Business

Other Minor features of Companies Act 2013

Acceptance of deposits

It is pertinent to note that the requirements relating to acceptance of deposits are already quite stringent under the 1956 Act and the Rules made thereunder. The 2013 Act further strengthens these provisions. A significant impact of the 2013 Act is that only those public companies which meet the prescribed net worth or turnover criteria may accept deposits from persons other than its members. Other companies can accept deposits only from its members.

The proposed provisions will enhance the protection of the deposit holders.

Companies will have to incur additional costs due to requirements related to credit rating, maintenance of additional liquid funds, deposit insurance, etc.

corporate governance act 2013

1. Acceptance of deposits

The 2013 Act states, that only those companies which meet such net worth or turnover criteria as may be prescribed will be eligible to accept deposits from individuals other than its members. Such companies will also be required to obtain the rating (including its net worth, liquidity and ability to pay its deposits on due date) from a recognised credit rating agency which ensures adequate safety [section 76(1) of the 2013 Act].
Companies which do not meet the net worth or turnover criteria will only be able to accept deposits from its members [section 73(2) of the 2013 Act].

All companies will be required to comply with the prescribed conditions which includes issuance of a circular to its members, obtaining credit rating, providing deposit insurance, maintaining deposit repayment reserve account, etc. [section 73(2) of the 2013 Act].

2. Outstanding deposits

The 2013 Act states that deposits accepted before the 2013 Act comes into force will need to be repaid within one year from the commencement of the 2013 Act or when such payments are due, whichever is earlier [section 74(1) of the 2013 Act]. This is likely to create significant financial impact on companies which have currently accepted deposits and will not meet the eligibility criteria under the 2013 Act.

3. Protection of depositors

An amount equivalent to a minimum 15% of deposits maturing during the financial year as well as the following financial year will need to be kept in a separate bank account with a scheduled bank. The Companies (Acceptance of Deposits) Rules, 1975 currently requires that 15% of deposits maturing during the financial year needs to be kept in bank or invested in specified securities [section 73(2) of the 2013 Act].

Additionally, the 2013 Act also states that the deposit insurance as prescribed will also be required to be provided [section 73(2) of the 2013 Act].

Registered valuers

The 2013 Act has introduced a new concept of registered valuers who are required for providing valuation reports mandated under various sections. These include the following:

• Further issue of share-capital (section 62 of the 2013 Act)
• Restriction on non-cash transactions involving directors (section 192 of the 2013 Act)
• Compromises, arrangements and amalgamations [section 230 of the 2013 Act]
• Purchase of minority share holding (section 236 of the 2013 Act)
• Submission of a report by the company liquidator (section 281 of the 2013 Act)
• Declaration of solvency in case of proposal to wind up voluntarily (section 305 of the 2013 Act)
• Power of the company liquidator to accept shares, etc., as consideration for the sale of property of the company
(section 319 of the 2013 Act])
• The qualification, experience as well as the process of registration as a valuer have been prescribed in the draft rules* (section 247 of the 2013 Act).

Winding-up

• Chapter XX of the 2013 Act consisting of sections 270 to 365, deals with the provisions of winding-up of companies. The 1956 Act prescribes three modes of winding-up. This includes the following:
–By the court
–Under the supervision of the court
–Voluntary

As against the existing modes of winding-up as prescribed by the 1956 Act, the 2013 Act prescribes the following two modes:
–By the Tribunal
–Voluntary

• The 2013 Act does not acknowledge the distinction between members voluntarily winding-up and creditors voluntarily winding- up. Additionally, the new grounds for winding-up by Tribunal are as follows:
— In a situation when the company has acted against the interests of sovereignty and integrity of India, the security of the state, friendly relations with foreign states, public order, decency or morality
— Order has been made under Chapter XIX (Revival and Rehabilitation of Sick Companies).
— An application has been made by the ROC or any other person authorised by the central government by a notification under the 2013 Act.
— The tribunal is of the opinion that the affairs of the company have been conducted in a fraudulent manner or the company was formed for fraudulent and unlawful purposes or the persons concerned in the formation or management of its affairs have been found guilty of fraud, misfeasance or misconduct in connection therewith, and that it is proper that the company be wound up
— The company has made a default in filing with the ROC, its financial statements or annual returns for immediately preceding five consecutive financial years

Dealing with fraud
• The 2013 Act deals extensively on the issue of fraud (section 447 of the 2013 Act) and has for the first time defined fraud specifically as:
“Fraud 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 injure 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”
The term, ‘wrongful gain’ means gain by unlawful means of property to which the person gaining is not legally entitled and ‘wrongful loss’ means the loss by unlawful means of property to which the person losing is legally entitled [Explanation to section 447 of the 2013
Act].
• Further, the penalties as prescribed under this section are as follows:

— Imprisonment for a term of not less than six months, but which may extend to 10 years
— Fine not less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud
— Also, where the fraud in question involves public interest, the term of imprisonment shall not be less than three years
• The provisions of this section have a significant impact and there are various areas across the 2013 Act, which will lead a person to be liable under this section. Some of these areas are as follows:
— Where a person furnishes any false or incorrect particulars of any information or suppresses any material information in relation to incorporation of a company filed with the ROC [section 7(5) and (6) of the 2013 Act]
— In case of the formation of the company with charitable purpose, where it is proved that the affairs of the company were conducted fraudulently – every officer in default [section 8(11) of the 2013 Act]
— Where a prospectus, issued, circulated or distributed includes any statement which is untrue or misleading in form or context in which it is included or where any inclusion or omission of any matter is likely to mislead, every person who authorises the issue of such prospectus [section 34 of the 2013 Act]
— Fraudulently inducing persons to invest money (section 36 of 2013 Act)
— Personation for acquisition, etc. of securities (section 38 of the 2013 Act)
— Where any depository or depository participant, has transferred shares with an intention to defraud a person (section 46(6)
of the 2013 Act)
— Failure to repay the deposit or a part thereof or any interest thereon, within the time limits as applicable, and where it is proved that such deposits were accepted with intent to defraud the depositors or for any fraudulent purpose (section 75 of the 2013 Act)

— Where the Tribunal is satisfied that the auditor of a company has, whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers [section 140(5) of the 2013
Act]
— Where it is proved that the partner or partners of the audit firm has or have acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to or by, the company or its directors or officers [section 147(4) of the 2013 Act]
— Penalty for furnishing false statement, mutilation, destruction of documents (section 229 of the 2013 Act)

Shareholder democracy
Acknowledging the concept of shareholder democracy, various provisions have been incorporated in the 2013 Act. These provisions can be broadly classified as under:
• Shareholder rights or protection
• Special consideration to small shareholders

1. Shareholder rights or protection

Class action suits: A class action is a legal form of lawsuit where a large group of individuals collectively bring a claim to court or in which a particular class of defendants is being sued. The concept of collective lawsuit finds its roots in the US , where it is still widely prevalent. In several European countries, changes have been made recently in their civil law, to allow consumer organisations to bring claims on behalf of large groups of consumers.

Acknowledging the need to be at par with global standards, for class action lawsuit, the 2013 Act has empowered shareholders associations or group of shareholders to take legal action in case of any fraudulent action on the part of company and to take part in investor protection activities and class action suits(section 245 of the 2013 Act).
Additionally, in response to the Standing Committee’s recommendation in its Twenty First Report for ensuring protection of interests of minority shareholders and small investors, the MCA suggested that during adjudication on class action suits, the Tribunal will ensure that the interests of shareholders are protected and wrongdoers, including auditors and audit firms, are required to compensate the victims on suitable orders by Tribunal.

Also, as stated in the 2013 Act, the central government will have power to prescribe class or classes of companies which shall not be permitted to allow use of proxies. The 2013 Act also to have provisions to provide that a person shall have proxies for such number of members or such shares as may be prescribed.

2. Special consideration to small shareholders

The 2013 Act acknowledges the existing rights of small shareholders envisaged in section 252A of the 1956 Act under the following sections:

• A listed company may have one director elected by such small shareholders in the manner and with the terms and conditions as may be prescribed. Here the term, ‘small shareholders’ means a shareholder holding shares of nominal value of not more than 20, 000 INR or such other sum as may be prescribed (section 166 of 2013 Act). Also refer to shareholder democracy, chapter on ‘Other Areas’

• The board of directors of a company which consists of more than 1,000 shareholders, debenture-holders, deposit-holders and any other security holders at any time during a financial year shall constitute a stakeholders relationship committee consisting of a chairperson who shall be a non-executive director and such other members as may be decided by the board. Further, the section under sub-section six, recognises the concept of the stakeholders relationship committee which is required to consider and resolve the grievances of security holders of the company(section 178 of the 2013 Act).

• Specific disclosure under the scheme of mergers or amalgamation regarding the effect of merger on minority shareholders is to be provided.

• Under various sections in the 2013 Act, for example, variation in terms of contract or object in prospectus, the dissenting shareholders have been provided with an option to exit which act as a protection of the interests of small shareholders.

The concept of class action suits, considering the best interests of the shareholders, is a welcome provision. However, the fact that there are always possibilities of misuse cannot be ignored

Additionally, it is important to note that India, being a developing economy, may find it difficult to appreciate the concept of ‘class action suits’ and implement it successfully.

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