Questions raised and conclusions drawn from the Interactive Session with ROC,

Karnataka (ROC) on 5th June, 2014

Chapter X - Appointment of Auditor

1. u/s 139 every Company shall appoint an Auditor at the 1st AGM to hold office from the
conclusion of that Meeting till the conclusion of 6th AGM and thereafter till the conclusion
of 6th AGM.

Does this mean that the tenure should be 5 years and nothing less ?i.e. is it possible to
appoint an Auditor, say for 3 years only ?

ROCs views: It is not possible to appoint Statutory Auditors for less than 5 years. At
every AGM held after appointment, the members have to ratify their appointment.
However, instead of ratification, new statutory auditors, if required, can be appointed.

2. As per proviso to Section 139(2), no auditor who has completed his term of 5 /10 years
shall be eligible for re-appointment for a period of 5 years from the completion of his term.
If an auditor has resigned before completing his term, can he be appointed once again,
without waiting for the cooling off period of 5 years?

ROCs views:If an auditor who has resigned before completing his term, is appointed
once again, without waiting for the cooling off period of 5 years, it would not amount to
violation of the provisions of the Act, but would amount to circumvention.

3. What is included under sec 144(h) Management services. Such services cannot be
rendered by the Auditor of the Company.

ROCs views:Auditors cannot render Management services. However, no clarification

given as to what is included under Management Services.

4. As per Section 139(1), the Company is required to intimate the auditors appointment in
the AGM, to the ROC within 15 days. Should this intimation be given even in case of first
auditors appointment?

ROCs views:No intimation is required to be given in case of first auditors appointment.

Section 139 (6) is silent on that.

5. If the auditor or his representative has not attended any general meeting (where he is not
exempted by the Company), it appears that the Company and every officer shall be
punishable u/s Section 147(1). Please clarify.
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ROCs views: Penalty clause u/s 147 (1) is not correct.

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Chapter XI Appointment and Qualification of Directors

6. Is there any transition period for appointment of Resident Director pursuant to Section
149of the Companies Act, 2013?

ROCs views:Transition period is one year. The transition period of one year specified
under Section 149 (5) is applicable to both Section 149 (3) and (4).

7. Tenure of Managing Director is 5 years even in case of private companies. In case of

private companies appointment is usually done without tenure i.e., MD holds the position
until resignation. In such a case, whether the 5 year period starts from 1st April, 2014 or
as on 1st April those who have completed 5 years, need to be reappointed?

ROCs views: If no tenure is specified, period of 5 years should be reckoned from

01.04.2014.

8. Is Schedule V with regard to Managerial remuneration applicable for Private Company?

Since Section 197 (3) speaks about Notwithstanding anything in sub section (1) and (2)
[1 and 2 speaks about Public Company] a company ............................, whether a
company to be construed as all types of Companies or only Public Limited Company?

ROCs views:As per the provisions of Section 197 (3) in case of no profits or inadequacy
of profits the restrictions relating to payment of remuneration to Managerial Personnel is
applicable to a private limited company also subject to Schedule V. If a private limited
company is having adequate profits, there is no restriction on payment of remuneration
and provisions of Section 197 are not applicable.

9. In case of Companies which have failed to file certain forms, say form 32 informing
resignation of Director we use to file Investor complaint. Thereafter, ROC after sending a
Notice to the company and after due process would informs us to file petition under
Section 614 of Companies Act, 1956. Since there is no corresponding provision for the
same under the Companies Act, 2013, whether the Director himself can now file DIR 11
informing his resignation in the other company prior to March 31, 2014.

ROCs views:Form DIR-11 can be filed

10. Sec 164(2) on disqualification of directors states, No person who is or has been a
director of a company which

a) has not filed financial statements or annual returns for any continuous period of three
financial years; or
b) has failed to repay the deposits accepted .. etc.,

shall be eligible to be re-appointed as a director of that company or appointed in other

company for a period of five years from the date on which the said company fails to do so.

Does this imply that a private company which did not file its financial statements etc. for
the year March 2010, 2011, 2012, on time, however filed all the pending returns in 2013
(alongwith the returns of 2013 also), would the directors of such Company is now
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disqualified ? Since the language is who is or has been. Normally, such sections
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starts with a phrase, On and from commencement of this Act.. Thats missing here.
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 ROCs views:If the Company has filed the due returns and makes good the default, the
directors of such Company are not disqualified.

11. As per Section158: whether Director has to mention his DIN wherever he furnishes any
information including certified true copy of Resolutions?

ROCs views:A director has to mention his DIN wherever he furnishes any return,
information or particulars including certified true copy of Resolutions in case such return,
information or particulars relate to the director or contain any reference of any
director. Example: Resolutions relating to appointment/resignation of directors.

However, following condition is prescribed in Rule 7 of Chapter 24:

Provided also that any correspondences (physically or electronically) and documents to be

filed by any person shall contain name, designation, address, membership number or
Director Identification Number, as the case may be, of the person signing such document
and make sure correctness thereof and in no case, correspondence, merely with signature
and writing authorized signatory shall be acceptable.

12. Section 149 - Every company shall have at least one director who has stayed in India for a
total period of not less than 182 days in the previous calendar year

How will ministry track the residential status of Director? Is there any necessity for the
company to intimate the residential of status each director to ROC every year?

ROCs views: Company should only be concerned about complying with the requirement.
It is for the Ministry to track the residential status.

13. Sec 149(3) requires every Company to have a resident director; Sec 149(4) requires all
listed public companies to have independent directors. Sec 149(5) stipulates a time period
of one year to comply with 149(4). This appears to be an inadvertent error here, since
listed companies were anyway required to have independent directors under Listing
Agreement and hence they do not need one years time to comply with this provision.
149(3) requires some time for compliance.

ROCs views: Already answered.

14. Definition of Independent Director:

As per Section 2(47) independent director means an independent Director referred to in

sub section (5) of Section 149.

However, Section 149(5) of the Act relates to complying with the provisions of Section
149(4), and the actual definition of independent director has been given in Section 149(6).

This appears to be a typo error. However, which section should we quote while referring to
independent director?

ROCs views: One has to refer to Section 149 (6).

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15. Appointment of Independent Director:

Suppose a person has been appointed as an Independent Director in a Company for a

period of five years and three years have elapsed as on the date of commencement of
Companies Act 2013. Is it required to re-consider his appointment on commencement of
the Companies Act, 2013?

ROCs views: Since an independent director is not liable to retire by rotation under the
Act, he can continue for the rest of the term. However, a resolution can be passed at the
ensuing AGM that the independent director is not liable to retire by rotation for the next
five years.

16. Format of DIR-8 (Intimation by Directors on disqualifications) covers only disqualifications

under Section 164(2). How will we come to know about the disqualifications under Section
164 (1)?

ROCs views:It is Directors duty to declare. Further in DIR-8 he has to declare

that. and that I, at present, stand free from any disqualification from
being a director.This covers all the disqualifications including disqualification under
Section 164(2).

17. If an existing company has not filed its financials for the last three financial years, as on
the date of commencement of the Act, will the directors of such company disqualified as
per Section 164(2) and consequently vacate office u/s 167?

ROCs views: As per Section 167 the disqualified director shall vacate office.

18. Is it mandatory for the Board to take note of the resignation, before intimating ROC as per
Section 168?

ROCs views:As per Section 168 (1) a director may resign from his office by giving a
notice in writing to the company and the Board shall on receipt of such notice take note of
the same. Since the word used is shall, it is mandatory to take note of the resignation.

If it is not possible to call a Board meeting, the resignation can be taken note by way of a
circular resolution.

Chapter XII Meetings of Board and its Powers

19. Section 173-

What is a year?

ROCs views:. Since year is not defined under the Act, one has to go by the definition
given under the General Clauses Act. Therefore, year will be a calendar year i.e. from
January to December.

In the year of incorporation whether a company is required to have five board

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meetings?
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 ROCs views: Yes

How to ensure that no one other than the concerned director is attending or having
access to the proceedings of the meeting when meetings of Board are held through
video conferencing or other audio visual means?

ROCs views:It is the responsibility of the Chairperson and/or Company secretary to

ensure compliance as specified in the Rules. The Rules are clear.

20. Section 175 Draft circular resolution to be sent to all directors at their addresses
registered with the Company in India. Does it mean that the circular resolution can be sent
only to the registered address in India with the Company?

ROCs views:Yes.

Should the non-resident directors have an address registered in India for this purpose?
Isnt the email address sufficient?

ROCs views:Yes. E-mail address is sufficient.

21. Section 177-What is the time period for constituting Audit Committee by Companies who
meet the threshold prescribed?

ROCs views: 1 Year. As per (3) As per Section 177 (3) every Audit Committee (AC) of a
company existing immediately before the commencement of this Act shall, within one year
of such commencement, be reconstituted in accordance with sub-section (2). Accordingly
it shall be construed as the Companies not having AC before the commencement of this
Act and required to have AC as per Section 177 shall within 1 year constitute such a
committee.

MCA notification dated June 12, 2014 clarifies this issue.

Also the Audit Committee shall consist of a minimum of three directors with independent
directors forming a majority. Transition period for appointment of independent director is 1
year.

22. Section 178-What is the time period to constitute Nomination Committee and
Stakeholders Relationship committee?

ROCs views: Official clarification required.

MCA notification dated June 12, 2014 clarifies this issue.

23. Section 182- How to calculate the average net profit during the three immediately
preceding financial years as net profit is not defined under the said Section?

[It may be noted that Section 198, which deals with calculation of profits, is only for a
limited purpose of Section 197]
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ROCs views: It is to be taken as Before Tax and Appropriations.

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24. Section 184 -Whether disclosure by director should be made at the meeting personally as
per sub-section (1) of the said Section? Or is it sufficient if the declaration is given by the
director at the beginning of the financial year and the same is placed and read out at the
first Board meeting?

ROCs views: Presence of director is required only at the first meeting he attends as a
director. Thereafter, at the first Board meeting of every financial year and Board meetings
where changes in the disclosure already made are noted, the presence of the concerned
director is not required.

25. As per Section 184(2), an interested director shall not participate in the meeting when the
contract or arrangement with any other body corporate/firm/entity is considered.
Further, as per Section 188 read with Companies (meetings of Board and its powers)
Rules, 2014, an interested director shall not participate at the meeting where a contract
(as listed out in the said section) with a related party is considered.

Therefore, if a company (in particular a private company) proposes to fix remuneration to

its directors, the interested director can still participate and vote. Please confirm.

ROCs views:Yes.

26. Section 185-

Whether Company can give guarantee or security on behalf of managing

Director/whole time director who has availed of loan from third party?

ROCs views:No.

What is Ordinary Course of business referred to in clause (b) of sub-section (1)?

ROCs views: Ordinary Course of business means the business in which the
Company ordinarily trades. For example for Banking Company, lending is an
ordinary course of business.

What could be quantum of loan that could be given to MD/WTD? Whether limits
prescribed under Section 186 to be kept in mind ?

ROCs views:Yes.

As per section 185(1) no company can directly or indirectly give loan or advance to
a director or any other persons but according to Section 186(2) no company shall
directly or indirectly give any loan to any person or body corporate exceeding 60%
of paid up share capital, free reserves and securities premium account or 100% of
its free reserves and securities premium account, whichever is more

ROCs views: There is a prohibition on loan to Directors under Section 185. The
wordings any person used in Section 186 should be construed excluding the
persons referred to in Section 185.
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27. Can company give loan or advance to director or any other person within limit as
mentioned in section 186(2)?

ROCs views:No. There is a prohibition on loan to Directors under Section 185. The
wordings any person used in Section 186 should be construed excluding the persons
referred to in Section 185.

If No, what is the time limit for the companies to take back money already given as loan to
director or relative of director?

What is the solution if a Director is already given a loan by the Company before
commencement of the Companies Act 2013?

ROCs views:The Companies can enjoy loan facility for an unlimited period. The
Company need not take back the money already given. However, the statutory auditor/s
may in his/their report qualify stating that the loan is prejudicial to the interest of the
Company.

28. Section 186-

The words without prejudice to the provisions contained in this Act used under
Sub-section (1) is applicable only to that sub-section or the entire Section?

ROCs views:It is applicable only to Sub-section (1).

Who can be covered under any person used in sub-section (2) of Section 186?

ROCs views:Other than Directors.

29. Whether Section 186 prevails over Section 185 because of the use of the words Save as
otherwise provided in this Act in the beginning of Section 185? If yes, can the
transactions prohibited under Section 185, be done under Section 186?

ROCs views:No.

30. Please explain sub-section (1) of Section 186.

ROCs views:Already explained.

31. Explain the meaning of the term related party to a director as contemplated under
Section 186(3).

ROCs views: Clarification from Ministry required.

32. What are the type of transactions falling under the purview of the expression Ordinary
Course of Business used in Section 188 of the Companies Act, 2013 ?

ROCs views:Business of Banks etc.

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33. If there is no dis-interested quorum at the meeting of shareholders, what would be the
status of related party transactions under Section 188? Should it be approved by Central
Government ?

34. ROCs views: Official clarification required.Sec.188 - related transactions - interested

director should not participate in the meeting. In case of private company, if all the
directors are interested, how to comply with the provision ? In most Private Companies
Directors and Shareholders will be same set of persons. There is no point taking the
matter to shareholder meeting also. What is the way out ?

ROCs views:No way out currently.

35. Section 188-

What is contract or arrangement?

What is a transaction?

Second proviso to sub-section (1) provides that no member of the company shall
vote on such special resolution, to approve any contract or arrangement, if such
member is a related party. What happens to contract or arrangement if husband and
wife are only the directors and members of a company?

In the above situation if it is a transaction instead of contract or arrangement

whether a related party who is member can vote?

ROCs views:
First proviso to sub-section (1) requires Prior approval of general meeting in respect
of contract or arrangement if a company has paid-up capital of Rs.10. cr or above.
Further sub-section (3) provides time limit to obtain consent of the Board or approval
of general meeting. So, if a contract or arrangement is consented by the Board or
approved by general meeting under Sub-section (3) is there still violation of sub-
section (1). What will be consequence if it is a transaction instead of contract or
arrangement?

ROCs views: ..

For certain contracts which company is intending to enter into, it has to take prior
approval from the members. If a Company enters into a contract without taking prior
approval from shareholders for which shareholders prior approval is required, the
same can be ratified by taking approval from members within 3 months from the
date of execution of contract. However, if the same is not ratified by the
Board/members, as the case may be, the same is voidable at the option of the
Board.

Therefore, it appears that even if the contract or arrangement is not ratified by the
shareholders, the Board can still continue with the contract or arrangement. In this
case, is there a violation of sub-section (1) of Section 188 and consequently
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punishment under sub-section (5) ? Whether such contracts or arrangements are

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still valid ?

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 ROCs views:

Now, in the light of subsequent developments, views are as below : There is no difference
between a transaction and a contract or arrangement. A transaction in which a related
party is interested will attract Sec. 188 just like a contract or arrangement. All other
queries appear to have been raised in the context of a Private Ltd company and now, the
provisions of Sec. 188 are likely to be exempted for Pvt Ltd Cos in the light of Draft
Notification dated 24.6.2014 U/s 462 of the Companies Act, 1956.

Section 194 -Whether this section applies both to private and public companies ?

ROCs views:Yes.

36. Section 195 -Whether this section applies both to private and public companies ?

ROCs views:Applicable only to public Companies since there is no question of insider

trading in private companies.

37. Sec. 297 approval already taken from RD for a period of 3 years commencing from
01.01.2013 to 01.01.2016.

Now from 01.04.2014, under the new law do we need to again pass a resolution u/s 188 ?
What is the procedure ?

ROCs views:Conditions of the approval shall continue for the remainder of the tenure.

CHAPTER XIII - Appointment and Remuneration of Managerial Personnel

38. Section 203 - Appointment of KMP:

A Company having paid up capital of less than Rs. 10 crores is under no obligation
to comply with section 203. However, if such companies have appointed CEO, CFO,
and CS etc as a business requirement, will they be still treated as KMPs under the
Act? Will they be required to comply with the provisions of the Act?

ROCs views:Unless they are designated as such and requisite forms are filed with
ROC there is no requirement of complying with the provisions of the Act in relation
to KMP. Choice is given to the company.

Whether same person having required qualification can be appointed as CFO cum
CS u/s 203 as a KMP ?

ROCs views:Yes. Since no qualification is prescribed for CFO, CS can be

appointed as CFO.

39. Whether approval of the members at the next general meeting is required for appointment
of MD/WTD/manager, in case of a private company, as per Section 196(4)?
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ROCs views:Yes
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40. Whether remuneration includes sitting fee?

ROCs views:Yes.

Disclaimer: Above are the ROCs views concluded from the Interactive session with the
members of ICSI, Bangalore chapter, held on 5th June, 2014. They shall not be construed
as official clarification by the Ministry of Corporate Affairs.

Some more replies to follow.

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