Companies Act 2013 India
The long-awaited Companies Bill 2013 got its assent in the Lok Sabha on 18 December 2012 and in the Rajya Sabha on 8 August 2013. After having obtained the assent of the President of India on 29 August 2013, it has now become the much awaited Companies Act, 2013 (2013 Act). An attempt has been made to reduce the content of the substantive portion of the related law in the Companies Act, 2013 as compared to the Companies Act, 1956 (1956 Act). In the process, much of the aforesaid content has been left, ‘to be prescribed’, in the Rules (340+) which are yet to be finalised and notified. As of the date of this publication, 99 sections have been notified and a few circulars have been issued clarifying the applicability of these.
We are pleased to bring you our new publication, Companies Act, 2013: Key highlights and analysis. This publication brings out the significant changes proposed by the 2013 Act as compared to the 1956 Act and our initial analysis thereon. It is pertinent to note that for the complete understanding of the implications of various sections of the 2013 Act, the related Rules will need to be read with. These Rules have been opened for public comments and consultation in tranches and are expected to be notified thereafter by the end of this fiscal year.
The 2013 Act introduces significant changes in the provisions related to governance, e-management, compliance and enforcement, disclosure norms, auditors and mergers and acquisitions. Also, new concepts such as one-person company, small companies, dormant company, class action suits, registered valuers and corporate social responsibility have been included.
We hope this publication clearly explains the significant changes and their potential implications.
30th November, 2013
Download the Complete PDF, PPT Report at the link Below :
Extracts from the report follow below :
New Companies Act 2013 India
The 1956 Act has been in need of a substantial revamp for quite some time now, to make it more contemporary and relevant to corporates, regulators and other stakeholders in India.
While several unsuccessful attempts have been made in the past to revise the existing 1956 Act, there have been quite a few changes in the administrative portion of the 1956 Act. The most recent attempt to revise the 1956 Act was the Companies Bill, 2009 which was introduced in the Lok Sabha, one of the two Houses of Parliament of India, on 3 August 2009. This Companies Bill, 2009 was referred to the Parliamentary Standing Committee on Finance, which submitted its report on 31 August 2010 and was withdrawn after the introduction of the Companies Bill, 2011. The Companies Bill, 2011 was also considered by the Parliamentary Standing Committee on Finance which submitted its report on 26 June 2012. Subsequently, the Bill was considered and approved by the Lok Sabha on 18 December 2012 as the Companies Bill, 2012 (the Bill). The Bill was then considered and approved by the Rajya Sabha too on 8 August 2013. It received the President’s assent on 29 August 2013 and has now become the Companies Act, 2013.
The changes in the 2013 Act have far-reaching implications that are set to significantly change the manner in which corporates operate in India. In this publication, we have encapsulated the major changes as compared to the 1956 Act and the potential implications of these changes. We have also included, where relevant, the provisions of the draft rules, which have been issued by the Ministry of Corporate Affairs (the MCA) till date for public comments. Such inclusions have been highlighted with an asterix at the end of the sentence (*). However, please note that these are only draft rules and will undergo changes before being notified.
Key definitions and concepts
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.
1.1 One-person company: The 2013 Act introduces a new type of entity to the existing list i.e. apart from forming a public or private limited company, the 2013 Act enables the formation of a new entity a ‘one-person company’ (OPC). An OPC means a company with only one person as its member [section 3(1) of 2013 Act].
1.2. Private company: The 2013 Act introduces a change in the definition for a private company, inter-alia, the new requirement increases the limit of the number of members from 50 to 200. [section 2(68) of 2013 Act].
1.3. Small company: A small company has been defined as a company, other than a public company.
(i) Paid-up share capital of which does not exceed 50 lakh INR or such higher amount as may be prescribed which shall not be more than five crore INR
(ii) Turnover of which as per its last profit-and-loss account does not exceed two crore INR or such higher amount as may be prescribed which shall not be more than 20 crore INR:
As set out in the 2013 Act, this section will not be applicable to the following:
• A holding company or a subsidiary company
• A company registered under section 8
• A company or body corporate governed by any special Act [section 2(85) of 2013 Act]
1.4. Dormant company: The 2013 Act states that a company can be classified as dormant when it is formed and registered under this 2013 Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction. Such a company or an inactive one may apply to the ROC in such manner as may be prescribed for obtaining the status of a dormant company.[Section 455 of 2013 Act]
2. Roles and responsibilities
2.1 Officer: The definition of officer has been extended to include promoters and key managerial personnel [section 2(59) of 2013 Act].
2.2 Key managerial personnel: The term ‘key managerial personnel’ has been defined in the 2013 Act and has been used in several sections, thus expanding the scope of persons covered by such sections [section 2(51) of 2013 Act].
2.3. Promoter: The term ‘promoter’ has been defined in the following ways:• A person who has been named as such in a prospectus or is identified by the company in the annual return referred to in Section 92 of 2013 Act that deals with annual return; or
• who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or
• in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act.
The proviso to this section states that sub-section (c) would not apply to a person who is acting merely in a professional capacity. [section 2(69) of 2013 Act]
2.4: Independent Director: The term’ Independent Director’ has now been defined in the 2013 Act, along with several new requirements relating to their appointment, role and responsibilities. Further some of these requirements are not in line with the corresponding requirements under the equity listing agreement [section 2(47), 149(5) of 2013 Act].
3.1 Subsidiary: The definition of subsidiary as included in the 2013 Act states that certain class or classes of holding company (as may be prescribed) shall not have layers of subsidiaries beyond such numbers as may be prescribed. With such a restrictive section, it appears that a holding company will no longer be able to hold subsidiaries beyond a specified number[section 2(87) of 2013 Act].
4. Financial statements
4.1. Financial year: It has been defined as the period ending on the 31st day of March every year, and where it has been incorporated on or after the 1st day of January of a , the period ending on the 31st day of March of the following year, in respect whereof financial statement of the company or body corporate is made up. [section 2(41) of 2013 Act]. While there are certain exceptions included, this section mandates a uniform accounting year for all companies and may create significant implementation issues.
4.2. Consolidated financial statements: The 2013 Act now mandates consolidated financial statements (CFS) for any company having a subsidiary or an associate or a joint venture, to prepare and present consolidated financial statements in addition to standalone financial statements.
4.3. Conflicting definitions: There are several definitions in the 2013 Act divergent from those used in the notified accounting standards, such as a joint venture or an associate,, etc., which may lead to hardships in compliance.
Companies Act, 2013
5. Audit and auditors
5.1 Mandatory auditor rotation and joint auditors: The 2013 Act now mandates the rotation of auditors after the specified time period. The 2013 Act also includes an enabling provision for joint audits.
5.2 Non-audit services: The 2013 Act now states that any services to be rendered by the auditor should be approved by the board of directors or the audit committee. Additionally, the auditor is also restricted from providing certain specific services.
5.3. Auditing standards: The Standards on Auditing have been accorded legal sanctity in the 2013 Act and would be subject to notification by the NFRA. Auditors are now mandatorily bound by the 2013 Act to ensure compliance with Standards on Auditing.
5.4 Cognisance to Indian Accounting Standards (Ind AS): The 2013 Act, in several sections, has given cognisance to the Indian Accounting Standards, which are standards converged with International Financial Reporting Standards, in view of their becoming applicable in future. For example, the definition of a financial statement includes a ‘statement of changes in equity’ which would be required under Ind AS. [Section 2(40) of 2013 Act]
5.5. Secretarial audit for bigger companies: In respect of listed companies and other class of companies as may be prescribed, the 2013 Act provides for a mandatory requirement to have secretarial audit. The draft rules make it applicable to every public company with paid-up share capital > Rs. 100 crores*. As specified in the 2013 Act, such companies would be required to annex a secretarial audit report given by a Company Secretary in practice with its Board’s report. [Section 204 of 2013 Act]
5.6. Secretarial Standards: The 2013 Act requires every company to observe secretarial standards specified by the Institute of Company Secretaries of India with respect to general and board meetings [Section 118 (10) of 2013 Act], which were hitherto not given cognizance under the 1956 Act.
5.7. Internal Audit: The importance of internal audit has been well acknowledged in Companies (Auditor Report) Order, 2003 (the ‘Order’), pursuant to which auditor of a company is required to comment on the fact that the internal audit system of the company is commensurate with the nature and size of the company’s operations. However, the Order did not mandate that an internal audit should be conducted by the internal auditor of the company. The Order acknowledged that an internal audit can be conducted by an individual who is not in appointment by the company.
The 2013 Act now moves a step forward and mandates the appointment of an internal auditor who shall either be a chartered accountant or a cost accountant, or such other professional as may be decided by the Board to conduct internal audit of the functions and activities of the company.
The class or classes of companies which shall be required to mandatorily appoint an internal auditor as per the draft rules are as follows: *
• Every listed company
• Every public company having paid-up share capital of more than 10 crore INR
• Every other public company which has any outstanding loans or borrowings from banks or public financial institutions more than 25 crore INR or which has accepted deposits of more than 25 crore INR at any point of time during the last financial year.
5.8. Audit of items of cost: The central government may, by order, in respect of such class of companies engaged in the production of such goods or providing such services as may be prescribed, direct that particulars relating to the utilisation of material or labour or to other items of cost as may be prescribed shall also be included in the books of account kept by that class of companies. By virtue of this section of the 2013 Act, the cost audit would be mandated for certain companies. [section 148 of 2013 Act]. It is pertinent to note that similar requirements have recently been notified by the central government.
6.1. National Company Law Tribunal (Tribunal or NCLT): In accordance with the Supreme Court’s (SC) judgement, on 11 May 2010, on the composition and constitution of the Tribunal, modifications relating to qualification and experience, etc. of the members of the Tribunal has been made. Appeals from the Tribunal shall lie with the NCLT. Chapter XXVII of the 2013 Act consisting of section 407 to 434 deals with NCLT and appellate Tribunal.
6.2. National Financial Reporting Authority (NFRA): The 2013 Act requires the constitution of NFRA, which has been bestowed with significant powers not only in issuing the authoritative pronouncements, but also in regulating the audit profession.
6.3. Serious Fraud Investigation Office (SFIO): The 2013 Act has bestowed legal status to SFIO.
7. Mergers and acquisitions
The 2013 Act has streamlined as well as introduced concepts such as reverse mergers (merger of foreign companies with Indian companies) and squeeze-out provisions, which are significant. The 2013 Act has also introduced the requirement for valuations in several cases, including mergers and acquisitions, by registered valuers.
8. Corporate social responsibility
The 2013 Act makes an effort to introduce the culture of corporate social responsibility (CSR) in Indian corporates by requiring companies to formulate a corporate social responsibility policy and at least incur a given minimum expenditure on social activities.
9. Class action suits
The 2013 Act introduces a new concept of class action suits which can be initiated by shareholders against the company and auditors.
10. Prohibition of association or partnership of persons exceeding certain number
The 2013 Act puts a restriction on the number of partners that can be admitted to a partnership at 100. To be specific, the 2013 Act states that no association or partnership consisting of more than the given number of persons as may be prescribed shall be formed for the purpose of carrying on any business that has for its object the acquisition of gain by the association or partnership or by the individual members thereof, unless it is registered as a company under this 1956 Act or is formed under any other law for the time being in force:
As an exception, the aforesaid restriction would not apply to the following:
• A Hindu undivided family carrying on any business
• An association or partnership, if it is formed by professionals who are governed by special acts like the Chartered
Accountants Act, etc.[section 464 of 2013 Act]
11. Power to remove difficulties
The central government will have the power to exempt or modify provisions of the 2013 Act for a class or classes of companies in public interest. Relevant notification shall be required to be laid in draft form in Parliament for a period of 30 days. The 2013 Act further states no such order shall be made after the expiry of a period of five years from the date of commencement of section 1 of the 2013 Act [section 470 of 2013 Act].
12. Insider trading and prohibition on forward dealings
The 2013 Act for the first time defines ‘insider trading and price-sensitive information and prohibits any person including the director or key managerial person from entering into insider trading [section 195 of 2013 Act]. Further, the Act also prohibits directors and key managerial personnel from forward dealings in the company or its holding, subsidiary or associate company [section 194 of 2013 Act].
For more detailed and comprehensive explanations download the ppt,pdf at the link below :