Introduction
Companies Act 2013 (the “Act 2013”) came up considering major ways out of the Companies Act of 1956, though still left with major loopholes which were compelling to bring more transparency, consistency and clarity in the provisions and to strengthen corporate governance.
The Company Law Committee (‘CLC’) was constituted by the Ministry of Corporate Affairs (MCA) to recommend the necessary changes to the Act for its proper and effective implementation which came out with its report, being 164th Company Law Committee Report in February 2016. Various amendments/modifications as proposed by the Committee have been broached in the Companies (Amendment) Bill, 2016 (‘Bill, 2016’ or ‘Bill’).
The Companies Amendment Bill, 2016 got the assent from Lok Sabha on July 27, 2017 and subsequently from Rajya Sabha on December 19, 2017. It got assent from President on January 03, 2018, though many sections have been notified, we are waiting for more.
Amendments made to Chapter IX: Accounts of Companies & Chapter X: Audit and Auditors including sections from 128 to 148 of Act 2013 are simply clarificatory in nature and are discussed below:
Significant -amendments:
| Section
|
Enactment | Particulars |
| 130
Reopening of accounts on court’s or Tribunal’s order |
Amendment Act | Insertion of new sub section (2)
No order shall be made under sub-section (1) in respect of re-opening of books of account relating to a period earlier than eight financial years immediately preceding the current financial year: Provided that where a direction has been issued by the Central Government under the proviso to sub-section (5) of section 128 for keeping of books of account for a period longer than eight years, the books of account may be ordered to be re-opened within such longer period |
| Remark | The restriction is imposed on the applicability of the provisions of section 130 for a period of eight years, unless a longer period is required through a specific direction issued by Central Government, under Section 128(5).
Moreover it is necessitous to bring consistency with section 128 (5) as it would be deadweight on companies if they have to maintain their accounts forever, or beyond a reasonable time limit because of this provision of re-opening of accounts. |
|
| Section 134 (1)
Financial Statement, Board’s report, etc. |
Amendment Act | The financial statement, including consolidated financial statement, if any, shall be approved by the Board of Directors before they are signed on behalf of the Board by the chairperson of the company where he is authorized by the Board or by two directors out of which one shall be managing director, if any, and the Chief Executive Officer, the Chief Financial Officer and the company secretary of the company, wherever they are appointed, or in the case of One Person Company, only by one director, for submission to the auditor for his report thereon.”; |
| Remark | The change pertains to omission of the requirement of the CEO to be a director in order to sign the report.
This is a much required change as, if a company not having a managing director, the Chief Executive Officer, irrespective of whether he was a director or not, being a KMP, is responsible for the overall management of the company; thus he should be mandated to sign the financial statements. |
|
| 134 (3)
Financial Statement, Board’s report, etc [Attachments to Board Report] |
Amendment Act | ▫ for clause (a), the following clause shall be substituted, namely:—
“(a) the web address, if any, where annual return referred to in sub-section (3) of section 92 has been placed ▫ after clause (q), the following provisos shall be inserted, namely:— “Provided that where disclosures referred to in this sub-section have been included in the financial statements, such disclosures shall be referred to instead of being repeated in the Board’s report ▫ Provided further that where the policy referred to in clause (e) or clause (o) is made available on company’s website, if any, it shall be sufficient compliance of the requirements under such clauses if the salient features of the policy and any change therein are specified in brief in the Board’s report and the web-address is indicated therein at which the complete policy is available ▫ In clause (p), for the words “annual evaluation has been made by the Board of its own performance and that of its committees and individual directors”, the words “annual evaluation of the performance of the Board, its Committees and of individual directors has been made” shall substituted; |
| Remark | As the numerous disclosures in the Board’s Report as specified in sub section (3) of section 134 makes the Report lengthier, and more expensive to produce.
Form MGT-9 is omitted with details regarding shareholding, etc. to be specifically prescribed under section 134(3) and providing web address would suffice. Also, the requirement of repetition of disclosure already covered in Financial statement is waived off. Only salient features of the policies placed on the website along with web address shall be provided in the Board Report. Salient points of the CSR Policy, Remuneration Policy may be included in the Report and the detailed documents/policies provided on the website of the company, if any, and web address or link of these documents/policies to be provided in the Board Report. Changes in the policies should be specifically highlighted in the salient points. It was necessitous that the Report should be structured; repetition is avoided and made more readable. § The existing provision provides the board for its own performance evaluation, which at times biased. Moreover, the evaluation is done by IDs and NRC. Thus the amendment is simply straightening of language and enhancing transparency. |
|
| 135 (1)
Corporate Social Responsibility |
Amendment Act | ▫ In sub section (1) for the words “any financial year”, the words “the immediately preceding financial year” shall be substituted;
▫ the following proviso shall be inserted, namely:— “Provided that where a company is not required to appoint an independent director under sub-section (4) of section 149, it shall have in its Corporate Social Responsibility Committee two or more directors. |
| Remark | Clarity was needed in regard to ‘any financial year’ as used in Section 135(1) for determining whether the threshold of specified net worth or turnover or net profit is met to constitute the CSR Committee. The amendment removed such ambiguity.
The amendment in respect relaxation to companies not having ID may constitute the committee without an ID is to bring it align with Rule 5(1) of CSR Policy Rules, 2014, allows unlisted companies, private companies, and foreign companies, to have the Committee with less than three directors, and without Independent Directors, where they were not required to be appointed. |
|
| Section 136 (1)
Right of member to copies of audited financial statement. |
Amendment Act | ▫ Fourth proviso shall be substituted as-
Provided also that every listed company having a subsidiary or subsidiaries shall place separate audited accounts in respect of each of subsidiary on its website, if any: Provided also that a listed company which has a subsidiary incorporated outside India (herein referred to as “foreign subsidiary”)— (a) where such foreign subsidiary is statutorily required to prepare consolidated financial statement under any law of the country of its incorporation, the requirement of this proviso shall be met if consolidated financial statement of such foreign subsidiary is placed on the website of the listed company; (b) where such foreign subsidiary is not required to get its financial statement audited under any law of the country of its incorporation and which does not get such financial statement audited, the holding Indian listed company may place such unaudited financial statement on its website and where such financial statement is in a language other than English, a translated copy of the financial statement in English shall also be placed on the website. ▫ Insertion of proviso to sub section (2) “Provided that every company having a subsidiary or subsidiaries shall provide a copy of separate audited or unaudited financial statements, as the case may be, as prepared in respect of each of its subsidiary to any member of the company who asks for it. |
| Remark | Relaxation is granted to listed companies to place unaudited financials of foreign subsidiaries on the website where country of incorporation does not require audit of such financials or may place consolidated financials of the foreign subsidiary;
To provide copy of separate audited or unaudited financial statements of subsidiaries mandatorily to a member who asks for. |
|
| 139 (1)
Appointment of Auditor |
Amendment Act | Proviso to sub section (1) of Section 139
“Provided that the company shall place the matter relating to such appointment for ratification by members at every annual general meeting” is omitted. |
| Remark | Previously, when the auditor’s appointment is not ratified in the annual general meeting it amounts to his removal. Whereas removal of auditor has to be in accordance with provisions of section 140 of the principal act.
Thus it is a significant change which will remove the inconsistency between the provisions. Moreover, the ratification of auditor in each general meeting is extraneous business to be transacted as members of the company undoubtly ratify his appointment. |
|
| 141 (3)(i)
Eligibility, qualifications and disqualifications of auditor |
Amendment Act | Clause (i) shall be substituted as –
a person who, directly or indirectly, renders any service referred to in section 144 to the company or its holding company or its subsidiary company. |
| Remark | Section 141(3)(i) provides that any person whose subsidiary, or associate company, or any other form of entity is engaged on the date of appointment, in the services prohibited under Section 144, shall be disqualified from being appointed as an auditor. It was suggested by the committee that the language of Section 141(3) (i) was such that a firm which was engaged in any of the activities mentioned in Section 144 anywhere in the world, and was rendering any such service to companies other than the auditee company, could not be appointed as an auditor of a company in India, even if such services were rendered to an entity which was totally unconnected with the auditee company.
There was need to straighten the language to bring more clarity in which the Amendment Act comes up with. |
Some other amendments:
| Section | Amendments |
| 129(3)- “Financial Statement” | The amendment includes associates for the purpose of consolidation and attachment of salient features to the financial statements.
Whereas the format of Form AOC-1 anyways mandated providing details of associates and joint ventures. The amendment is simply Clarificatory as the explanation to sub section 3, subsidiary includes associate and joint venture. |
| Proviso to 130(1)- “Re-opening of accounts on court’s or Tribunal’s orders” | The court or the Tribunal shall give notice to the Central Government, the Income-tax authorities, SEBI or any other statutory regulatory body or authority concerned or any other persons concerned and shall take into consideration any representations made by them before passing any order under this Section.
The amendment provides that other concerned parties, like a company or the Auditor/Chartered Accountant of the company should also be given an opportunity to present their point of view. |
| 132- “Constitution of National Financial Reporting Authority” | The amendment relates to omission of provisions relating to constitution of an Appellate Authority for National Financial Reporting Authority. The appeals against the order the same shall be examined by NCLAT.
Further, the minimum penalty on firms for professional misconduct decreased from Rs. 10 Lakhs to Rs. 5 Lakhs under sub section (4)(c)(A)(II), as the Chartered Accountant or the firms are highly monitored by ICAI and suitable disciplinary action are taken. Thus there is no rational to impose harshness by two authorities. Also, in sub-section (5), for the words, brackets and figure “the Appellate Authority constituted under sub-section (6) in such manner as may be prescribed”, the words “the Appellate Tribunal in such manner and on payment of such fee as may be prescribed” shall be substituted; Omission of sub section (6), (7), (8) & (9) from section 132 of the Act 2013 |
| 134 (3) Financial Statement, Board’s Report, etc. | Prescriptive powers have been given to Central Government to prescribe abridged Board’s report for OPC or small company. |
| 135 (3)
Corporate Social Responsibility |
To widen the scope, it would be appropriate for the said clause to be modified to refer to subjects in Schedule VII within which CSR activities could be taken up by an eligible company.
Consequently, the words and figures “as specified in Schedule VII”, is replaced with “in areas or subject, specified in Schedule VII” in Amendment Act. |
| 135 (5)
Corporate Social Responsibility |
The amendment pertains to insertion of explanation for giving prescriptive power to CG for exclusion of certain sums for “net profit” calculation to be calculated in accordance with Section 198 of the Act 2013 |
| Section 136 (1)
Right of member to copies of audited financial statement. |
The Ministry of Corporate Affairs had issued a circular dated 21st July 2015, in which it had clarified that the shorter notice period would also apply to the circulation of annual accounts. The Committee felt that it would be appropriate that clarity allowing financial statements to be circulated at a shorter period in accordance with the provision for shorter notice meeting under Section 101 be provided in Section 136.
The said recommendation has been implemented in the Amendment Act which provides for sending the documents in less than 21 days before AGM consent requirement is same as in section 101 of the Act, 2013. |
| 143 (1)
Proviso- “Powers and duties of auditors and auditing standards |
The Amendment Act provides Auditors of holding company to have right to access records of associate companies.
This is done to bring consistency with amendment in Section 129 regarding consolidation of financial statements of holding company with its subsidiaries, associate companies and joint venture. |
| 143 (3)
Powers and Duties of auditors and auditing standards |
The amendment pertains to Internal Financial Reporting to be with stated in auditor’s report with reference to financial statements only.
It has been observed that auditing internal financial control systems by auditors would be an onerous responsibility. It was also suggested that their responsibility should be limited to the auditing of the systems with respect to financial statements only. Keeping in view the abovementioned concern, the change has been made to clause (i) of sub section (3). |
| 143 (14)
Powers and Duties of auditors and auditing standards |
The word “cost accountant in practice”, to be replaced with “cost accountant”
The said amendment is in align with the amendment made to clause (28) of section 2 of the Act 2013. |
| 147 (2)
Punishment for contravention |
The amendment is in penalty of auditor of the company if he contravenes any of the provisions of Section 139, 143 or 145 of Act 2013, then he shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees or four times the remuneration of the auditor, whichever is less;
For known contravention, minimum fine is to be reduced to fifty thousand rupees but which may extend to twenty-five lakh rupees or eight times the remuneration of the auditor whichever is less. |
| 147 (3)
Punishment for contravention |
The Auditor’s liability to pay for damages to be limited to members or creditors of the company as against any other person.
The auditor will be liable to pay for the damages incurred by the members or creditors in addition to the company and statutory bodies or authorities for loss arising out of incorrect or misleading statements his audit report. |
| 147 (2) proviso
Punishment for contravention |
Insertion of proviso to sub section (5)
“Provided that in case of criminal liability of an audit firm, in respect of liability other than fine, the concerned partner or partners, who acted in a fraudulent manner or abetted or, as the case may be, colluded in any fraud shall only be liable.”. The amendment is done to bring Rule 9 of the Companies (Audit and Auditors) Rules, 2014, in to the Act. |
| 137 (1), (2) & (3) | The word and figure “within the time specified under section 403” or “in section 403” shall be omitted. |
Conclusion:
The amendments made to above sections have brought down to a major extent duplication in information which is required to be made available to stakeholders thus making board report more crisp and to the point while other amendments are made in view to remove prevailing ambiguity and relaxing certain cumbersome requirements.
(Author is associated with Mamta Binani and Associates and can be reached at mamtabinaniandassociates@gmail.com )
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