Companies Bill 2012 – An overview

CA Punkaj Jain

OUTLINE

• Background of Companies Bill, 2012
• Definition
• Audit & Auditors
• Penal provisions
• Loans and Investments
• Directors, KMP’s and Governance
• Corporate Social Responsibility
• Regulatory bodies (NCLT, NFRA, SFIO)
• Mergers and Acquisitions
• Other key issues
• Way forward

FLASH BACK

WHY NEW COMPANIES ACT?

•    Massive increase in number of Companies from about 30,000 in 1956 to nearly 8 lakhs; (How many active and compliant!!!)
•    Modernization & regulatory harmony in the wake of corporate scandals; (Satyam Saga & Sahara OFCD’s issue)
•    Recognition of good corporate practices & technological improvements;
•    Simplification of law by placing related provisions under one clause/section
•    Introduction of new provisions to meet the current economic environment
  

STRUCTURE OF COMPANIES BILL,2012…

NEW AMENDED TERMS

 

 

NEW TYPES OF COMPANIES

One Person Company – 2(62)

   Introduction of One Person company akin to UK Companies Act

   A private Company subscribed by one Individual;

   Name shall affix OPC or one person Company

Dormant Company – 455

   Introduction of Dormant Status: Formed for future project, holding as asset or intellectual property etc

   Companies not carrying significant accounting transaction & inactive companies

   ROC may suo-moto issue treat notice for dormant status

Small Company – 2(85)

Private Company having

INR 50 lacs of paid up capital (or higher limit to be prescribed not exceeding INR 5 Cr; and

Turnover not exceeding INR 2 Crores (or higher limit to be prescribed not exceeding INR 20 Cr)

COMPLIANCE REQUIREMENTS

Particulars	One Person Co	Small Co	Dormant Co
Cash flow requirement	NA	NA	NA
Annual return	CS/ Director		NA
Board meetings	One meeting in each half of the calendar year and gap not less than 90 days
Quorum	NA	2 memberspersonally present	NA
Others	Limited liability and  flexibility in compliance	Relatively lessCompliance and easy to operate	Can be converted to an Active Co later

Subsidiary Company – 2(87)

   A company in which the holding company:

   controls the composition of the board of directors; or

   Exercises or controls more than one half of the total share capital either at its own or together with one or more of its subsidiary companies

   Provided prescribed Companies shall not have layers of subsidiaries beyond such numbers as may be prescribed (discussed later)

Impact:

   Under the extant provisions of the Act, it is more than one half of the total equity share capital, however the term used by the Bill is ‘share capital’ which may include all kinds of share capital including equity, preference or any other convertible securities

Private Company – 2(68)

   Minimum paid-up share capital of 1 lacs; and

   Restricts the right to transfer its shares; and

   Limits the number of its members to 200

Impact

   Ease of capital raising by offering securities to more than 50 members

   However, Clause 42 (Private Placement) restricts the offer to not more than 50 people or such higher number as may be prescribed. These contradictory provisions need to be reconciled

OFFICER IN DEFAULT – 2(60)

   The definition of the term has been expanded to include the following class of persons other than already provided under Section 5 of the Cos Act:

   Any person who, under the immediate authority of the Board or any key managerial personnel, is charged with any responsibility including maintenance, filing or distribution of accounts or records, authorizes, actively participates in, knowingly permits, or knowingly fails to take active steps to prevent, any default

   Every Director, who is aware of any contravention by virtue of receipt by him of any proceedings of the Board or participation in such proceedings without objecting to the same

   In respect of the issue or transfer of any shares of a company, the share transfer agents, registrars and merchant bankers to the issue or transfer

PROMOTER – 2(69)

   Person named in a prospectus or is identified as such in the annual return; or

   Who has control over the affairs of the company, other than in professional capacity, as a shareholder or a director or otherwise; or
In accordance with whose advice or directions the Board is accustomed to act

Impact:

   Widening of definition in line with SEBI and all penal provisions like fraud, non compliance etc now applicable to widened definition of ‘Promoters’

ASSOCIATE COMPANY – 2(6)

   A company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company

   “Significant influence”:

   Control of at least 20% of total share capital; or

   business decisions under an agreement;

Impact:

•    Disclosure of associate companies in financial report and consolidation for Associate Co’s
•    Widens scope of related parties covering associate parties under its ambit
•    Associate Company included to put restrictions on following:
•    Qualification of Directors
•    Qualification of Auditors
•    Vacation of officer of Director (discussed in ensuing slides)
•    Restriction on non-cash transactions involving directors

RELATED PARTY – 2(76)

•    A director or his relative;
•    A Key Managerial Personnel (‘KMP’) or his relative;
•    A firm – in  which a director, manager or his relative is a partner;
•    A private company – in which a director or manager is a member or director;
•    A public company: in which a director or manager is a director or holds  along with his relatives, more than two per cent of its paid-up share capital;
  

Impact:

•    All Related Parties Transactions (‘RPT’) to be at arm’s length price, similar to ALP under Income-tax Act
•    All specified RPT to be approved by Board of Directors and special resolution in general meeting (except certain transactions with prescribed value and Cos with prescribed paid up capital)

CONTROL – 2(27)

•    Includes the right to appoint majority of the directors; or
•    control the management or policy decisions by a person or persons acting in concert, directly or indirectly, including by virtue of their shareholding; or Management rights or Shareholders agreements or Voting agreements or in any other manner;

Impact:

   Definition in line with SEBI’s definition of control

FINANCIAL PERIOD – 2(41)

   Means the period ending on the 31st day of March every year

   The National Company Law Tribunal (“NCLT”) shall have the power to allow a different financial year for companies which are either holding companies or subsidiaries of a company incorporated outside India so as to enable consolidation of accounts of such companies

   Window of 2 year given to align the financials as per new Co’s Bill

FOREIGN COMPANY – 2(42)

‘Foreign Company’:

   Any company or body corporate incorporated outside India which (a) has a place of business in India whether by itself or through an agent, physically or through electronic mode;  and

   conducts any business activity in India in any other manner

Impact:

   Currently there is no specific provision for mandatory registration of foreign companies engaged in online business practices, e commerce activities etc

   Enable effective regulation of such entities

LISTED COMPANY – 2(52)

‘Listed company’:

   Means a company which has any of its securities listed on any recognized stock exchange

Impact:

   With the new definition of listed company, Any Co having securities like debentures listed on any stock exchange would be termed as listed Company

ACCOUNTS OF COMPANIES

FINANCIAL STATEMENTS

MAJOR CHANGES

•    Recognition of keeping Books of accounts in electronic form;
•    Laying of Consolidated Accounts besides subsidiary shall also include associate company & joint venture;
•    No provision for extension of financial year;
•    Uniform Financial Yr, i.e. period ending 31^st March
•    Provision of re-opening/recasting of Books of A/c
•    Provision of revision of financial statements;
•    Authority to prescribe Accounting Standards now vested with Central Govt.
  

AUDIT & AUDITORS (CLAUSE 139 TO 148)

APPOINTMENT OF AUDITORS -COMPARISON

Particulars	Under Companies Act,1956	Under Companies Bill
Mandatory rotation	No mandatory rotation Mandatory rotation of Individual Auditor after term of 5 yrs & Audit Firm after 10 yrs	Mandatory rotation of Individual Auditor after term of 5 yrs & Audit Firm after 10 yrs
Whistleblower	No such provision Immediate reporting by Auditors to Government in case of fraud	Immediate reporting by Auditors to Government in case of fraud
Restriction on services	No such provisions Prohibition of rendering classified services by Auditors to Co./Holding/Subsidiary	Prohibition of rendering classified services by Auditors to Co./Holding/Subsidiary
Other disqualification	Sec 226 prescribes qualification & disqualification criteria Additional disqualification of Auditors	Additional disqualification of Auditors

 

 

 

 

 

 

 

 

 

 

RESIGNATION & REMOVAL OF AUDITORS

Particulars	Under Companies Act,1956	Under Companies Bill
Reasons for resignation	No such provision Statement indicating the reasons for resignation shall be filed within 30 days to Company, Registrar  & CAG in case of Government companies	Statement indicating the reasons for resignation shall be filed within 30 days to Company, Registrar  & CAG in case of Government companies
Special resolution on removal of auditor	No special resolution for removing auditor on expiry of tenure Special resolution required for appointment of auditor other than retiring auditor	Special resolution required for appointment of auditor other than retiring auditor
Change of auditor by Tribunal	No such provisions Tribunal can suo moto or on application from Central government/ any person can direct change of Auditor	Tribunal can suo moto or on application from Central government/ any person can direct change of Auditor

OTHER KEY PROVISIONS

•    A limit of 20 audits per partner without any distinction between public and private companies, as against the current ICAI imposed limit of 30 audits
•    Ratification of appointment of auditors, by the members at every annual general meeting of the company, has been made mandatory
•    Shareholders at liberty to decide by passing resolution that audit partner and the audit team, be rotated every year
•    Company bound to re-open and recast its financial statements if application having been made by following and an order has been made by the NCLT or a other Court
•    Central Government, SEBI, Income tax authority
•    Any Statutory body or authority or any person concerned
•    Consolidated financial statements of companies are required to also include financial statements of associate companies and joint ventures
•    Class action suits, can be filed against auditors to claim damages or compensation for improper or misleading statement of particulars in the audit report or for fraudulent, unlawful or wrongful actions

LLP /PARTNERS OF LLP AS AUDITORS

•    The word “firm” shall include a incorporated LLP;
•    LLP can be appointed as an Auditor but only Chartered Accountant can act as an Auditor under Clause 141(2);
• Impact:
•    Formation of Multi disciplinary/ Hybrid LLP’s permitted
•    Corresponding amendments to be brought in Acts governing professionals like CA, CS, CWA’s etc.

NEGATIVE LIST OF SERVICES- AUDITORS

Clause 144

•    Accounting and book keeping services
•    Internal audit
•    Design and implementation of any financial information system
•    Actuarial services
•    Investment advisory services
•    Investment banking services
•    Rendering of outsourced financial services
•    Management services
•    Directly/ Indirectly not allowed

AUGMENTED RESPONSIBILITIES OF AUDITORS

•    Expected to act as Whistle Blower;
•    Mandatory  Attendee of the AGM;
•    Conduct of Internal Audit by CA/CWA/authorized professional;
•    Written consent & Certificate required in case of Appointment;
•    Extraneous duty to report to Central Govt. in case of fraud;
•    Imposition of Criminal  Liability on Auditors

PENAL PROVISIONS

UNDER COMPANIES ACT 1956

 

UNDER COMPANIES BILL 2012

NEW PENAL PROVISION -CLAUSE 147

AUDITING OF AUDITORS

•    Replacement of NACAS by NFRA;
•    Autonomy given to ICAI under the C.A. Act curtailed;
•    Harsh Provisions of Clause 140 & 147  can be restricted to large & listed Co’s;
•    Prohibition of rendering consultancy services to hamper growth of CA Profession;
•    Difficulty in Survival of small and medium-size audit firms.

LOANS AND INVESTMENTS BY COMPANY – 186

Particulars	Sections of extant Co’s Act	Corresponding Clause of Bill
Applicability	Not applicable to Private Company	Applicable to all Companies
Coverage	•      Loans given by one company to another company •      Guarantees and securities in favour of a person who has given any loan to the company •      Acquiring by subscription or otherwise, securities of a company by other company	•      Loan to any person or other body corporate •      Guarantee or provide security in connection with a loan to any other body corporate or person •      Acquiring by subscription or otherwise, securities of a company by other company
Exemptions	•      Exemption available for loans, investments and guarantees given by Holding Co to its WOS	•  No such exemption
Exemptions	Exemption available to infrastructure companies for loans, provision of security and guarantee, investments	The exemption available to infrastructure companies continues for loans, provision of security and guarantee but not for investments
Rate of loan	•      At the prevailing bank rate	•      At a rate not lower than the prevailing yield of the 1, 3, 5 or 10 years G-Sec closest to the tenor of the loan
Upper limit/ Capping	Higher of •      60% (Paid-up share capital+ free reserves) or •      100% (free reserves and)	Higher of •      60% (Paid-up share capital+ free reserves + Securities premium) or •      100% (free reserves and securities premium)
Approval for exceeding the limit	No change. Prior approval by Special resolution passed in general meeting	No change. Prior approval by Special resolution passed in general meeting

Impact:

•    Private limited included under new clause
•    Definition widened as loans given to ‘any person’ included
•    Clarity bought on inclusion of securities premium for upper cap
•    Rate of loan in line with yield of G-Sec
  

DIRECTORS, KMP’s & GOVERNANCE

NEW CONCEPTS

COMPOSITION OF BOARD – COMPARATIVE

COMPOSITION OF BOARD – COMPARATIVE

Particulars	Under Companies Act,1956	Under Companies Bill
Max. Directors Public: Private:	Section 252 2 No upper limit	Clause 149 15 15
Number of Directorship	Section 275 Maximum upto 15 (directorships in private companies as well as alternate directorships are not counted)	Clause 165 Maximum upto 20 and not more than 10 in public companies Overall capping of 20 now
Resident Director	No such provisions	Clause 149 (2) Atleast 1 director  to be Resident Director and stay in India for atleast 182 days during the calendar year
Women Director	No such provisions	Clause 149 (1) Woman Director in prescribed Companies

 

GOVERNANCE OF BOARD – COMPARATIVE

Particulars	Under Companies Act,1956	Under Companies Bill
1st Board meeting	Section 285, 286 No specific provisions of for time limit	Clause 173 Specific provision for holding 1st  board meeting within 30 days from incorporation.
Minimum number of meetings	4 meetings every year 1 meetings every quarter 4 meetings every year such that maximum gap is 120 days between two meetings
Board meeting notice timeline	No such provisions Minimum 7 days notice for  Board meeting

KEY MANAGERIAL PERSONNEL (KMP)

KMP’s covered under  ‘Officer in Default’ & ‘Related Parties’

A KMP cannot be a KMP of any other company other than the subsidiary

INTENT TO INTRODUCE KMP’S

Recognition of highest level of Management Personnel with Liabilities commensurate with their position

INDEPENDENT DIRECTORS

•    No provision of Independent Director under Act but term now defined in the Bill
•    Prescribed Co’s including Listed Co’s, to have minimum 1/3rd Directors as Independent Directors
•    Limited Tenure: Maximum of 2 consecutive tenures of 5 consecutive years
•    Not entitled to any remuneration in form of stock option
•    Insulated from liability unless the fraudulent act is done with their consent, knowledge & connivance

MANAGERIAL REMUNERATION

•    Maximum limit of 11% profits – retained
•    Insurance Premium not be treated as part of remuneration
•    Public Co’s required to seek prior approval of CG; if limits exceeded
•    Additional exemptions in case of Co’s having no/inadequate profits
•    Enhanced Individual limits vis-à-vis existing limits

CSR PROVISIONS – CLAUSE 135

– Applicability:

Company which satisfies any one conditions

Net worth of INR 500 Cr or more; or

Turnover of INR 1000 Cr or more; or

Net profit of INR 5 Cr or more during any financial year

–  Activities which may be included enlisted in SCHEDULE VII

– CSR Committee:

Mandatory to constitute CSR Committee of the board

Constitution: At least 3 Directors; 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 policy in report

Board to ensure that that the CSR policy is complied; and

The company spends at least 2% of the average net profits made by the company in the preceding three financial years in accordance with the policy

In case of failure, Board to give reasons in the board’s report

– Impact:

Mandatory  to formulate a CSR committee and policy

Difficult for start up Companies to comply with CSR provisions

Deductibility of expenditure incurred under Income-tax

–Suggestions:

Deemed deduction for any CSR expenditure as revenue expenditure under Income-tax

A weighted deduction for tax purposes of, say, 150% of the CSR expenditure could be introduced

CSR done under Trust etc should also be considered for 2%

REGULATORY BODIES

NFRA – CLAUSE 132

–Constitution

CG to constitute NFRA – Quasi judicial authority by notification

Appeal for a order of NFRA shall lie before Appellate Authority

NFRA given powers of a civil court for investigation.

 –Composition

1 chai person & members (Maximum 15)

– Role

 Advisory role, monitoring compliances & Investigation of professional misconduct by CA’s;

Oversee the quality of service of the Auditors;

PENALIZATION UNDER NFRA

•    Penalty of not Less than 1 Lakh in case of Individual Auditor ;
•    Penalty of not Less than 10 Lakh in case of Audit Firm; &
•    Debar from Professional Practice for 6 months  to 10 years

ICAI VS. NFRA

•    Marginalization of ICAI;
•    Intrusion into Exclusive domain of ICAI like Investigation, Penalization, recommendation of Accounting & Auditing Policies;
•    Restriction ICAI’s role to acting as a certifying body;
•    Seizure of power to institute proceedings if already initiated by NFRA

Impact/ Issues:

•    Matters of misconduct handled by ICAI in past
•    Validity of verdict by peers
  

NCLT – CLAUSE 408-410

National company law tribunal (‘NCLT’)

– Constitution

   CG by notification to constitute NCLT & its appellate body, NCLAT (Proposed to replace CLB, BIFR & AIFR)

– Role

   Speedy disposal of cases; likely within 3 months

   All proceedings relating to Arbitration, Compromise & Arrangement shall be transferred to NCLT

   Special Courts can be set up Government for speedy trials

– Impact/ Issues:

   Consolidation of all legal bodies of Corporate law

   Practical issues regarding functioning, resource and training to Authorities

SFIO – CLAUSE 211

Serious Fraud Investigation Office (‘SFIO’)

– Object of SFIO under New Co’s Bill

•    Specific enunciation of good governance practices
•    Easier prosecution of Delinquent Directors
•    Active involvement of Directors
•    Enhancement of objectivity/independence by non-executive & Independent Directors
•    Liabilities specified with defined limits

– Constitution

   Status of SFIO established under Bill

– Role

•    Investigation of Report of SFIO equivalent to Police Report for framing charges
•    Power to arrest in case of certain cognizable offences
•    Stringent penalty provided for fraud related offences

Impact/ Issues

•    Strengthening of investigation proceedings
•    Effective process by inclusion of experts of various field
  

MERGERS AND ACQUISITIONS

Particulars	Extant Co’s Act	Co’s Bill, 2012
Merger of Indian Co into Foreign Co	•      Not permitted	•      Permitted •      Prior approval of the RBI required before any foreign company merges with an Indian company or vice versa
Creation of Treasury stock	•      No such restriction	•      The Bill prohibits creation of treasury stocks
Merger or amalgamation between small companies or between holding companies and a WOS or prescribed companies	•      No such provision	•      Proposed new process of merger/ amalgamation of small companies or group companies involves the approval of •      shareholders holding at least 90% of the shares of the company •      RoC •      Official liquidator •      Central Government
Auditors certificate	•      No such provision for Private Cos	•      Auditor to certify accounting treatment in the scheme is in conformity with the AS prescribed under Clause 133 of the Bill
Dispensation of the meeting of creditors	•      Possible to seek approval of dispensation based upon consent letters received	•      Creditor or class of creditors, having at least 90% value agree and confirm, by way of an affidavit to the scheme

OTHER KEY ISSUES

NEW CONCEPTS INTRODUCED

•    Recognition of electronic form of Books of Account
•    Provision of re-opening/recasting of books of accounts
•    Provision of revision of financial statements
•    Authority to prescribe Accounting Standards now vested with CG

REGISTERED VALUER

– Role

   Appointment made mandatory

   Valuation of shares, net worth, assets, liabilities, as required under law

   Specific duties & role of Register Valuer has been prescribed

– Others

   Qualification & experience as prescribed by way of Rules

   Appointment to be effective by audit committee or Board of Directors

– Mandatory valuation

•    Allotment of Shares for consideration other than cash
•    Acquisition of minority shareholding by holders of at least 90% of issued equity share capital of a company
•    Exit opportunity to the dissenting shareholders of transferor company/listed company being merged with an unlisted company
•    Submission of valuation report by liquidator in the event where tribunal has made a winding up order
•    Declaration of solvency by the board of directors in the event of voluntary winding up

OTHER IMPORTANT PROVISIONS

WAY FORWARD

•    Bill to be passed in Rajya Sabha and assent of the President
•    Rules to be prescribed and notified for implementation of Cos Bill
•    Preparing the Regulatory bodies with adequate resources and training