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MrunalExplained:CompaniesAct2013,TypesofCompanies

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[Economy]CompaniesAct2013:Salientfeatures,typesof
Companies,publicltd.vsprivateltd,IndependentDirectors,
SFIO,SEBICorporategovernancenorms
PostedBySupportStaffOn14/08/2014@12:33amInEconomy|61Comments

Prologue
Whatiscorporategovernance
Typeofcompanies
Holding,SubsidiaryandAssociatecompanies
BoardofDirectors
Independentdirectors(ID)
SEBInorms:Independentdirectors
Boardmeetingsdurationandquorum
BoD:Committee
AnnualGeneralMeeting(AGM)
Auditrelatedprovisions
AuditCommittee
ExternalAuditorstermsandresponsibility
CompanySecretary
CompanysLoans
4newstatutorybodies
#1:NationalCompanyLawTribunal(NCLT)
#2:NationalFinancialReportingAuthority(NFRA)
#3:InvestorandEducationProtectionAUTHORITY
#4:SeriousFraudInvestigationOffice(SFIO)
2%CorporateSocialresponsibility(CSR)
SEBIscorporategovernancenorms
Appendix:Relatedpartytransactions(RPT)

Prologue
AssuchImwritingsummariesofEconomicsurvey2013.ButCompaniesAct,2013isarecurring
terminmanychapters.Therefore,needstobecoveredparallel.

Whatiscorporategovernance

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Whatiscorporategovernance
Manydefinitions,youneedtomemorizeatleastonefortheGS4.
Corporategovernanceisawayofdirectingthecompany
Toprotectstakeholdersinterest.ObservethewordstakeholdernotShareholders.Meaning,
companyshouldlookafteritscustomers,rawmaterialsuppliers,wholesales,dealers,employees,
shareholdersallforthem
Tocomplywithlegalregulatoryrequirements.Notjustfromtechnical/auditpointofviewbutfrom
ethicalpointofviewaswellforexamplemisleadingads,harmfulproducts,environmentally
unsustainableproductionmethodsetc.
Absenceofcorporategovernanceleadstofraud,mismanagement,embezzlementandharmto
societyandenvironment.
Torecentinitiativestoenforcecorporategovernance
CompaniesAct
originalactmadein1956
newactpassedinAugust2013

SEBInorms
2012:AdiGodrej
Committee
2014,April:SEBIpublished

Hastotal470sections,Governmentbeganphasewisenotificationfrom
Feb2014.

willbeeffectivefrom1

Imnotgoingintothetechnicalpartsrelatedtomerger,acquisition,

October2014(i.e.oneday

takeoveretc.butjustfocusingonareashavingconnectionwithethics, beforeGandhisBday)
corporategovernance,CSR&alliedtopics.

Typeofcompanies

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HavetoregisterwithMinistryofCorporateAffairs
CompaniesAct1956

Companiesact2013
OnePersonCompany.

nosuchthing

minimumcapitalonelakhrupees
ButhastoconverttopublicorprivatelimitedcompanyIFturnover>2cr
orcapital>50lakhs.

privatelimited:2to50
members

2to200members.minimumcapitalRs.onelakh

publiclimited:samein

7tounlimitedmembersminimumcapitalRs.FIVElakhswithinthat,two

bothacts

subgroups

ListedcompanyifshareslistedonanyIndianstockexchangee.g.Infosys,TCSetc.
Unlistedcompany:selfexplanatory.e.g.NokiaIndia,SaharasthosetwoHousingfinance
companies*.
*whichweresellingOFCDs&gotSubratoinJail,forhedidnotgetSEBIpermissionbeforeselling
OFCDsanddidnotrepayinvestorsmoneywhenSEBIorderedhimto.
overall,9lakhcompaniesinIndia
>90%ofIndiancompaniesareprivatelimited.

Holding,SubsidiaryandAssociatecompanies
Holdingcompany=itselfowns20%ormoresharesofanothercompany.
thatAnothercompanyisfurtherclassifiedinto:
subsidiarycompany

associatecompany

If50%sharesownedbyholdingcompany. If20%ormoresharesownedbyholdingcompany.

BoardofDirectors

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CompaniesAct2013:Salientfeaturesforcorporategovernance
democraticcountry voters=>parliament=>executive
companies

Shareholders(AGM)=>boardofdirectors=>CEO,executives.

Boardofdirectorsconsistsof
Chairman
executivedirectors/fulltimedirectors
nominateddirectors(BybanksorcentralGovernmente.g.duringmegascamlikeSatyam)
Independentdirectors:toprotecttheinterestsofminorityshareholders.
NowletscheckprovisionsofCompaniesact2013fordirectors
Minimumdirectorsineachcompany
Onepersoncompany 1
privateltd.

publicltd.

Maximum15directors
CanaddevenmoredirectorsbyresolutioninAGM(Annualgeneralmeetingofshareholders).
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Onepersoncanserveasdirectorinmaximum20companies
OnedirectormustbeIndianresident(i.e.stayinginIndiafor182daysormore)
OnedirectorWomanintheboard.(SEBInormssaysthesame)
Ifdirectorremainsabsentfor12monthsconsiderhispositionvacant,andgetnewguy.Means
SachinandRekhawillhavetothinktwicebeforebecomingdirectorsinanycompany.
Anyways,theseareprovisionsfordirectors,ingeneral.Nowletscheckspecificprovisionsfor
Independentdirectors

Independentdirectors(ID)
JobofIndependentdirector=protecttheinterestsofshareholders,particularlytheminority
shareholders.Hehastofulfillfollowingcriteria:
HeisnotaPromoterofthecompany,NOTnominatedbytheChairman
Hehasnopecuniaryinterestinthecompany,exceptsalaryasdirector.(meaningcompanys
wholesaler,retaileretc.cannotbecomeindependentdirectors)
Heisnotanemployeeofthecompany
CompaniesAct2013IDrequirements
1/3rddirectorsinpublicltd.companymustbeIndependentdirectors.(so,ifcompanytakes15
directors,5mustbeID)
Theyllhave2termsoffiveyearseach=total10years
ButtheirperformancewillbereviewedinshareholdersAnnualGeneralMeeting(AGM).Meansagain
SachinandRekhawillhavetothinktwicebeforebecomingIndependentdirectorsofanycompany.
After10yearsservice,iftheywanttojoinsamecompanyasIDagain,theyllhavetowaitfor3
yearscoolingperiod.

SEBInorms:Independentdirectors
Letspausefromcompaniesactforawhile.Weknowthat
CompaniesAct
newactpassedinAugust2013

SEBInorms
2014,April:SEBIpublished
willbeeffectivefrom1stOctober2014

so,whatdoesSEBInormssayabouttheseindependentdirectors?
10yearstermyesBUTfromretrospectiveeffect.Meaning,ifIwereanIndependentDirectorina
companysince2010,thenmyretirementis2020.(andnot2014+10=2024).
OnepersoncanbecomeIndependentdirectorofsevencompaniesatmost.
Ifheisafulltimedirectorinasinglecompany,thenhecanbecomeIDin3companiesatmost.
Enoughofdirectors,movingtonexttopic:

Boardmeetingsdurationandquorum
Doesntapplytoonepersoncompanies.
Companymustholdminimum4meetingsperyear
mustnothavemorethan120daysgapbetweentwomeetings
Quorum:1/3rdstrengthortwodirectors,whicheverismax.
Ifdirectorscannotgivephysicalpresence,videoconferencingispermitted.
Directorsmustbegiven7dayspriornotice.(Sotheycanmakepriortravelarrangements.)

BoD:Committee
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justlikeparliamenthasPAC,estimateCommittee,departmentalstandingCommitteeetc.same
way,CompanieswillberequiredtomakefollowingCommitteesoutoftheirboardmembers
Auditcommittee
Stakeholderrelationshipcommittee(SRC)
CSRcommittee(CSRC)
NominationandRemunerationcommittee(NRC)theyllobservefollowing
MD/Directorssalarydoesntexceed11%ofcompanysprofit
PayriseofCEO,directorsetc.vscompanyperformance
TheyllpresentthisdatainAGM.
Sofar,wecheckedprovisionsrelatedtodirectorsandboardmeetings.Mockquestionscanbe
formedbytwistingthefacts,forexample
WhichofthefollowingstatementsarecorrectasperthenewcompaniesAct?
1/3rddirectorsmustbeIndianresidents
atleastonewomandirectormustbeIndian
atleastoneindependentdirectormustbeawoman
noneofabove(Correctanswer)
Movingtonexttopic

AnnualGeneralMeeting(AGM)
Onepersoncompany:noneed
Public&pvtLTD.companiesyestheyvetoholdAGM.
Generalnoticecanbesentbyletter/emailtoshareholders.
Proxyvotingpermitted.
ElectronicVotingalsopermitted(asperSEBIscorporategovernancenorms).
Quorumdependsonnumberofshareholders.
DatanotimportantexceptforMBAinterviews
members
privateltdcompany

quorum
2members

publicltdcompanyupto1000shareholders 5members
publicltd>1000upto5000

15members

publicltd.>5000shareholders

30members

Auditrelatedprovisions
AuditCommittee

HavetomakeanauditCommitteefromboardofdirectors.
Itschairmanmustbeanindependentdirector.
ProvisionforinternalauditbyCA,Accountants,evenother(nonCA)persons.ICAIisopposingthis.
Companieswillhavetosetupwhistleblowermechanism.

ExternalAuditorstermsandresponsibility
Oneauditorcanauditmaximumof20companies.
IfhefindsanyfraudhemustreporttobothUnionGovernment(ministryofcorporateaffairs)and
duringtheAGM.
Auditorcannotauditthesamecompany
forever
individualauditor 5years
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auditfirm

2termsx5years=10years

Afterthatcoolingoffperiodof5years.
Why?Well,samereasonwhyGovernmentofficialsshouldbetransferredafter35yearssothey
dontdevelopnexuswithlocalthugs.

CompanySecretary
CompanySecretaryactsasalinkbetweenboardofdirectorsandshareholders.
HearrangesBoDmeetings,AGM,ensurequorum,minutesofthemeetingetc.
Companiesabovecertainsharecapital,havetocompulsorilyhirecompanySecretary.
CompaniesAct1956
CompaniesabovecapitalofRs.5crore=>havetocompulsorilyhirecompany
Secretary.

Companiesact
2013
10crore

Therearehardly~7000companiesinIndiahavingsharecapitalof10croreorabove.(Whilethere
are>20,000peopledoingthiscourse).
ForremainingcompaniesnotnecessarytohirecompanySecretary=lessjobsavailableforcompany
Secretaries.
ThereforecompanySecretariesandtheirnationalbody,areopposingthisnewprovision.

CompanysLoans
Companycannotgiveloantodirector/relatedpersons
Ifcompanygivesloantoanyonethenitsminimuminterestratemustbehigherthanthatof
Governmentsecurities(Gsec).(OtherwiseCEOmightpassloantohisownpuppetdriverat2%
interestandthenuseItforbettingincricketorsharemarket!)
CompanymustgetCreditrating(A,BB,Cetc.)beforeacceptingpublicdeposit(incollective
investmentschemes)
Companieshavetoappointachieffinanceofficetolookafterauditandaccount.

4newstatutorybodies

Not1,not2,not3total4newstatutorybodieswillbecreatedunderCompaniesAct2013.
Inotherwords,ifanyministrywantstolearnhowtoharassUPSCaspirantstheyshouldtake
COACHINGfrombabus@ministryofcorporateaffairs.
ListofStatutoryBodiesunderCompaniesAct
Matter

Statutorybody

tribunal/litigations NationalCompanyLawTribunal(NCLT)
accountingnorms

NationalFinancialReportingAuthority(NFRA)

awarenessgeneration InvestorandEducationProtectionFund
frauddetection

SFIO

Letschecktheirfeaturesonebyone

#1:NationalCompanyLawTribunal(NCLT)
Composition Judicial+technicalmembers
Deadline

havetofinishcasein3months

Hearing

Youcanpresentcasebyyourown,vialawyer,CAorcompanySecretary.

Appeal

IfeitherpartyisunsatisfiedwithNCLTverdict,theycanapproachNCLAT(national
companylawAPPEALATEtribunal).

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DisputeswhereNCLTwilladjudicate:
Companyfailstocomplywithanyprovisionsoftheact(e.g.quorumnotmaintained,auditorsnot
changedafterdeadlineetc.)
Mergerandacquisitiondisputes
ConvertingPublicltd.Toprivateltd.
FilingClassactionsuits(e.g.SatyamsUSshareholdersfilledsuchsuitinUSAandrecoveredmoney.
ButIndianshareholderscouldntbecause56sacthadnosuchprovision)

#2:NationalFinancialReportingAuthority(NFRA)
1Chairman+15members
WillsetAccountingstandardsforcompanies
WillhavePowersofcivilcourt.
AggrievedpartycanappealatNFRAA(NationalFinancialReportingAPPELATEAuthority)
CandebarCAandaccountantsforprofessionalmisconduct.
ICAIunhappywiththisprovisionbecauseunderCharteredAccountantsAct,1949,theyvethe
powerstotakeactionagainstCAs.

#3:InvestorandEducationProtectionAUTHORITY
Asthenamesuggests,thisfundmoneyisusedforawarenessgeneration,financialliteracyso
investorsdontfallintotrapslikeSaradhachitfund,SaharaOFCDetc.
Wheredotheygetmoney?Ans.Companieshavetopaydividend,interestandprincipaltotheir
investors.
Butifanymoneyremainsunclaimed(death,disappearanceofinvestoretc.)=>Moneygoesto
corporateaffairsministry=>intothisfund.
Thisisnotanewthing.Alreadyexists,But2013sactgivesitstatutorystatus,withfollowing
provisions
HQatDelhi.RegionalofficesacrossIndia.
Chairman:SecretaryofCorporateaffairsministry
Membership:executivedirectorsfromRBI,SEBIexpertsfromlegalandfinancialsector.

#4:SeriousFraudInvestigationOffice(SFIO)
Notanewbody,alreadysetupin2003undercorporateaffairsministry(basedonNareshChandra
report)
IthassolvedSaradhachitfund,Satyamscametc.
ThenwhatsnewinCompaniesAct2013?
SFIOismadeastatutorybody.
ItllhavepowertoSearchseizearrest(untilnow,itcouldonlyexaminedocuments)
SFIOinvestigatorswillhavesamepowersunderCrPC,likeapoliceofficer.
OnceSFIOgetscase,otheragenciescantproceed.
Statepolice,ED,CBIetc.willhavetohandoverdocuments,witnessandcooperateinfurther
investigation.

2%CorporateSocialresponsibility(CSR)
Underthenewact,Companieswillhavetospend2%oftheirlastthreeyearsaverageprofitonCSR
activities.(e.g.schools,slumredevelopment,chowkidaritopreventjuntafrom
urinating/defecatingaroundrailwaystationetc.)
2%CSRruleappliestoonly
followingcompanies
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Netprofit 5crore(beforetax)
Networth 500crore
turnover 1000core
2%ruledoesntapplytoincomeearnedfromforeignbranchesoftheabovecompanies.
AbovecompanieshavetosetupCSRCommitteemadeupof3boardofdirectors.
Committeewillformulate&monitorCSRpolicy.

SEBIscorporategovernancenorms
2012:AdiGodrejCommittee
2014,Feb:SEBInotifiedthenorms
2014,1stOctober:theseruleswillbecomeeffective.
Theyrunparalleltowhatisalreadygivenundercompaniesact.
Followingdiagramsummarizesitjustwritetwolinesoneachofthemandyouredonewith100200
wordsquestioninmains.

Appendix:Relatedpartytransactions(RPT)
Lengthytopic,notimportantforprelims.Butwillbeimportantfor(MBA)interviewsbecausethis
MarutiSuzukicontroversywilldragonforlong.
MarutiSuzukiIndialtd
majorityshareholder SuzukiJapan
minorityshareholder HDFC,RelianceCapital,ICICI,SBIetc.
2012:StrikeinManesarplant,Haryana.Managerdied,morethan3000crorelostduetohaltin
production.

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Afterthis,Suzuki(Japan)registeredaseparatecompanySuzukiMotors,Gujarattosetupseparate
factoryinMehsana,Gujarat.
SuzukiitselfwillmanufacturethecarsinthisGujaratplant,willhandItovertoMarutiSuzukifor
sellingthroughitsshowrooms.

before

after

MarutiSuzukimanufactured
cars,soldthem=profitto

Suzukiwillkeepprofitoncarmanufacture.

themselves.

Maruti(India)willenduplikeacardistributorcompany=>less

Thentheydistributeddividend

profitforIndiancompany=>lessdividendtoitsminority

toSuzukiandother

shareholders.

shareholders.
Sointhiscase,wevetwoparties
HoldingCompanySuzuki(Japan)thatowns~56%inMarutiSuzukiIndialtd.(Subsidiarycompany).
Nowoneparty(Japan)istakinganaction(ofsettingplantinGujarat),whichwillhavenegative
ramificationfortheinvestorsinotherparty(IndianMaruti).
Thisisonetypeofrelatedpartytransaction.
AspercompaniesAct2013,RelatedpartytransactionsrequirevotingapprovalfrommajorityOFthe
minorityshareholders.Therefore,Suzukihasdecidedfollowing:
Firsttheylldoroadshowsandseminarsforawarenessgenerationamongshareholders(aboutthe
benefitsofGujaratplant)
(Rumors)TheyhaveevenhiredinvestmentbankerstoinfluencetheFIIswhoownsharesinMaruti
SuzukiIndia.
VotingwillbedoneprobablyinSeptember2014sAGM

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Atthattime,Suzukicantvote(becausemajorityshareholder)butIFfromtheremaining
shareholders,if3/4thvoteinfavor,thenSuzukicanproceedinsettingupGujaratplant.

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