / his relative is a partner

Related party transactions to require Board approval

Now shareholders
shareholders approval for companies having
*
prescribed paid up capital (earlier Central Government)
Interested shareholders not to vote - how
h
to
t deal
d l with
ith
contracts between holding and subsidiary company ?

* Not yet prescribed

FOREIGN COMPANY

FOREIGN COMPANY
has a place of business in India whether by itself or through an agent,
physically or through electronic mode

conducts any business activity in India in any other manner

Deemed to be an Indian Company

Have to comply with Indian regulatory compliances like conducting
audit, filing return with ROC

CORPORATE SOCIAL RESPONSIBILITY

CORPORATE SOCIAL RESPONSIBILTY

APPLICABILITY
Company
p y which satisfies any
y one of the following
g condition
Net worth of INR 5 billion or more; or
Turnover of INR 10 billion or more; or
Net profit of INR 50 million or more:
during any financial year
*Activities separately specified

COMMITTEE
Mandatory to constitute CSR committee of the Board
Constitution :
At least 3 Directors;
At least one director shall be an independent director

Role of CSR Committee :

Formulate and monitor the CSR policy; and
Recommend the expenditure to be incurred on such activities

Board Role and responsibility :

Disclosure of CSR committee and contents of p
policy
y in report
p
Compliance with CSR policy
At least 2% of average net profits during 3 immediately
preceding years on CSR activities
In case of failure, Board to give reasons in report

NEW REGULATORY BODIES

NEW REGULATORY BODIES

NATIONAL COMPANY
LAW TRIBUNAL

NATIONAL FINANCIAL
REPORTING AUTHORITY

SERIOUS FRAUD
INVESTIGATION
AUTHORITY

STRICTER GOVERNANCE

STRICTER GOVERNANCE
Not to commence business unless:

Registered office is verified

Subscribed capital is received

Directors Report to include:

Extract of Annual return

Number of Board meetings
Declaration by independent directors
Details of loans,
loans guarantees,
guarantees investments
Details of contracts with related parties
Such other matters as may be prescribed

STRICTER GOVERNANCE
Annual return to contain information up to financial year
(instead of till AGM) and to include:

Changes off promoters / KMP since

Ch
i
previous
i
fi
financial
i l year
Meetings of Board / shareholders with attendance
Remuneration of Directors / KMPs
Penalties / punishments
p nishments imposed on company
compan

Audit committee to be constituted by every listed company

or prescribed
ib d class
l
off companies
i
Nomination and Remuneration Committee:

For every listed or prescribed class of companies

To recommend appointment and removal of directors
Carry out performance evaluation of directors

STRICTER GOVERNANCE
Stakeholders relationship committee:

Mandatory for every company with > 1000 shareholders,

debenture holders or any other security holders

Quorum now based on number of shareholders

Voting through electronic means permitted
S
Secretarial
i l standards
d d for
f board
b
d / shareholders
h
h ld
meetings
i
now mandatory (earlier recommendatory); as specified by
ICSI
Minimum 7 days notice to hold Board meeting ; quorum to
be 1/3
/ of total strength
g

STRICTER GOVERNANCE
Loans given in excess of prescribed limits:

Extended to any person (earlier only corporates)

Rate linked to government securities based on tenure of
loan (earlier prevailing bank rate)
Made applicable to private companies
Relaxation to loans given by holding company to subsidiary
company dispensed with

MERGERS AND ACQUISITIONS

PARTICULARS

COMPANIES ACT, 2013

Merger
g of Indian Co into
Foreign Co

Permitted

Merger or amalgamation
between
small
companies or between
holding companies and a
WOS or prescribed
Companies

Proposed
new
process
of
merger/
amalgamation of small companies or group
companies involves the approval of

COMPANIES ACT,
1956
Not p
permitted

Prior approval of the RBI required before

any foreign company merges with an Indian
company or vice versa

a. shareholders holding at least 90% of

the shares of the company
b. RoC
c. Official liquidator
d. Central Government

No such provision

PARTICULARS
Auditors Certificate

COMPANIES ACT, 2013

Auditor to certify
y accounting
g
treatment in the scheme is in
conformity with the
AS
prescribed under Clause 133
of the Act

COMPANIES ACT, 1956

No such p
provision

END OF SESSION 1

AccountingStandardsand
A di i S d d
AuditingStandards

FINANCIAL STATEMENTS
STATEMENTS
Financial
Position

OBJECTIVES

Performance

Cash Flows

Provide information useful to wide range of users.economic decisions

4
8

Investor
Creditor

Customer

USERS
Public

Employee

Lender

Regulator

Underlying Assumptions
Assumptions

Accrual

Going
Concern

Consistency
Clause22,23,24oftheFramework

Framework
Framework
Understandabilityy
Relevance
Reliability

Q
Qualitative
Characteristics

Substance Over
Form
Comparability
p
y
Prudence
Completeness

Example:
Example:A Listed Indian Companies having listed subsidiaries in US, Europe etc

Regroup T
R
Transactions
ti
& Report as per Indian GAAP
For ROC and SEBI.

Regroup Transactions
& Report as per IFRS
For Europe.

Regroup Transactions
& Report as per USGAAP
For SEC.

Major Challenges:a) Huge Cost and Resource Requirment

b) Comparability

52

To achieve the Global Objective

j
IASB - Introduced
IFRS (International Financial Reporting Standards)
(earlier also knows as IAS)

US

Group
Transactions
& Report as per
IFRS Only

India

Europe

Understanding Financials Across Boundaries .

53

Challenges

5
4

Challenges

5
5

India works on a multi-regulator model

Reserve Bank (RBI)

MCA

State Registrar
Of Chit Funds

National
Housing IRDA
Bank

RBI regulates deposit

taking activity

NBFCs

HFC

FC

AAA.C
..C

XX co.

SEBI

XXX

LC

YY
Infrastructure

XXX
Nidhi

ZZZZ
Chit Fund C.

CCCC SBC

General
Insurance

MF

ABC

Cost
Standards

Tax
Tax
Standards

IFRS
Regulators
RBI,SEBI,
IRDA.

AS

ToHelpUser
To
Help User
TakeDecisions

Ind
AS
(Schedule
VI)

FinancialStatements

New Concepts and Disclosure

Requirements

Accounting
g Standards

Auditing
g Standards

5
8

Current Structure of auditing standards In India

SQC

StandardonQualityControl 1 Qualitycontrolforfirmsthatperformaudit
&reviews

SAs

StandardsofAuditing(SA200to810) applicablefortheauditorswhile
conductingtheauditofhistoricalfinancialinformation

SREs

StandardsonReviewEngagement(SAEs2000and2699) tobeappliedfro
reviewofhistoricalfinancialinformation

SAEs

StandardsonAssuranceEngagement(SAEs3400and3402) applicableonall
assuranceengagementdealingonotherthanhistoricalfinancialinformation

SRSs

StandardsonRelatedservices(SRSs4400and4410)
(
) applicableincaseof
pp
engagementforagreedproceduresandcompilefinancialinformation
59

Title
Addressee

Auditors Reportp
Contents

Introductory
y Para
Mgt Responsibility for FS Para

Adobe Acrobat
Document

Auditors Responsibility Para

Auditors Opinion
Other Reporting Responsibilities
Signature of the Auditor
Date of the Auditors Report
Place of Signature

60

Inte nal Audit

Internal
A dit

Prescribedcompanieswillappointaninternalauditortoconductinternal
Prescribed
companies will appoint an internal auditor to conduct internal
auditofthefunctionsandactivitiesofthecompany.

Internalauditorwilleitherbeacharteredaccountantoracostaccountant,
orsuchotherprofessionalasmaybedecidedbytheboard.

TheCentralGovernment,may,byrules,prescribesthemannerandthe
intervalsinwhichtheinternalauditshallbeconductedandreportedto
theBoard.

Issues
Issues

Act

Standards

CASE STUDY - 1

Whatifdeparturefromstandardisallowedby
the regulator
theregulator

AS 15
Feb9,2011 RBIissuedcircular(DBOD.BP.BC.80/21.04.018/201011)on
reopening of Pension Option to employees of Public Sector
reopeningofPensionOptiontoemployeesofPublicSector
BanksandEnhancementsinGratuitylimits.
Intermsofthiscircularthebankmayamortizethisexpense
overaperiodof5years
p
y

This is departure from requirements of AS 15

AS 15
ICAIAnnouncement
Sincetheaccountingtreatmentforsuchexpenditureisprescribed
underprudentialregulatoryframeworkoftheRegulator,theauditors
neednotqualifytheirauditreportonthisaccount
AsperStandardofAudit(SA)706 themattershouldbebroughtout
bywayofEmphasisofMatterParagraphintheauditreport
Withoutqualifyingouropinion.

CASE STUDY - 2

Whethertwoormoreviewsarepossiblein
Accounting Standards
AccountingStandards

AS 15
AirlinesXallowsitsemployeestopurchase
airticketsatconcessionalprice
i i k
i
l i
Schemeallowsanemployeetopurchase
p y
p
maximum10ticketsinayear
Thiswillbesubjecttoavailabilityofseatsin
Thi ill b
bj t t
il bilit f
t i
therelevantflightandwithpriorreservation
Evaluate whether it needs to fair value the tickets provided to the
employees and recognize the difference as employee cost under AS 15

View

Clause4ofAS15 Employeebenefitalsoincludesnonmonetary
benefitssuchasmedicalcarehousing,carandfreeorsubsidizedgoods
SoprovisionofairticketsatconcessionalpriceiscoveredunderAS15

AS 15 g
generally
y talks about measurement of benefits as The Cost of the benefits
hence the measurement are based on difference between cost and amount charged.

Since no specific guidance on measurement of such benefits, an alternative view

also seems possible. The management may measure the cost of benefits by
reference to Fair Value of the goods.

CASE STUDY - 3

Whethererrorcorrectionsallowedin
Accounting Standards
AccountingStandards

LISTED COMPANY
Income Tax
to SCH XIV

Increased
Increased
Profitsof
109+ cr
109+cr

AS-6
AS-1

Proper
Disclosures

AS-5
Your View???????

Purrpose

Dep Rate
Changed
frompast

Change in Policies (AS 5)

S.
S
No

Ch
Changes

Eff t
Effect

Change in Accounting
Policies

Retrospective

Change in Estimates

Prospective

P i P
Prior
Period
i d It
Items

R t
Retrospective
ti

71

CASE STUDY - 4

WhetherAccountingStandardshavearole....

CaseStudy PrivateLimitedCompany
Rs. Million

AsperLocaloffice
As at
Capital
LoansfromHead
officetoSubsidiary

March 31,2010
500

Creditors

100

Stock

500

Debtors

600

CaseStudy PrivateLimitedCompany
Rs. Million

AsperLocaloffice

AsperHead
officeatJapan

March 31,2010

March31,2010

500

100

400

Creditors

100

100

Stock

500

500

D b
Debtors

600

600

Asat
Capital
LoansfromHead
officetoSubsidiary

Collecting Evidence Auditwas..

CollectingEvidence
Audit was
File

Recording
significant
itemsforfuture

Accordingto
Standards

Law
Asper
regulatory
requirements

Assisttingengagementteam

Planned

Basisfor
conclusion

75

RECAP New Companies

p
Act 2013
Responsibilities

Flexibility

Compliances
Penalties

???

Rules

Mergers
One man company

CSR

IFRS
Compatible

Class suit action

www.asa.in