How to enroll on independent director’s data bank and pass examination for independent director

My article is related to preparation of exam of independent director. In this article I am trying to help my Profession colleagues or others who want to pass their exam and wish to add his/her name in the database of independent director. In this article I elaborate the need of independent director, Procedure of online examination, working mechanism of data bank and detailed discussion on topic covered in exam. I tried to discuss provisions of companies Act, Rules made there under, SEBI (LODR) Regulation, 2015, other relevant laws, financial prudence, basic concept of accounting and financial ratio. In this Article I mentioned direct link of e-book of companies Act, rules made there under, SEBI (LODR) Regulation, 2015 and my other relevant articles on these topics, which will be beneficial for reader point of view. In my personal opinion, this article may definitely benefit the persons who intend to appear in the examination for enrollment in the Independent director’s Databank

(A) Why need Independent Director

Today time corporate governance has received increased attention because of high-profile scandals involving abuse of corporate power or alleged criminal activity by corporate officers. Therefore, laws and regulations have been passed to address the components of corporate governance. Organizations have Duties and responsibilities towards their shareholders and stakeholders and hence they need to be governed in accordance with the law and keeping in mind the interests of the stakeholders and shareholders. The board of directors is responsible for creating the framework for corporate governance that best aligns business conduct with objectives. This term encompasses the internal and external factors that affect the interests of a company’s stakeholders, including shareholders, customers, suppliers, government regulators and management. An Independent director plays a good role to comply with the good corporate governance. We can say that independent director is security guard of shareholders to save the money which they have invested in the company for future growth. Independent director is a like a bridge between shareholder and the management of company. Independent Directors serve as an important Institution of corporate governance contributing significantly at the boards by bringing a diverse set of skills with an independent judgement on the significant issues. Independent Directors need to act as the custodians of good governance by discharging monitoring and advisory role effectively. They need to act in the interest of the company and the interest of all stakeholders. An independent director improves the quality of corporate governance.

(B) Why need of this Online Self Assessment Test for selection of Independent Director

Now Ministry of corporate affairs (MCA) with Indian institute of corporate affairs (IICA) has started online self assessment test to show knowledge, Skills and potential to work as an independent director. Now a person can pass the exam and get register his name in database of independent director. The company which needs an independent director for its board can pick the name from database. Earlier there were no requirement of any exam to become an independent director of company which raises a question on selection criteria of an independent director and their independence. From past time some major scandal and irregularities came in the corporate world which started panic in the mind of investor to investing money in the companies. Now the initiative of government, rather I should say the seriousness of government for selection process of independent director is very helpful for the interest of shareholder, stakeholder and various internal and external parties involved in the corporate world.

(C) Introduction of Data Bank of Independent Director

Ministry of Corporate Affairs has realised the importance of strengthening the Institution of Independent Directors and enhancing its effectiveness by way of creating a pool of skilled professionals to act as Agents of Change. MCA along with Indian Institute of Corporate Affairs (IICA) has developed a databank of Independent Directors in accordance with the provisions of Section 150 of the Companies Act, 2013.

Simultaneously, acting as a facilitator and educator, the Ministry has provisioned for the capacity building of Independent Directors through an integrated Learning Management System (LMS) to deliver interactive and engaging library of eLearning courses.

Objectives of Data Bank

(a) Develop a database of Independent directors by way of empanelment of existing Independent Directors as well as the professionals aspiring to become independent directors.

(b) Build capacities of Individuals by delivering eLearning courses on topics related to corporate governance, regulatory framework, financial prudence, and other important aspects.

(c) Provide a platform to individuals to help them acquire knowledge, develop new skills, assess their understanding, and apply best practices.

(d) Create an eco-system of individuals looking for opportunities and corporate requiring to appoint independent directors.

Features

  • Empanelment of professionals acting as Independent Directors
  • Empanelment of professionals with/without DIN who wish to serve as Independent Directors
  • Online courses offered through an integrated Learning Management System (LMS):
    • Board Essentials Courses
    • Board Practice Courses
  • Newsletter and knowledge resources for continued professional development
  • Profile sharing for corporate access for helping them appoint well-trained and informed Independent Director

(D) How data bank of Independent Director works?

Below Link can be used to go through the process of registration on independent director’s data bank.

https://www.independentdirectorsdatabank.in/databank_video

(E) Rule 6 of Companies (Appointment and Qualification of Directors) Amendments Rules, 2020

Summarized Provisions in the form of question and answer are being produced below:

1. Who has to apply?

Every individual already acting or aspiring to become an independent director on the board of a company

2. What is Time Period for Enrollment in Databank?

Existing independent directors should register by September 30, 2020 (after latest extension allowed) and individuals aspiring to become Independent director shall register before appointment anytime.

3. What has to be done after Enrollment?

After enrollment the individuals are also required to pass an “online self assessment test” within 1 year from the date of registration in databank failing which their names shall be removed from the databank

4. What if existing Independent Director Fails to enroll by September 30, 2020 or the candidates after enrollment fails to pass the test within 1 year?

If they fails to do so their names shall be removed from the databank.

5. Is there any Exemption from Test?

Yes individuals who had already served as a director or KMP for at least 10 years in-

a) Listed public Company or

b) Unlisted public company having a paid up share capital of Rs 10 Crores or more or

c) Listed body corporate

Provided that any period during which an individual was acting as a director or as a KMP in two or more companies/bodies corporate at the same time shall be counted only once.

6. When renewal application shall be filed?

The renewal application shall be filed within a period of 30 days from the expiry of 1 year or 5 years subscription as the case may be.

(F) Companies (Creation and Maintenance of databank of Independent Directors) Rules, 2019

Summarized Provisions in the form of question and answer are being produced below:

1. Where to Apply?

They have to apply online at MCA website www.mca.gov.in in ID Data Bank Services under MCA Services tab on home page. The applicant has to first create a user account on website and then has to fill his/her DIN/PAN/Passport number (as may be applicable) and thereafter he/she will be automatically redirected to IICA website for further processing.

2. Whether having DIN is mandatory for individuals Registration?

No, the individual can also register by using his PAN or Passport number.

3. What is the Fee for Individual Registration?

Individuals can apply by paying a fee of INR 5000 (+GST) for one year , INR 15000(+GST) for 5 years or INR 25000(+GST) for lifetime registration.

4. What is the pass percentage to clear the test?

The individuals are required to score at least 60 % marks in the online test.

5. How many times can an individual take the Test?

There is no limit on number of attempts an individual may take for passing this online test within one year.

6. Where the test will be conducted?

There are no physical tests being held but the whole process is online.

7. Whether any mock tests are also available?

Yes the candidates can take the mock test before the actual test in order to familarize themselves with the test environment.

8. Which subject areas would be covered in test?

The test is broadly based on relevant topics on functioning of an individuals acting as independent directors and competence in Companies Law, Securities Law, Basic Accountancy and Corporate Governance, etc.

9. Who can avail information in the Databank?

The data bank can be accessed only by the companies required to appoint IDs after paying some fees.

(G) Duties of the institute (Indian Institute of Corporate Affairs)

Creation and maintenance of data bank.

(I) The institute shall create and maintain a databank of persons willing and eligible to be appointed as independent directors, and such databank shall be an online databank which shall be placed on the website of the institute.

(II) The data bank referred to in sub-rule (1) shall contain the following details in respect of each person included in the data bank to be eligible and willing to be appointed as independent director—

(a) DIN (Director Identification Number), if applicable;

(b) Income Tax PAN;

(c) the name and surname in full;

(d) the father’s name;

(e) the date of Birth;

(f) gender;

(g) the nationality;

(h) the occupation;

(i) full Address with PIN Code (present and permanent);

(j) phone number;

(k) e-mail id;

(l) the educational and professional qualifications;

(m) experience or expertise, if any;

(n) any pending criminal proceedings as specified in clause (d) of sub-section (1) of section 164;

(o) the list of limited liability partnerships in which he is or was a designated partner along with—

(i) the name of the limited liability partnership;

(ii) the nature of industry; and

(iii) the duration- with dates;

(p) the list of companies in which he is or was director along with—

(i) the name of the company;

(ii) the nature of industry;

(iii) the nature of directorship—Executive or Non-executive or Managing Director or Independent Director or Nominee Director; and

(iv) duration – with dates.

(III) Conduct an online proficiency self-assessment test covering companies law, securities law, basic accountancy, and such other areas relevant to the functioning of an individual acting as an independent director;

(IV) Prepare a basic study material, online lessons, including audio-visuals for easy reference of individuals taking the online proficiency self-assessment test;

(V) Provide an option for individuals to take advanced tests in the areas specified in clause (III) and prepares the necessary advanced study material in this respect.

(VI) The institute shall daily, share with the Central Government, a cumulative list of all individuals

(a) whose names have been included in the data bank along with the date of inclusion and their Income Tax PAN or Passport number in case of foreign director (not required to have Income-Tax PAN);

(b) Whose applications for inclusion in the data bank have been rejected along with grounds and the dates of such rejection; and

(c) Whose names have been removed from the data bank along with grounds and the dates of such removal.

Note: The institute, shall with the prior approval of the Central Government, fix a reasonable fee to be charged from :—

(a) individuals for inclusion of their names in the data bank of independent directors; and

(b) companies for providing the information on independent directors available on the data bank.

(H) How can we prepared for online proficiency self-assessment test for Independent Director

IICA in compliance with Rule 6(1) of the Companies (Appointment and Qualification of Directors) Rules, 2014 (As amended) is conducting the Online Proficiency Self-Assessment through the Independent Director’s Databank platform. The Online Proficiency Self-Assessment is conducted upon a robust, scalable, and secure proctor based assessment platform that would issue an e-certificate upon successful completion of the test. The online test could be attempted by the Independent Directors at their own convenience from their office or residence and will not require them to visit any test centre or institute for the same.

Presently, the mock tests are available to familiarize the users with test environment.

(a) Syllabus on prima facie

  • Companies Act, 2013 and Rules made there under
  • Securities Law
  • Board composition and functions
  • Corporate social responsibility
  • SEBI (Listing obligation and Disclosure Requirement) Regulation, 2015
  • Secretarial audit and secretarial standards
  • Concept of accountancy
  • Enterprise risk management
  • Basic knowledge of financial Ratios
  • Corporate frauds including case studies
  • Others topics

(b) Topic wise syllabus in tabular Form is being produced below:

Companies Act,2013
1. Incorporation of Companies

(Relevant Sections: Section 3 to 22 of Companies Act,2013 deals with matter related to incorporation of company, and matters incidental thereto)

(Relevant Rules: Chapter II, The Companies (Incorporation) Rules, 2014)

• Company means an association of people incorporated under the Companies Act, 2013)

• Types of Companies:

Public company(7 members or more)-Section 2(71) of Companies Act,2013,

Private company (2 members or more but not exceeding 200) Section 2(68) of Companies Act,2013

One Person company (Pvt company formed with one person along with nominee to be introduced at the time of incorporation) Section 2(62) of Companies Act, 2013.

The Companies may be incorporated in the following Categories:

a. The Companies Limited by Shares (Section 2(22) of Co Act,2013)

b. The Companies Limited by guarantee and having Share capital or not (Section 2(21) of Companies Act,2013)

c. Unlimited Companies and having Share capital or not (Section 2(92) of Co Act,2013)

• Formation of Company (section 3 of Companies Act,2013 deals with that what are the requirements for the formation)

• Procedure for Incorporation of Company (Section 7 of Companies Act, 2013)

Name of Person

The Company is Artificial personality and run through human Agency which is known as Board of directors.

Public co- min 3 Directors

Pvt Co- Min 2 Directors

OPC co- Min 1 Director.

Director who is named as first director at the time of incorporation of company is called as subscriber to the Memorandum.

Obtain Digital Signature

Required for signing e-forms filling electronically to the Authorities.

Obtain DIN (Section 153 of Co Act,2013) –DIN can also be applied in Form INC-32 while incorporating a company up to 3 Directors –Rule 38(3) of the Companies (incorporation) Rule ,2014

Method of incorporation of company

(a) Reserve Unique name(RUN)

OR

(b) Simplified Performa for incorporating company electronically (SPICe)

Form no INC-32

e-MOA in Form no INC-33

e-AOA in Form no INC-34

Difference Between RUN and SPICe is the RUN is only for name Registration whereas SPICe is complete incorporation of Company (name, e-MOA and e- AOA).

MOA: It is considered as a constitution of company which consisting of 6 clause. It is an idea of a company to understand that what is the main object of company and limit of monetary liability of each member toward company. MOA is classified as follows for different type of Companies.(Refer Schedule I of Companies Act,2013)

Table-A MOA of co limited by share capital

Table-B MOA of co limited by guarantee and not having share capital

Table-C MOA of co limited by guarantee and having share capital

Table-D MOA of a unlimited co and not having share capital

Table-E MOA of a unlimited co and having share capital

Clause under MOA of a company

(i) Name Clause

(ii) Registered office clause

(iii) Object clause

(iv) Liability Clause

(v) Capital Clause

(vi) Subscription or Association Clause

AOA It is an important document apart from MOA which is required at the time of incorporation of company. It is bylaw of the company. AOA is classified as follows for different type of Companies.(Refer Schedule I of Companies Act,2013

Table-F AOA of co limited by share capital

Table-G AOA of co limited by guarantee and having share capital

Table-H AOA of co limited by guarantee and not having share capital

Table-I AOA of a unlimited co and having share capital

Table-J AOA of a unlimited co and not having share capital

• Authorities under the Companies Act, 2013 means the Authorities which need to be approached for the registration of the companies. (First Authority to be approached is Centre Registration centre (CRC) and once the company is get incorporated with the name and register with the AOA and MOA then company has to go to the Jurisdictional Registrar of Companies (ROC) as per section 396 of Companies Act, 2013.

• Documents required to be filed and attached with incorporation form

MOA

AOA

Declaration by Professionals

Declaration by each subscriber to the memorandum and each of the first directors named in the Article

2 General Meetings

(Relevant Sections: Section 96 to 102 of Companies Act,2013)

(Relevant Rules: The Companies (Management and Administration) Rules, 2014)

Secretarial Standard on General Meetings (SS-2) issued by ICSI

Three Type of Meetings(AGM, EOGM and Meeting of Members called by Tribunal)

•Annual General Meeting (AGM) (Section 96,97 of Companies Ac,2013)

(AGM is required meeting under the ordinance, through which S/H control affairs of company. AGM protects the interest of the S/H. AGM is held within 6 month from close of year and within 9 months from the date of close of first FY. Time gap between tow AGM not exceed 15 months, AGM shall be held at Registered office (RO) or at within same city/ town/ village where RO is situated. AGM during Business Hrs only and not on national holiday)

• Meeting of Members called by Tribunal (Section 98 of Companies Ac,2013)

(If for any reason it is impracticable to call a meeting of a company, other than an AGM, in any manner in which meetings of the company may be called, or to hold or conduct the meeting of the company in the manner prescribed by this Act or the articles of the company, the Tribunal may, either suomotu or on the application of any director or member of the company who would be entitled to vote at the meeting,-

(a) order a meeting of the company to be called, held and conducted in such manner as the Tribunal thinks fit; and

(b) give such ancillary or consequential directions as the Tribunal thinks expedient, including directions modifying or supplementing in relation to the calling, holding and conducting of the meeting, the operation of the provisions of this Act or articles of the company

• Punishment for defaulting in complying with the Provisions of Section 96 to 98 (Section 99 of Companies Ac,2013)

(The company and every officer of the company who is in default shall be punishable with fine which may extend to 1 lakh rupees and in the case of a continuing default, with a further fine which may extend to 5000 rupees for every day during which such default continues.)

•Extraordinary General Meeting (EOGM) (Section 100 of Companies Ac,2013 read with Rule 17 of Companies (Management and Administration Rules, 2014))

(All General Meetings of Company, Other than AGM and Statutory meetings are called EOGM. Such meeting are called to deal with urgent special business that cannot be postponed till the AGM)

• Notice of General Meeting (Section 101)

(Notice of meeting of a company is given 21 clear days in advance. The date of sending notice and date of meeting shall be considered extra for calculation of 21clear days.

If Notice is sent by post/ courier, 2 days extra need to be considered.

Meeting can be convened on a shorter notice, if consent is accorded by members having not less than 95% of members entitled to vote there at.

The notice of Meeting shall be given to every member, legal representative of any deceased member or the assignee of an insolvent member, auditor and every director of the company.

Notice shall specify the place, date, day and the hour of the meeting.

Notice is given either in writing (mode of dispatch may be Registered Post/ Speed post/ Courier) or by electronic mode.

A notice may be sent through e-mail as a text or as an attachment to e-mail or as a notification providing electronic link or Uniform Resource Locator for accessing such notice.)

• Explanatory Statement to be annexed with notice (section 102) (Applicable on Special Business items (items other than ordinary business. four items are included in Ordinary business i.e. adoption of Financial Statement, Declaration of dividend, Appointment of director in place of retire by rotation, Appointment and fixing remuneration of Auditor)

• Quorum of Meeting (Section 103)

(1) Unless the articles of the company provide for a larger number,—

(a) in case of a public company,—

(i) 5 members personally present if the number of members as on the date of meeting is not more than 1000;

(ii) 15 members personally present if the number of members as on the date of meeting is more than one thousand but up to 5000;

(iii) 30 members personally present if the number of members as on the date of the meeting exceeds 5000;

(b) in the case of a private company, 2 members personally present, shall be the quorum for a meeting of the company.

(2) If the quorum is not present within half-an-hour

(a) the meeting shall stand adjourned to the same day in the next week at the same time and place, or to such other date and such other time and place as the Board may determine; or

(b) the meeting, if called by requisitionists under section 100, shall stand cancelled:

Provided that in case of an adjourned meeting or of a change of day, time or place of meeting under clause (a), the company shall give not less than three days notice to the members either individually or by publishing an advertisement in the newspapers (one in English and one in vernacular language) which is in circulation at the place where the registered office of the company is situated.

(3) If at the adjourned meeting also, a quorum is not present within half-an-hour from the time appointed for holding meeting, the members present shall be the quorum.

• Chairman of Meeting (Section 104)

(1) Unless the articles of the company otherwise provide, the members personally present at the meeting shall elect one of themselves to be the Chairman thereof on a show of hands.

(2) If a poll is demanded on the election of the Chairman, it shall be taken forthwith in accordance with the provisions of this Act and the Chairman elected on a show of hands under sub-section (1) shall continue to be the Chairman of the meeting until some other person is elected as Chairman as a result of the poll, and such other person shall be the Chairman for the rest of the meeting.

• Proxies (Section 105)

(The Proxy need not be a member of the Company. The instrument appointing the proxy should, however, be deposited at the registered office of the Company not less than 48 hours before the commencement of the Meeting.

A person can act as a proxy on behalf of members not exceeding 50 and holding in the aggregate not more than 10% of the total share capital of the Company carrying voting rights. A member holding more than 10 % of the total share capital of the Company carrying voting rights may appoint a single person as proxy and such person shall not act as proxy for any other person or shareholder.

Proxies shall not have the right to speak at such meeting and shall not be entitled to vote except on a poll.)

• Restriction of Voting Rights (Section 106)

• Voting by show of hand (Section 107)

• Voting electronically (Section 108)

• Demand for Poll (Section 109)

• Postal Ballot (Section 110 read with rule 22 of relevant Rules)

(A company may Transact any business through postal ballot except ordinary business and any business in respect of which directors or auditors have a right to be heard at any meeting.)

For clarity of provisions related to Annual general Meetings, you may refer my Published Article on Tax guru. Link is being given below for your ready reference.

https://taxguru.in/company-law/summary-provisions-notice-annual-general-meeting.html

3 Accounts of Companies

(Relevant Sections: Section 128 to 138 of Companies Act,2013)

(Relevant Rules: The Companies (Accounts) Rules, 2014)

(Relevant Rules: The National Financial Reporting Authority Rules, 2018)

-Maintenance of books of account would mean records maintained by the company to record the specified financial transaction. It has been specifically provided that every company shall keep proper books of account.

• National Financial Reporting Authority (NFRA) section 132 of Companies Act, 2013
The CG Constituted NFRA to provide matter relating accounting and Auditing Standard.

Financial Statement: Section 2(40) of Companies Act, 2013

Financial Statement includes:-

B/S, P/L, Cash flow, State of change in equity, notes to account but in case of OPC, small co and dormant co., financial statement does not cover Cash flow.

2(41) of Companies Act- “financial year”, in relation to any company or body corporate, means 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 year, 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:

Provided that where a company or body corporate, which is a holding company or a subsidiary or associate company of a company incorporated outside India and is required to follow a different financial year for consolidation of its accounts outside India, the Central Government may, on an application made by that company or body corporate in such form and manner as may be prescribed, allow any period as its financial year, whether or not that period is a year

Section 2(43) of companies Act “free reserves” means such reserves which, as per the latest audited balance sheet of a company, are available for distribution as dividend:

Provided that—

(i) any amount representing unrealised gains, notional gains or revaluation of assets, whether shown as a reserve or otherwise, or

(ii) any change in carrying amount of an asset or of a liability recognized in equity, including surplus in profit and loss account on measurement of the asset or the liability at fair value,

shall not be treated as free reserves.

Section 2(57) of companies act “net worth” means the aggregate value of the paid-up share capital and all reserves created out of the profits, securities premium account and debit or credit balance of profit and loss account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets, write-back of depreciation and amalgamation.

Books of Accounts- Section 128

-keep at its registered office.

– gives a true and fair view.

– kept on accrual basis according to the double entry system of account.

– may be kept at such other place in India as the Board of Directors may decide and the company shall within 7 days file with the registrar and notice in writing.

– may be kept in electronic form also (read with rules 3 of the Companies (Accounts) Rules, 2014- electronic mode shall remain accessible in India and shall remain complete and unaltered, proper system of storage, retrieval, print out, proper display)

– The books of account of every company relating to a period of not less than eight financial years immediately preceding a financial year, or where a company has been in existence for a period less than eight years, in respect of all preceding years together with vouchers relevant to any entry in such books of account shall be kept in good order.

Consequence of non-compliance MD, WTD in charge if finance, the CFO or any other person of the company charged by the board is responsible for non compliance. Punishable with imprisonment for a term which may be extended to 1 year or with fine not less than 50,000 but may be extend to 5 Lacs or both.

Section 129 financial statement

-Gives true and fair view

-comply with accounting standard notified u/s 133 and in accordance with Schedule-III

-If co has subsidiary, associates or JV, then prepare consolidated financial statement along with standalone financial statement.

-BOD shall present the financial statement before AGM

Consequence of non-compliance MD, WTD in charge if finance, the CFO or any other person of the company charged by the board is responsible for non compliance. Punishable with imprisonment for a term which may be extended to 1 year or with fine not less than 50,000 but may be extend to 5 Lacs or both.

Signing of Financial Statement

Section 134(1) of Companies Act,2013 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 authorised 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.

Section 134(2) of Companies Act, 2013- The Auditors report shall be attached to every financial statement.

Rule-11 Companies Accounts Rules,2014- Circulation of Financial Statements

In case of all listed companies and such public companies which have a net worth of more than one crore rupees and turnover of more than ten crore rupees, the financial statements may be sent-

(a) by electronic mode to such members whose shareholding is in dematerialised format and whose email Ids are registered with Depository for communication purposes;

(b) where Shareholding is held otherwise than by dematerialised format, to such members who have positively consented in writing for receiving by electronic mode; and

(c) by dispatch of physical copies through any recognised mode of delivery as specified under section 20 of the Act, in all other cases.

Section 137 of Companies Act, 2013– Copy of Financial statement including CFS to be filed to registrar within 30 days of AGM in AOC-4 or AOC-4 XBRL.

Mandatory reopening or recasting of financial statement u/s 130 of Companies Act, 2013.

A company shall re-open its books of account and recast its financial statements only if when an application in this regard is made by the Central Government, the Income-tax authorities, the Securities and Exchange Board, any other statutory regulatory body or authority or any person concerned and an order is made by a court of competent jurisdiction or the Tribunal to the effect that—
(i) the relevant earlier accounts were prepared in a fraudulent manner; or
(ii) the affairs of the company were mismanaged during the relevant period, casting a doubt on the reliability of financial statements:

Voluntary Revision of Financial Statements or Board’s Report u/s 131.

If it appears to the directors of a company that—

(a) the financial statement of the company; or
(b) the report of the Board,

do not comply with the provisions of the Act, they may prepare revised financial statement or a revised report in respect of any of the three preceding financial years after obtaining approval of the Tribunal.

-Listed Company shall place its financial statement on its website

4 Acceptance of Deposits

(Relevant Sections: Section 73 to 76A of Companies Act,2013)

(Relevant Rules: The Companies (Acceptance of Deposits) Rules, 2014 )

Equity, preference shares, debenture and commercial papers are ordinarily Source for finance of company. When company expends the business then it needs more and more money. Company can borrow from bank and ask for deposits from public. To regulate theses deposits and for safe guard the interest of investors the companies Act, 2013 and The Companies (Acceptance of Deposits) Rules, 2014 makes certain Provisions.

•Meaning of deposits
Section 2(31) “deposit”
includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India.

The company can take deposits from its members or form public (whether secured or unsecured)

• Compare loan with deposits
(Deposit is taken at the instance and for the benefit of the person depositing the money. Also, in deposit, the deposit is payable on demand of the depositor. In case of a loan, loan is taken at the instance or for the benefit of the person requesting the money. Loan are payable only when the obligation to repay the amount arises, as per the loan agreement.)

• Identify the deposit process

(Passing a Resolution in general meeting, Issuance of circular to its members, Filling of circular with statement of financial position to ROC, Certification that there is no default of payment of deposits accepted, Providing security)

Acceptance of deposits from members(Section 73):

-A company may deposits from its members on term and condition which included provision of security and repayment of deposits with interest.

-Depositing, on or before the 30 day of April each year, such sum which shall not be less than 25% of the amount of its deposits maturing during the following financial year and kept in a scheduled bank in a separate bank account to be called deposit repayment reserve account

Acceptance deposits from Public (Section 76)

The eligible company (i.e. public co. net worth 100 Cr of TO 500 Cr) can accept deposits from public. Deposits cannot be less than 6 month and more than 36 months. Less than 6 months permitted for short term requirement. Deposits amount cannot exceed 10% of Paid up share capital and free reserve.

Every company accepting secured deposits from the public shall within thirty days of such acceptance, create a charge on its assets of an amount not less than the amount of deposits accepted in favour of the deposit holders.

Penalty u/s 76A if provision of section 73 and 76 not comply: (Company is liable in addition of deposits and interest due thereon, a penalty of Rs 1 Cr or twice the deposit amount whichever is low and fine may be extended to 10 Cr.

Individual is liable 25 Lacs and 7 years imprisonment. Fine may be extended to 2 Cr.

Willfull default would attract liability of corporate fraud.)

5 Related Party Transactions

(Relevant Sections: Section 188 and 189 of Companies Act,2013)

(Relevant Rules: Rule 6A, 15 and 16 of the Companies (Meetings of Board and its Powers) Rules, 2014 )

As per section 188:Related Parties Transaction are: a) sale, purchase or supply of any goods or materials;
(b) selling or otherwise disposing of, or buying, property of any kind;
(c) leasing of property of any kind;
(d) availing or rendering of any services;
(e) appointment of any agent for purchase or sale of goods, materials, services or property;
(f) such related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company; and(g) underwriting the subscription of any securities or derivatives thereof, of the company:2(76) “related party”, with reference to a company, means—(i) a director or his relative;(ii) a key managerial personnel or his relative;(iii) a firm, in which a director, manager or his relative is a partner;(iv) a private company in which a director or manager or his relative is a member or director;

(v) a public company in which a director or manager is a director and holds along with his relatives, more than two per cent of its paid-up share capital;

(vi) any body corporate whose Board of Directors, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager;

(vii) any person on whose advice, directions or instructions a director or manager is accustomed to act:

Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions given in a professional capacity.

2(77) “relative”, with reference to any person, means any one who is related to another, if—

(i) they are members of a Hindu Undivided Family;

(ii) they are husband and wife; or

(iii) one person is related to the other in such manner as may be prescribed which is as follows;

1) Father (includes step-father)

(2) Mother ( includes the step-mothers)

(3) Son (includes the step-son)

(4) Son’s wife.

(5) Daughter.

(6) Daughter’s husband.

(7) Brother:( includes the step-brother

(8) Sister (includes the step-sister)

Material Related Party Transactions

“A transaction with a related party shall be considered material if the transaction(s) to be entered into individually or taken together with previous transactions during a financial year, exceeds ten percent of the annual consolidated turnover of the companies as per the last audited financial statements of the company.”

Arm’s Length Transaction

Means a transaction between two related parties that is conducted as if they were unrelated, so that there is no conflict of interest.

• Relevant provisions of the Companies Act, 2013
(a) Section 188 of Companies Act, 2013
(Not applicable to the transaction entered in to ordinary course of business and are entered on Arm’s length price.)

(b) Rule 6A,15 and 16 of the Companies (Meetings of Board and its Powers) Rules, 2014 )

(c) Regulation 23 of SEBI (LODR) regulation,2015

6 Audit & Auditors

(Relevant Sections: Section 139 to 148 of Companies Act,2013)

(Relevant Rules: The Companies (Audit and Auditors) Rules, 2014

Companies Act, 2013 Section Title
139 Appointment of Auditors
140 Removal, Resignation of auditor and giving of

special notice.

141 Eligibility, qualifications and disqualifications of

auditors.

142 Remuneration of auditors.
143 Powers and duties of auditors and auditing standards.
144 Auditor not to render certain services.
145 Auditors to sign audit reports, etc. (similar)
146 Auditors to attend general meeting.(similar)
147 Punishment for contravention.
148 Central Government to specify audit of items of

cost in respect of certain companies. (Cost Audit)

Section 139: Appointment of Auditors

-Every company shall, at the first AGM, appoint an individual or a firm as an auditor who shall hold office from the conclusion of that meeting till the conclusion of its sixth annual general meeting and thereafter till the conclusion of every sixth meeting.

-Before such appointment, the written consent of the auditor to such appointment, and a certificate from him indicate that whether the auditors satisfies the criteria provided in Section 141 shall be taken.

– No audit firm having a common partner or partners whose tenure has expired immediately preceding the financial year, shall be appointed as auditor of the same company for a period of five years

-Company shall inform the auditor concerned of his or its appointment, and also file a notice in ADT-1 of such appointment with the Registrar within 15 days of the meeting in which the auditor is appointed.

-No listed company or a company belonging to such class or classes of companies(*) as may be prescribed, shall appoint or re-appoint—
(a) an individual as auditor for more than one term of five consecutive years; and
(b) an audit firm as auditor for more than two terms of five consecutive years:

*

• Unlisted public co. having paid up capital 10 Cr

• All Pvt co having Paidup capital 50 Cr or more,

• All co. having paid up capital less from mentioned above but having loan from bank, FI and public deposit exceeding 50 Cr or more.

-If the company has no Audit Committee then board shall take in to consideration the qualifications and experience of the individual or the firm proposed to be considered for appointment as an auditor. If the Audit committee is constituted then board on recommendation of AC, recommend the proposed auditor in AGM.

Section 140: Removal, Resignation of auditor and giving of special notice.

-The auditor appointed under section 139 may be removed from his office before the expiry of his term only by a special resolution of the company, after obtaining the previous approval of the Central Government in that behalf in the prescribed manner:

-The Application to the CG for removal of Auditors shall be made in FORM no ADT-2 within 30 days of the resolution passed by board. The company shall hold general meeting within 60 days of receipts of approval of CG for passing Special resolution.

-The auditor who has resigned from the company shall file within a period of thirty days from the date of resignation, a statement in the prescribed form with the company and the Registrar.(ADT-3)

Section 142: Remuneration of auditors shall be fixed in general meeting.

Section 148: 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.

If the Central Government is of the opinion, that it is necessary to do so, it may, by order, direct that the audit of cost records of class of companies and which have a net worth of such amount as may be prescribed or a turnover of such amount as may be prescribed, shall be conducted in the manner specified in the order.

7 Institution of Directors

(Relevant Sections: Section 149 to 172 of Companies Act,2013)

(Relevant Rules: The Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014)

(Elaborate on the concepts relating to directors including types of directors, role, powers, functions and penalties and related the procedure under the Companies Act, 2013.)

• Understand meaning, role, and composition
• Describe role of directors
• Identify legal status of directors
• Explain the provisions for resident and woman director
• Define role, maximum directorship, and tenure of Independent Directors
• Outline the provisions for resignation and removal of directors

8 Duties of Directors

(Relevant Sections: Section 166 of Companies Act,2013)

Schedule IV of Companies Act,2013

Code of Independent Directors

Codified Duties of directors (Section 166)

(1) Subject to the provisions of this Act, a director of a company shall act in accordance with the articles of the company. (AOA does no overrule Provisions of Act)

(2) A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.

(3) A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.

(4) A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.

(5) A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company.

(6) A director of a company shall not assign his office and any assignment so made shall be void.

(7) If a director of the company contravenes the provisions of this section such director shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

• Understand the differences between liability and duty.
Duty: Duties emerges out of the position occupied by directors (eg. Duty of MD is different from director who is not MD). Duty is minimum standard expected out of a director.

Liability: It is a result of breach of any duty. No duty would mean no liability. Liability follows duty.

9 Liability of Directors and KMP (Role and liabilities of Key Managerial Persons (KMP) under Companies Act, 2013 and concept of officer in default and related legal provisions.)

Key Managerial Personnel (KMP): CEO, MD, WTD, CFO, Manager, CS, any other officer as may be prescribed.

Appointment of KMP (Section 203) read with Rule 8 and 8A Companies (Appointment and Remuneration) Rules, 2014

Managing Director (Section 196)

Managing Director as KMP (Section 189(2))

Officer in default Section 2(60)

Important obligation of Director

Liability of Director (Individual / Corporate Liability)

Liability of Non executive/ Independent Director

10 Oppression & Mismanagement

(Relevant Sections: Section 241 to 246 of Companies Act,2013)

(Provisions relating to oppression and mismanagement are an important tool in the hands of the members when the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members.)

• Define oppression and mismanagement
• Identify various elements of oppression
• Explain instances of oppression
• State the acts of oppression and mismanagement as prejudicial to the interest of company and public

11 Safeguarding Directors (Understand the provisions of the Companies Act, 2014 and SEBI LODR that safeguards the Directors of the companies from certain liabilities. Important duties and obligations of the Directors.)

• Describe the responsibilities of the directors
• Identify the provisions of the Companies Act, 2013 for protection of directors from certain liabilities
• Explain how the Act safeguards the interest of the directors

12 Penalties and Compounding of offences (The Act provides the legal basis for various corporate governance norms that are considered essential for proper corporate operation and protecting the rights of stakeholders. Violations of such norms are defined as offences with associated penalties. This topic would cover the legal provisions relating to Penalties and Compounding of Offences.)

• Outline the provisions in the Companies Act, 2013 to maintain transparent working of a company
• Identify cognizable and non-cognizable offences
• Describe Advantages of Compounding

1 Share Capital

(Relevant Sections: Section 43 to 72 of Companies Act,2013)

(Relevant Rules: The Companies (Share Capital and Debentures) Rules, 2014 )

Share Capital: means the capital in terms of rupees divided into specified number of shares of fixed amount each. It is money raised by company through issue of shares.

Difference between Debts and share capital

Debt SHARE CAPITAL
Meaning Funds owed by the company towards another party is known as Debt. Funds raised by the company by issuing shares is known as Share capital.
What is it? Loan Funds Own Funds
Reflects Obligation Ownership
Term Comparatively short term Long term
Status of holders Lenders Proprietors
Risk Less High
Types Term loan, Debentures, Bonds etc. Shares and Stocks.
Return Interest Dividend
Nature of return Fixed and regular Variable and irregular
Collateral Essential to secure loans, but funds can be raised otherwise also. Not required

Meaning of Share: Share is unit of ownership in the company. Shares are transferable in nature. A share is a right to a specified amount of share capital of a company, carrying with it certain right and liabilities while the company is going concern and it’s winding up.

Classification of share capital: Authorized Capital, issued capital, subscribed capital, Paid up capital.

Transfer and transmission of shares (Section 56):

Transfer of Shares

– Transfer of shares is a voluntary act that takes place by way of contract between transferor and transferee.

– Transfer deed is executed in transfer of shares.

– Transfer of shares refers to the transfer of title to shares, voluntarily, by one party to another.

– Adequate consideration is involved under this contract.

– Liabilities of transferor cease on the completion of transfer.

– Stamp duty is involved under transfer and payable on the market value of shares.

Transmission of Shares

– Transmission of shares means the transfer of title to shares by the operation of law.

– It is initiated by legal heir or receiver.

– No transfer deed is involved in transmission of shares.

– No adequate consideration is involved under this contract.

– Original liability of shares continues to exist.

– No stamp duty is payable.

Share certificate (Section 46): A certificate issued under the common seal, if any, of the company or signed by two directors or by a director and the Company Secretary, wherever the company has appointed a Company Secretary, specifying the shares held by any person, shall be prima facie evidence of the title of the person to such shares.

Kind of share capital (Section 43): The share capital of a company limited by shares shall be of two kinds, namely:—

(a) equity share capital—

(i) with voting rights; or

(ii) with differential rights as to dividend, voting or otherwise in accordance with such rules as may be prescribed; and

(b) preference share capital:

Equity Share capital: All share capital which is not preference share capital. Equity does not have to be repaid. It is the amount of money that investors put into a company in return for a share of the company’s ownership. When the business makes money, some of the profit is then distributed to those shareholders as a return on their investment.

Preference share capital: These are shares which are preferred over equity shares in payment of dividend, the preference shareholders are the first to get dividends if the company decides to distribute or pay dividends.

Preference shares are shares having preferential rights to claim dividends during the lifetime of the company and to claim repayment of capital on wind up. In case of preference shares, the percentage of dividend is fixed i.e. the holders get the fixed dividend before any dividend is paid to other classes of shareholders.

Preference shares are one important source of hybrid financing because it has some features of equity shares and some features of debentures. The preference shareholders enjoy preferential rights with regard to receiving dividends and getting back capital in case the company winds-up.

Mode of issue of Share Capital :

(A)Public offer :

a) Initial public offer (IPO) – When in the first time shares of public company are offered to the public at large the it is termed as IPO.

b) Further public offer (FPO) – A public offer made subsequent to an IPO by a listed company is a FPO .The mode of FPO are – Right issue, bonus issue, Sweat equity shares, ESOP.

(B) Private Placement (Section 42): A private placement is any offer of securities or invitation to subscribe securities to a selected group of persons by a company (other than by way of public offer) through private placement offer letter. Offer of securities under this section shall be made to persons not exceeding 50 and such offer shall be made to not more than 200 persons in aggregate in a financial year. Such limit shall not include QIBs and employee of the company. It is an alternative for a company seeking to raise capital for expansion. Investors invited to participate in private placement programs include wealthy individual investors, banks and other financial institutions, mutual funds, insurance companies, and pension funds.

Right Shares (Section 62(1)(a))- A rights issue is an invitation to existing shareholders to purchase additional new shares in the company. This type of issue gives existing shareholders securities called rights. With the rights, the shareholder can purchase new shares at a discount to the market price on a stated future date. The company is giving shareholders a chance to increase their exposure to the stock at a discount price.

Bonus issue (Section 63)- Bonus shares are additional shares given to the current shareholders without any additional cost, based upon the number of shares that a shareholder owns. These are company’s accumulated earnings which are not given out in the form of dividends, but are converted into free shares.

Sweat equity shares (Section 54)- Sweat equity shares’ are such equity shares, which are issued by a Company to its directors or employees at a discount or for consideration, other than cash, for providing their know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.

Sweat equity shares is one of the modes of making share based payments to employees of the company. The issue of sweat equity shares allows the company to retain the employees by rewarding them for their services. Sweat equity shares rewards the beneficiaries by giving them incentives in lieu of their contribution towards the development of the company.

ESOP (section 62(1) (b):- It is an option granted to employee of the company to buy a certain amount of shares at a predetermined price. An employee stock option plan (ESOP) is an employee benefit plan that gives workers ownership interest in the company. It is used by companies to encourage the employees, retain talent and give the employees a sense of ownership in the company and a right to have a share in profits.

2 Debentures and Bonds

(Relevant Rules: Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014 )

Debenture u/s 2(30): It includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not. Debenture carries interest, which is to be repaid at periodic interval. The amount borrowed is to be repaid at the end of the stipulated term, as per the terms of redemption. The issue of debentures publicly requires credit rating.

Classification of Debentures

On the basis of Security: Secured and Unsecured Debentures

On the basis of Convertibility: Convertible and Non-Convertible Debentures

On the basis of negotiability: Registered and Bearer Debenture

On the basis of Performance: Redeemable and Irredeemable (Perpetual) Debentures

On the basis of priority: First Mortgaged and Second Mortgaged Debentures

Bonds: A financial instrument which shows the obligation of borrower towards the lender is known as bond. These are created to raise the money for the company and government. It is certificate specifying a contract of indebtedness of the issuing company, for the amount lent by the debenture holder. In general; bonds are secured by collateral i.e. an assets is pledged as security that if the company fails to pay the sum with in stipulated time, the holder of bond can discharge their debts by seizing and selling the assets secured. These are issued by public sector company, government firms and large corporation etc.

Types of Bonds: Zero coupon bonds, double option bonds, options bond, inflation bonds, floating rate bonds, euro bonds, foreign bonds, fully hedged bonds, Euro convertible zero bonds, Euro bond with equity warrants.

Difference between debenture and bonds

1. Bonds are the financial instruments issued by Government agencies and also by Private organizations for raising additional fund from the public. Debentures are issued by private/public companies for raising capital from the investors.

2. Bonds are backed by the asset of the issuer whereas debentures are not secured by any of the physical assets or collateral. Debentures are issued and purchased only on the creditworthiness and reputation of the issuing party.

3. The interest rate of bonds is generally lower than debentures. The lower interest rate depicts the low-risk factor. On the other hand, debentures give you a high-interest rate but they are unsecured in nature hence the risk factor is more here.

4. The interest on a bond is given to the bondholder in monthly, half-yearly or annually. The interest amount never differs as the interest paid is not depended on the performance of the issuer. Adversely, if you buy debentures, your interest rate may be high but the interest payment will be periodic depending on the performance of the issuer.

5. There is no to the minimum risk involved in bond investments but the risk factor is high in debentures.

6. At the time of liquidation, the bondholders are always given preference.

7. If you own bonds, you can never convert it to equity shares, but debentures can be transferred to equity funds.

Issue of debenture to public: The power to issue of debenture can be exercised on behalf of the company at a meetings of the Board under provisions of section 179 (3) of Companies Act, 2013. Further section 71 deal with the provisions relating to issuance of debenture along with penalties in case of non compliance.

– A company may issue debentures with an option to convert such debentures into shares, either wholly or partly at the time of redemption; subject to approval by a special resolution passed at a general meeting.

– Company can issue secured and unsecured debenture. Now secured debentures can be issued by companies subject to certain terms and conditions.

-Company cannot issue any debenture carrying voting rights.

-The company shall create debenture redemption reserve account out of the profit of the company available for payment of dividend and the amount credited to such account shall not be utilized by the company except for the redemption of the debenture.

– Companies Act, 2013 provides that only when the companies issue prospectus or make an offer or invitation to the public or its members exceeding 500 for the subscription of its debentures, then only it is required to appoint a debenture trustee.

– The powers of debenture trustee to protect the interests of the debenture holders and redress their grievances shall be in accordance with the prescribed rules.

– In case the Debenture Trustee comes to a conclusion that the assets of the company are insufficient or likely to become insufficient, then he or she may file a petition before the Tribunal instead of Central Government.

-If any default is made in complying with the order of the Tribunal under this section, every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than two lakh rupees but which may extend to five lakh rupees, or with both.

-A contract with the company to take up and pay for any debentures of the company may be enforced by a decree for specific performance.

Conditions for issue of secured debenture:

-Secured debenture may be issued, provided that the date of its redemption shall not exceed ten years from the date of issue. (30 years in case of company engaged in the setting up of infrastructure projects).

-Such an issue of debentures shall be secured by the creation of a charge on the properties or assets of the company or its subsidiaries or its holding company or its associates companies, having a value which is sufficient for the due repayment of the amount of debentures and interest thereon.

Debenture Trustees

-The company shall appoint the debenture trustee before the issue of prospectus or letter of offer for subscription of its debentures and not later than sixty days after the allotment of the debentures, execute a debenture trust deed to protect the interest thereon.

-The security for the debentures by way of a charge or mortgage shall be created in favour of the debenture trustee on:-(i) any specific movable property of the company or its holding company or subsidiaries or associate companies or otherwise.

(ii) Any specific immovable property wherever situate, or any interest therein.

Debenture Redemption Reserve Account

The company shall create Debenture Redemption Reserve (DRR) for the purpose of redemption of debentures, in accordance with conditions given below-

-Debenture Redemption Reserve shall be created out of profits of the company available for payment of dividend;

-The company shall create DRR account equivalent to at least fifteen percent. of the amount raised through debenture issue before debenture redemption commences.

Duty of Debenture Trustees:

(a) satisfy himself that the letter of offer does not contain any matter which is inconsistent with the terms of the issue of debentures or with the trust deed;

(b) satisfy himself that the covenants in the trust deed are not prejudicial to the interest of the debenture holders;

(c) call for periodical status or performance reports from the company;

(d) communicate promptly to the debenture holders defaults, if any, with regard to payment of interest or redemption of debentures and action taken by the trustee therefor;

(e) appoint a nominee director on the Board of the company in the event of-

(i) two consecutive defaults in payment of interest to the debenture holders; or

(ii) default in creation of security for debentures; or

(iii) default in redemption of debentures.

(f) ensure that the company does not commit any breach of the terms of issue of debentures or covenants of the trust deed and take such reasonable steps as may be necessary to remedy any such breach;

(g) inform the debenture holders immediately of any breach of the terms of issue of debentures or covenants of the trust deed;

(h) ensure the implementation of the conditions regarding creation of security for the debentures, if any, and debenture redemption reserve;

(i) ensure that the assets of the company issuing debentures and of the guarantors, if any, are sufficient to discharge the interest and principal amount at all times and that such assets are free from any other encumbrances except those which are specifically agreed to by the debenture holders;

(j) do such acts as are necessary in the event the security becomes enforceable;

(k) call for reports on the utilization of funds raised by the issue of debentures-

(l) take steps to convene a meeting of the holders of debentures as and when such meeting is required to be held;

(m) ensure that the debentures have been converted or redeemed in accordance with the terms of the issue of debentures;

(n) Perform such acts as are necessary for the protection of the interest of the debenture holders and do all other acts as are necessary in order to resolve the grievances of the debenture holders.

3 Prospectus & Allotment of Shares

(Relevant Sections: Section 23 to 41 of Companies Act,2013)

http://ebook.mca.gov.in/Default.aspx?page=main

(Relevant Rules: The Companies (Prospectus and Allotment of Securities) Rules, 2014)

http://ebook.mca.gov.in/Default.aspx?page=rules

Prospectus: A prospectus is a formal document that is required by and filed with the Securities and Exchange Commission (SEC) that provides details about an investment offering to the public. A prospectus is filed for offerings of stocks, bonds, Debentures and mutual funds. The document can help investors make more informed investment decisions because it contains a host of relevant information about the investment security. It includes notice, Advertisement, any other communication for said purpose.

Why issue Prospectus: To help the investors in taking investment decision.

It is issued by :

-Every public listed company which intends to offer shares or debenture of the company to the public.

-Every private company which ceases to be private company and converts in to public company and intends to offer shares or debentures of the company to the public.

Requirements of Prospectus: In Writing ,issued by and on behalf of company, issued to public and it contain invitation to public for making deposits or for subscription of shares in or debenture of a company.

Contents of Prospectus:

1. Registered company office address.

2. Company secretary, CFO, auditors, bankers, underwriters, etc., their respective names and address.

3. Opening and closing dates of the issue.

4. Allotment letters and refunds declaration within the prescribed time.

5. A statement by the board of directors about the separate bank account where all monies received out of shares issued are to be transferred.

6. Underwriting of the issue their details.

7. Directors, auditors, bankers Consent to the issue, expert’s opinion if any.

8. The authority for the issue and the details of the resolution passed thereof.BOD have to be authorised to take steps for making an issue of shares.

9. Procedure and time schedule for allotment and issue of securities.

10. The Capital structure of the company with a comprehensive outlook.

11. Main objects and location of the present business of the company.

12. Public offer and terms of the present issue and its objective.

13. Minimum subscription, amount payable by way of premium, issue of shares otherwise than on cash.

14. Appointment and remuneration details of the director

15. Sources of promoter’s contribution.

Reports in prospectus:

Reports by the auditors of the company

Reports relating to profit and loss of the company

Business or the transaction where proceeds to be utilized

Declaration about compliance of companies Act, SEBI Act and SCRA.

If Contravention u/s 26 :If a prospectus is issued in contravention of the provisions of this section, the company shall be punishable with fine which shall not be less than 50,000 rupees but which may extend to 3 Lacs rupees and every person who is knowingly a party to the issue of such prospectus shall be punishable with imprisonment for a term which may extend to 3 years or with fine which shall not be less than 50,000 rupees but which may extend to 3 lacs rupees, or with both.

Types of Prospectus:

ABRIDGED PROSPECTUS:

  • Provisions related to Abridged prospectus has been discussed under section 2(1) of Companies Act, 2013.
  • Consists of a memorandum, which contains the prospectus all the information of the prospectus in brief so that it should be convenient and quick for an investor to know all the useful information in short. The purpose of it to reduce the expenses burden of public issue. This prospectus is provided with the application form. The full prospectus has to be maintained in the office of a company.

DEEMED PROSPECTUS:

  • Provisions related to Deemed prospectus has been discussed under section 25(1) of Companies Act, 2013.
  • Provided that any company to offer securities for sale to the public, allots or agrees to allot securities, the document will be considered as a deemed prospectus through which the offer is made to the public for sale.

SHELF PROSPECTUS:

  • Provisions related to shelf-prospectus has been discussed under 31 of Companies Act, 2013.
  • Issued by the public financial institutions, company, or bank.
  • When a shelf prospectus is issued then the issuer does not need to issue a separate prospectus for each offering, he can offer and sell without issuing a further prospectus.
  • The Company that is filing a shelf prospectus is required to file the information memorandum.
  • Information Memorandum consists of all the facts regarding the new charges created, what changes have undergone in the financial position of the company since the first offer of the security or between the two offers.

RED HERRING PROSPECTUS:

  • The prospectus which lacks the complete particulars about the quantum and the price of the securities.
  • Issues this prospectus prior to the issue of prospectus when it is proposing to make an offer of securities.
  • Red Herring prospectus needs to be filed with the registrar at least three days prior to the opening of the subscription list or the offer.

Minimum subscription:

shall not be less than 5 % of the nominal amount of the securities

-If the stated minimum amount has not been subscribed and the sum payable on the application is not received within period of 30 days from the date of issue of prospectus, all amount received shall be returned within prescribed time and in prescribed manner.

-The company shall file a statement with the ROC a return of allotment.

Types of Allotments:

For Public co:

-To public through issue prospectus

-Private Placement

-Right issue

-Bonus issue

For Private Companies:

-Right and bonus issue and Private placements

Dematerialisation shares: Every company making a public offer shall the securities only in dematerialised form. There is no bar of other company issue share in any form.

Board composition and functions
1 Board Committees The Board of Directors are responsible for the governance of their companies and are appointed by shareholders. The Constitution of committee enables the board to effectively govern and make decision on various aspects through small group discussion, focus and diligence. The Companies Act and SEBI (LODR) Regulations require several mandatory board committees with different roles and responsibilities. There are also various board committees, which play a major role in the working of the company.

Identify role of an audit committee (Section 177 of Companies Act,2013)
For summarized provisions related to Audit Committee under Co’s Act, 2013 and SEBI (LODR) regulation, you may refer my Published Article on Tax guru. Link is being given below for your ready reference.

Constitution, composition and Roles and Responsibilities of Nomination and Remuneration Committee (Section 178 of Companies Act, 2013 read with Regulation 19 of SEBI (LODR) Regulations,2015)

Constitution: Consisting of 3 or more non executive Directors.

Roles:

(i) To guide the Board in relation to appointment and removal of Directors

(ii) Formulate the criteria for determining qualifications, positive attributes and independence of a director

(iii) Formulate criteria for evaluation of performance of independent directors and the board of directors

(iv) Recommend the board on remuneration payable to the directors, key managerial personnel and other employees

(v) Making a policy on diversity of board of directors

(vi) Identifying persons who are qualified to become directors and who may be appointed in senior management and recommend to the board of directors their appointment and removal.

(vii) Extend or continue the term of appointment of the independent director, on the basis of the report of performance evaluation of independent directors.

The policy of Committee is disclosed in Board reports.

Constitution, composition and Roles and Responsibilities of Stakeholders Relationship Committee –SRC (Section 178 of Companies Act, 2013 read with Regulation 20 of SEBI (LODR) regulation, 2015)

Constitution: The board of Directors of a company that have more than 1000 shares holders, debenture holders, and any other securities holder at any time during a financial year to constitute a SRC .

The chairperson of this committee shall be a non-executive director.

Roles:

(i) Resolving the issues of transfer / transmission of shares, non-receipt of annual report, non-receipt of declared dividends, issue of new/duplicate certificates, general meetings etc.

(ii) Review of measures taken for effective exercise of voting rights by shareholders.

(iii) To monitor and review the performance and service standards of the Registrar and Share Transfer Agents of the Company and provides continuous guidance to improve the service levels for investors.

(iv) Review of the various measures and initiatives taken by the listed entity for reducing the quantum of unclaimed dividends and ensuring timely receipt of dividend warrants/annual reports/statutory notices by the shareholders of the company.

Constitution, composition and Roles and Responsibilities of Corporate Social Responsibility Committee (Section 135 of Companies Act,2013)

Following companies to constitute CSR committee if Net worth of Rs. 500 crore or more, or Turnover of Rs. 1000 crore or more, or Net Profit of Rs. 5 crore of more during immediate preceding financial year.

Committee to consist of atleast 3 directors out of which atleast 1 to be independent director.

Board’s Report to disclose composition of CSR Committee.

The Committee to formulate and recommend to the board, a CSR policy, which will indicate the activities to be undertaken by the company in area or subject, specified in schedule VII of the Companies Act,2013 as well as amount of expenditure to be incurred on the activities referred to in the CSR policy

Link of Schedule VII of the Companies Act,2013 http://ebook.mca.gov.in/Default.aspx?page=main

2 Board Meetings

(Relevant Section 173 to 195 of the Companies Act, 2013)

(Relevant Rules: The Companies (Meetings of Board and its Powers) Rules, 2014)

(The procedure for conducting the board meeting involve calling of meetings through notice, quorum of the board meeting, participation of directors in board meeting, passing of resolution both special and ordinary and power exercisable by the board of directors under the Companies Act, 2013 and related rules would be discussed in this topic).

-Regulatory frameworks of board meetings
-The Companies Act,2013

-The Companies (Meeting of Board and its Power) Rules, 2014

-Secretarial standard issued by ICSI

Frequency of Board meetings

1. First Board Meeting (BM) should be held within 30 days of the date of Incorporation of Company

2. There shall be minimum of 4 Board Meeting every year and not more than 120 days shall intervene between two consecutive Board Meeting.

3. In case of One Person Company, Small Company, Dormant Company, Start up Private Company, Section 8 Company:

> At least One BM should be conducted in each of the half of the calendar year

> The gap between the two BM should not be less than 90 days

Notice of Board meetings

Meeting of Board of Director should be called by giving 7 days notice to Directors at his registered address through:

> By hand delivery

> By post

> By Electronic means

Note – In case the notice is send by speed post, registered post or by courier, an additional two days shall be added for the service of notice.

Shorter Notice: A meeting of Board of Directors can be called by shorter notice to transact urgent business subject to the conditions:

  • If the company is require to have independent director:-

> Presence of at least one Independent director is required.

> In case of absence, decision taken at such meeting shall be circulated to all the directors, and shall be final only on ratification thereof by at least one Independent Director

  • In case the company does not have an Independent Director:

> the decisions shall be final only on ratification thereof by a majority of the Directors of the company, unless such decisions were approved at the Meeting itself by a majority of Directors of the company.

Quorum of Board Meeting:

  • 1/3 rd of total strength OR 2 (Two) Directors, whichever is higher.
  • Quorum in case of Section 8 Company:

> The quorum for meeting of the Board shall be Eight Members OR 25% of the total strength, Whichever is less. (Subject to minimum 2)

  • Where meeting of Board could not be held for want of quorum, the meeting shall automatically adjourn to same time, same place at next week (Not being national holiday).
  • Due to Resignation or Removal of Director, if the number of Directors of the Company is reduced below the quorum as fixed by the AoA of the company, then the continuing Directors may act for the purpose of increasing the number of Director to that required for the quorum. It shall not act for any other purpose.
  • Quorum in case of Interested Directors:

> If interested director exceed or equal to 2/3 of total strength the remaining directors not being less than 2 (two) shall be the quorum.

Note:

1. Any fraction of number shall be r/off as one. Total strength shall not include directors whose places are vacant.

2. Interested director means, a director interested in accordance with section 184(2).

3. Director participating in a meeting through video conferencing or other audio visual means shall be counted for the purpose of quorum, unless he is to be excluded for any items of business under any provisions of the Act or the rules.

4. OPC Having One Director: Provision of Section 173 and 174 shall not apply to an OPC having one director.

Quorum of Board Meeting as per LODR

Min 3 Directors or 1/3 of total strength, whichever is higher, including at least 1 independent director.

Board meeting through video conferencing

Notice of Board meeting shall inform the directors regarding the option available them to participate through video conferencing or other visual mode. A Director shall give prior intimation of his intention to participate through video conferencing or other visual mode. Such declaration shall be valid for 1 calendar year. In absence of declaration, it shall be assumed that director shall attend the meeting person.

Matter not to be dealt with a Board Meeting through video conferencing

-Approval of financial statement

Approval of Board Report

Approval of the prospectus

Audit Committee meeting for consideration of financial statements.

Approval of matter relating to amalgamation, merger, Acquisition and takeover.

Minutes of Boar Meetings

-Minutes shall disclosed particulars of directors who attended the meeting through video conferencing or other visual mode.

-Draft Minutes shall be circulated among all directors within 15 days of the meeting either in writing or in electronic mode as may be decided by the board.

-Every director who attended the meeting shall confirm or give his comments in writing with in within 7 days or some reasonable time as decided by board.

-After completion of meetings, the minutes shall be entered in the minute book as specified u/s 118 of the Act and signed by chairperson.

Role and objective of Secretarial Standards – As per the Explanation to Section 205(1) of the Companies Act, 2013, Secretarial Standards means the “Secretarial Standards” as issued by the ICSI constituted under section 3 of the Company Secretaries Act, 1980 and approved by the Central Government.

Basically, Secretarial Standards are a codified set of good governance practices which seek to integrate, harmonise and standardise the diverse secretarial practices followed by companies and play indispensable role in enhancing the corporate culture and governance across the organisations. Secretarial Standards help in improved governance and compliance, confidence building in minds of investors which ultimately lead to flow of capital in India.

Where the Law is not clear or needs explicit spirit of the law, Secretarial Standards, provide clarity on them. Secretarial Standards only provide clarity on the respective subjects but it doesn’t mean that the Secretarial Standards are alternative to the original Laws.

(1) Authority to convene Board meeting

-Director or CS or If no CS any other person.

-In consultation with chairman/ MD/ WTD/ Director/ Secretary.

-Unless AOA provides otherwise.

-chairman can adjourn the meeting unless object by majority of directors.

(2) General

Time, place, mode and serial no. of meeting

Every meeting shall have serial no.

Meeting / Adjourned meeting shall not to be hold on national holiday.

(3) Notice:

-By hand or by speed post or by registered post or by facsimile or by e-mail or by any other electronic means.

-Serial number, day, date, time and full address of the venue of the Meeting

-At least seven days before the date of the Meeting (excluding the day of the Board Meeting), unless the Articles prescribe a longer period

-Specify availability of electronic mode

-Notice to all director including original director and alternate director

-No Business to be transacted if notice not given as per SS-1

-Agenda notes to be given with notice before 7 clear days

-AOA may provide longer period

-Each item to be serially numbered.

-The consent of shorter notice to be recorded in minutes

(4) Agenda:

-Agenda can be placed on table with consent of majority of director

Shorter notice, agenda, and notes may be given, if one ID is present.

-Permission of chairman and consent of majority present is required.

-If no ID present/ no ID , then decision taken should be ratified by majority of director of the company

-Supplementary agenda about significance items can be taken up without consent.

-Items of unpublished price sensitive information can be taken up without consent

(5) Meetings

– Total four meeting with not less than 120 days gap

-committee to meet as decided by board

-Statutory to meet as prescribed by authority

-ID shall meet once in a year to review performance of the board, chairman etc.

-CS to facilitate convening & holding ID meeting if desired by ID

(6) Quorum

-To present throughout the meeting

-If interested director exceeds, the remaining director being not less than two should be quorum

-If directors are reduced, no business can be transacted

-The Quorum is 1/3rd of total strength or two directors, which is higher

-If the interested directors or 2/3rd or higher than remaining directors presents at the meetings, being not less than 2, shall be the Quorum for such items during the meetings.

-If meeting is adjourned for want of quorum, the meeting shall be held at the next week at the same time and place.

-If no quorum at adjourned meeting –meeting stands cancelled.

(7) Minutes

-In electronic form or as may be decided by board

-Serially numbered

-Finalized within 15 days

-Comment of director within 7 days

-Signed minutes to be circulated within 15 days

-To be enter in minutes book within 30 days

-Member of company has no right to inspect the minutes

(8) Preservation of minutes and other records

-To be preserved permanently

-Office copies of records should be preserve for 8 years and to be destroyed under authority of board

3 Governance of Committees (To understand the imperative of board committees as a feeding mechanism to board meetings. Understand the need and basic premise of every board committee for the independent directors to discharge their duties in an effective manner. The limitations of the committee form of board governance could also be understood in the process.)

• Outline imperatives for the board of directors
• Identify the need for board committees
• Define basic premises of committees
• Underline limitations of board committees

4 Governance and Strategy (To understand the role of strategy for a company for the business success. The Topic articulates various concepts relating to design and development of the strategy for effective execution. Independent directors will get an overview of the practise of strategy for improvising their oversight role.

• Describe mission and vision of a company
• Outline components of vision and mission
• Explain BHAG theory
• Identify capabilities and management systems

5 Managing CSR & Engaging Stakeholders (To understand the moral purpose of business and interdependence of the company and the stakeholders. The topic will help understanding how effectively a company can engage with stakeholders for strategic CSR for a wider impact.

• Identify moral purposes of business
• Outline the concept of interdependence for CSR
• Define stakeholders
• Explain the goals of strategic stakeholder management

6 Board Evaluation (To understand the importance of evaluation of the board in raising the standards of corporate governance practice at the board level. The topic will also help to understand the elements, process and guiding norms for evaluating board performance.)

• Explain the fundamental principles of board evaluation
• Identify annual objectives of board evaluation
• Analyze board’s capabilities and process
• Outline the culture of exemplary board

7 Evaluation of Independent Directors • Explain the fundamental principles of board evaluation
• Identify annual objectives of board evaluation
• Analyze board’s capabilities and process
• Outline the culture of exemplary board
Corporate social responsibility
1 Corporate Social Responsibility

(Relevant Sections: Section 135 of Companies Act,2013)

(Relevant Schedule: Schedule VII of Companies Act,2013)

Applicability

On every Company having:

  • Net worth of Rs. 500 Crore or more, or
  • Turnover of Rs. 1000 crore or more, or
  • Net Profit of Rs. 5 crore or more

during the immediately preceding financial year.

CSR Committee:

Every Company on which CSR is applicable is required to constitute a CSR Committee of the Board:

  • Consisting of 3 or more directors, out of which at least one director shall be an independent director. However, if a company is not required to appoint an independent director, then it shall have in 2 or more directors in the Committee.

Functions of CSR Committee:

The CSR Committee shall—

  • Formulate and recommend to the Board, a CSR Policy in areas specified in Schedule VII
  • Recommend the amount of expenditure to be incurred on the activities referred in Sch VII
  • Monitor the CSR Policy of the company from time to time

Responsibility of Board of Directors (BoD):

The BOD of every company on which CSR is applicable shall:

  • after considering the recommendations made by the CSR Committee, approve the CSR Policy for the Company and disclose contents of such Policy in Board report.
  • ensure that the activities as are included in CSR Policy of the company are undertaken by the Company
  • shall disclose the composition of the CSR Committee in Board Report
  • ensure that the company spends, in every financial year, at least 2% of the average net profits of the company made during the 3 immediately preceding financial years, in pursuance of its CSR Policy. The CSR projects/programs/activities undertaken in India only shall amount to CSR Expenditure.
  • Disclosed reason for not spending under section 134(3)(o)

Display of CSR Activities on its Website

The BoD shall disclose contents of CSR policy in its report and the same shall be displayed on the company’s website, if any.

CSR Policy

The CSR Policy of the company shall, inter-alia, include the following namely :-

  • A list of CSR projects or programs which a company plans to undertake specifying modalities of execution of such project or programs and implementation schedules for the same
  • Monitoring process of such projects or programs
  • A clause specifying that the surplus arising out of the CSR projects or programs or activities shall not form part of the business profit of the company.

• Penalization provisions for non-compliance
The company shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to twenty-five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both.

SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR)
1 SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR)

 

(Listing denotes the permission granted by a recognized stock exchange to a public company for the purpose of the company’s particular securities being traded and dealt on the recognized stock exchange which has granted such permission. This topic would discuss the procedure for listing, important clause of listing agreement and delisting. )

•Identify applicability of SEBI LODR

Provision of LODR is applicable to the listed entities having the following securities listed in Recognized Stock Exchange

a. specified securities listed on main board or SME Exchange or institutional trading platform(ITP)

b. non-convertible debt securities

c. non-convertible redeemable preference shares

d. perpetual debt instrument

e. perpetual non-cumulative preference shares

f. Indian depository receipts (IDR)

g. Securitised debt instruments

h. security receipts

i. units issued by mutual funds

j. Any other securities as may be specified by the Board.

Main regulation of SEBI (LODR) Regulation,2015

Regulation no 4 – Principles governing disclosures and obligations

6 Compliance Officer and his Obligations.

7 Share Transfer Agent

17 Board of Directors

18 Audit Committee

19 Nomination and remuneration committee

20 Stakeholders Relationship Committee.

21 Risk Management Committee.

22 Vigil mechanism.

23 Related Party Transaction

24 Corporate governance requirements with respect to subsidiary of listed entity.

25 Obligations with respect to independent directors.

26 Obligations with respect to employees including senior management, key managerial persons, directors and promoters.

27 Corporate Governance

29 Prior Intimations.

30 Disclosure of events or information.

33 Financial results.

34 Annual Report

36 Documents & Information to shareholders

40 Transfer or transmission or transposition of securities.

42 Record Date or Date of closure of transfer books.

44 Voting Results

46 Website.

47 Advertisements in Newspapers.

Schedule specified in SEBI (LODR)

For Knowledge of some major provisions related to SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR), you may refer my Published Article on Tax guru. Link is being given below for your ready reference.

https://taxguru.in/company-law/audit-committee-companies-act-2013-sebi-lodr-2015.html

https://taxguru.in/sebi/registrar-share-transfer-agent.html

https://taxguru.in/sebi/good-corporate-governance.html

https://taxguru.in/company-law/provisions-transfer-transmission-shares-companies-act-lodr-2.html

https://taxguru.in/company-law/transfer-unclaimed-shares-iepf.html

https://taxguru.in/sebi/summary-provisions-financial-results-listed-entities.html

Secretarial Standard
1 Secretarial Audit & Compliances

(Relevant Sections: Section 204 of Companies Act,2013)

(Relevant Rules: Rule 9 of The Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014)

Secretarial audit
It is a process to check compliances made by the Company under Corporate Law & other laws, rules, regulations, procedures etc. It is a mechanism to monitor compliance with the requirements of stated laws and processes. Periodically examination of work is necessary to point out errors & mistakes and to make a robust compliance mechanism system in an organization.Every company needs to comply hundreds of Laws, rules, regulations. These laws are complex and non-compliances would attract major risk to company. Periodically inspecting the records of company gives exact information whether, and if so, to what extent Company has complied with the laws applicable to the Company.Secretarial Audit gives comfort to the regulators, stakeholders and management that company has disciplined approach to evaluate and improve effectiveness of risk management, control, and governance processesApplicability of secretarial audit
As per section 204 of the Companies Act, 2013 read with Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, following companies are required to obtain ‘Secretarial Audit Report’ form independent practicing company secretary;(1) Every listed company(2) Every public company having a paid-up share capital of Fifty Crore rupees or more; or(3) Every public company having a turnover of Two Hundred Fifty Crore rupees or more.

Secretarial Audit is also mandatory to a private company which is a subsidiary of a public company, and which falls under the prescribed class of companies

WHO CAN BE APPOINTED AS SECRETARIAL AUDITOR?

Only a member of the Institute of Company Secretaries of India holding certificate of practice (company secretary in practice) can conduct Secretarial Audit and furnish the Secretarial Audit Report to the Company.

APPOINTMENT OF SECRETARIAL AUDITOR

As per Rule 8 of the Companies (Meetings of Board and its powers) Rules, 2014, Secretarial Auditor is required to be appointed by means of resolution passed at a duly convened Board meeting and resolution for appointment shall be filed with Registrar of Companies within 30 days in E-form MGT-14. Normally appointment is for the period of reporting and shall come to end on submission of report to the board. The term comes to an end on submission of report.

SCOPE OF SECRETARIAL AUDIT

A secretarial auditor has to check compliances by the company under the following laws and rules made there-under;

i. The Companies Act, 2013 (the Act) and the rules made there-under;

ii. The Securities Contracts (Regulation) Act, 1956 (‘SCRA’) and the rules made there-under;

iii. The Depositories Act, 1996 and the Regulations and Bye-laws framed there-under;

iv. Foreign Exchange Management Act, 1999 and the rules and regulations made there-under to the extent of Foreign Direct Investment, Overseas Direct Investment and External Commercial Borrowings;

v. The following Regulations and Guidelines prescribed under the Securities and Exchange Board of India Act, 1992 (‘SEBI Act’):-

a. The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011;

b. The Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992;

c. The Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009;

d. The Securities and Exchange Board of India (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines, 1999;

e. The Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008;

f. The Securities and Exchange Board of India (Registrars to an Issue and Share Transfer Agents) Regulations, 1993 regarding the Companies Act and dealing with client;

g. The Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009; and

h. The Securities and Exchange Board of India (Buyback of Securities) Regulations, 1998;

vi. Secretarial Standards issued by The Institute of Company Secretaries of India.

vii. The Listing Agreements entered into by the Company with Stock Exchange(s), if applicable;

viii. Other laws as may be applicable specifically to the company

Resignation / Removal of Secretarial Auditors- By Board Approval or through resignation

Format of Secretarial Audit Report also requires reporting on whether-

  • The Board of Directors of the Company is duly constituted with proper balance of Executive Directors, Non-Executive Directors and Independent Directors.
  • The changes in the composition of the Board of Directors that took place during the period under review were carried out in compliance with the provisions of the Act.
  • Adequate notice is given to all directors to schedule the Board Meetings, agenda and detailed notes on agenda were sent at least seven days in advance, and a system exists for seeking and obtaining further information and clarifications on the agenda items before the meeting and for meaningful participation at the meeting.
  • Majority decision is carried through while the dissenting members‟ views are captured and recorded as part of the minutes.

There are adequate systems and processes in the company commensurate with the size and operations of the company to monitor and ensure compliance with applicable laws, rules, regulations and guidelines.

POWER TO SECRETARIAL AUDITOR

The Companies Act, 2013 has empowered secretarial auditor and has given him all rights and powers as given to statutory auditor. As per section 204 of the Companies Act, 2013, the secretarial auditor company shall be entitled to require from the officers of the company such information and explanation as he may consider necessary for the performance of his duties as auditor.

PUNISHMENT FOR DEFAULT

Sub-Section 4 of Section 204 of the Companies Act, 2013, provides that if a company or any officer of the company or the company secretary in practice, contravenes the provisions of section 204 of the Act, the company, every officer of the company or the company secretary in practice, who is in default, shall be punishable with fine which shall not be less than 1 lakh rupees but which may extend to 5 lakh rupees.

Moreover as per sub section (15) of section 143 of the Companies Act, 2013, if a secretarial auditor, has reason to believe that an offence involving fraud is being or has been committed against the company by officers or employees of the company, he shall immediately report the matter to the Central Government within such time and in such manner as may be prescribed. Failure to do so shall attract a fine which shall not be less than 1 lakh rupees but which may extend to 25 lakh rupees.

In case of false statement by Secretarial auditor ,shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud

2 Secretarial Standard 2

Link of SS-2 issued by ICSI.

https://www.icsi.edu/ssb/home/

(This standard seeks to prescribe a set of principles for the convening and conducting of General Meetings and matters related. This Topic would cover the details of the SS-2 applicable to General Meetings.)

• Identify authority for convening general meetings
• Outline the process of issuing notice for meetings
• Explain the process for deciding chairman of meeting
• Understand guidelines for conducting voting and e-voting

Concept of accountancy
1 How to Read Balance Sheet • Importance of balance sheet and Audited balance sheet

• Generally accepted accounting concept (ex. Going concern, Accrual system, Materiality & aggregation, off of Assets & Liabilities and income & expenditure, frequency of reporting and comparative information)

•Basis Principles on the basis of Balance Sheet is Prepared (Accounting Standard(AS) and Indian Accounting Standard(Ind As) as specified under section 133 of Companies Act,2013 read with rule 7 of Companies (Accounts) Rules,2014 )

• Knowledge of Component of Balance sheet
(Auditors Report including report on internal financial control, CARO report, B/S, P/L, Cash Flow, Significant Accounting Policies, Notes to Accounts and Director’s Report)

• How to read a balance sheet, P&L statement, and cash flow statement.

•Pronouncement of ICAI and Guidelines issued by SEBI

•Requirement of Disclosure and presentation as per Schedule III of the Companies Act, 2013

(Link Sch-III) http://ebook.mca.gov.in/Default.aspx?page=main)

•Understand the provisions of Quarterly Financial Results of Company

2 Decoding Financial Statement (P/L, Assets side of B/S, Liabilities Side of B/S, Connecting Statements, Auditors Report and CARO)

P/L: Analysis of Revenue from Operation, Component of other income, Raw Material consumption, Trading Profit/(Loss), Operating cost, Financial Cost impact on health of company, Depreciation and amortization expenses, Tax Expenses, Other Expenses, EBIDTA Margin etc .

Assets Side B/S: Identify Current and Non Current Assets, How to read investment in to Fixed Assets and benefit for the same in business operation, Analysis of investment made by the company and its relevance for the business, Various other assets including loans and advances, Analysis of Debtors and inventories,

Liabilities Side B/S: Net worth/ Shareholder’s Fund, Various Provisions, Short/ Long Term Borrowings (secured /unsecured) , Trade Payable and other Current Liabilities, Company position to meet out it’s Current Liabilities,

Connecting Statements: Analysis of Significant Accounting Policies use while framing Financial Statements, explanatory information on items covered in B/s and P/L by way of Notes on account and Cash flow Statement which is prepared on the basis of both B/S and P/L.

Auditors Report: Read Auditors opinion on financial statement, analysis of clean or qualified report. Auditors report include the opinion on internal financial control

CARO Report: Analysis of Auditors comment/reports on Point covered under CARO reporting. (Eg. Physical verification of Fixed Assets and Inventory, Loan to related person, Cost records, Govt. dues, Fraud by employee of company, Deposits Provisions, Managerial Remuneration etc.

For clarity of provisions related to Financial Results, you may refer my Published Article on Tax guru. Link is being given below for your ready reference.

https://taxguru.in/sebi/summary-provisions-financial-results-listed-entities.html

Enterprise risk management
1 Exemplary Board BOD is the highest decision making body of the company. It is agent of the company. It is fiduciary relationship with shareholders and stakeholders.

Exemplary Board constitution:

Well Diversified in terms of knowledge, experience, gender, ethically etc.

Balanced-right proportion of executive and independent directors.

Right size: Neither too large nor too small

Right People- Leaders

Well informed- Regular flow of information whether internal or external.

Optimum utilization of time and resources:

– Well constituted Board committees like Audit Committee, Stakeholder relationship committee, CSR committee, Nomination and remuneration committee Risk Management Committee etc.

-Prioritization of agenda items

-allocation of sufficient time to Board responsibilities

Board Role:

Appointment of CEO and his team

Monitoring and advising Executive Team

Arranging resources through networking

Constituting the Board

Evaluating Board and directors for self improvement.

Protecting the company from opportunistic behavior of executive management and Unwarranted risks.

Board’s Task:

Build the right culture

Making strategy and monitoring implementation,

Risk Management and Internal financial control

Approve Related Party Transaction

Independence the internal and external Auditors

Transparency within and outside the Board

Evaluate the board and director for self improvement

Personal counseling the Independent director

Periodically invite experts

2 Board Effectiveness & Culture •Factors that determine board effectiveness

Board composition, Composition of Committee, Board Size, Diversity, Commitment, information, culture

• Human elements of board culture

Good corporate governance ,robust, effective social system, well functioning,

Techniques of informal meetings

Training Session, Director outreach programmes, informal dinner with senior management.

Lead Independent Directors

In many companies the practice is to rotate the position of the lead independent director. The lead independent director should be an individual who is highly respected within and outside the board and who has the leadership qualities. He plays an important role to evaluate the performance of board and individual director. He chairs the separate meeting of independent director.

3 Building Resilient Company: Boards Role (To understand the role of the board in managing crisis and turbulent business eco system. The topic will help to understand how board can assist the executive management and managing risk and coping with the crisis situations.)

• Define Enterprise Risk Management (ERM)
• Categorize different types of risk
• Identify risk appetite
• Outline ERM components

Basic knowledge of financial Ratios
1 Managing Through Financial Ratios Principle of prudence
It is preferable to understate assets and profit in a situation of measurement uncertainty.-Recognise an assets when its cost or value can be measured reliably.-Measure inventory at lower of cost or NRV-Do no recognized internally generated intangible assets-Do not recognize an asset from R&D, Training and advertisement expenditure.•Accounting equationEquity (net worth) = Assets- Liabilities

-Equity represents owners capital , which is residual claim on the assets after deducting all liabilities

-Assets represent resources controlled by the entity. They expect to produce future benefits.

-Liabilities are obligations, settlement of which will result in outgo of economic benefits.

Components of equity and preference share capital

-Equity Share capital

Share Capital is face value of outstanding shares

Share Premium is Difference between issue price and face value of outstanding shares

Reserve and surplus is profit retained by company after distributing of dividend

Preference share capital

Holders of preference share capital have preferential right over profit and net assets

They are entitled to predetermined profit when the company earns profit.

In India, companies are allowed to issue only redeemable preference share capital

IND AS classifies redeemable preference share capital as debt

Examples of different assets and liabilities

Assets

Property, plant and equipment and intangible assets –Measured at Acquisition cost less depreciation less impairment loss

Finished goods, WIP and RM is measured at cost or NRV, whichever is low

Receivable is measured at realizable value

Loans are measured at amortised cost less impairment loss

Investment are measured fair value (Exit Price)

Liabilities

Redeemable preference share capital, Debenture, Bank Loan, Operating Liabilities (like trade payable deferred revenue, advance from customers, security deposits, earnest money)

Liabilities are usually measured at historical cost

Current Assets

CA are those Assets which are held for trading or expected to be consumed or realized within normal operating cycle or are expected to be consumed or realized within 12 months after reporting period. (Ex.- Current investment, inventories, debtors, cash and cash equivalent, short term loans and advances.)

Non current Assets

Those assets that cannot be classified as current assets.(Ex.- Property, plant and equipment, intangible assets, non current investment, and long term loans and advances)

Current Liabilities

Those which are held for trading or are expected to be settled within the normal operating cycle or are expected to be settled within 12 Months after the reporting period. (Ex.-Short term borrowing, trade payable and short term provisions)

Non Current Liabilities

Liabilities that cannot be classifies as current liabilities(Ex.- Long term borrowings, deferred tax liabilities, and long term Provisions)

Income: Increase in economic benefits during the accounting period in the forms of inflows or enhancements of assets or decrease of liabilities that result in an increase in equity, other than those relating to contributions from equity participants.

Revenue: It is income arising in the course of entities ordinary activities. (For non finance company- sales of goods and services, export subsidy and For finance company- interest and commission)

Other income: Income that cannot be classified as revenue. (Interest , Dividend, profit from sale of FA)

Expenses: Decrease in economic benefits during the accounting period in the forms of outflows or depletions of assets or incurrence of liabilities that result in decrease in equity, other than those relating to distributions to equity participants.(ex.- Cost of goods sold, operating cost, interest expenses, depreciation cost,)

Discretionary expenses: Those expenses which has no direct cause and effect relationship with the revenue for the current year.

Ex. Research and development expenses, advertisement expenses, training expenses

Profit hierarchy:

Gross Profit: Revenue-Cost of goods sold and direct expenses

EBITDA: Earnings before interest, tax , depreciation)

EBIT

EBT

Net Profit:- EBT-Tax

NOPAT:- EBIT-EBIT*Marginal tax rate

Financial Ratio

-Establish benchmark ratio

-Trend analysis and cross sectional analysis

-Ratio help to ask question, but do not provide answer.

Capital Employed= Total debt + equity

EVA= It represents the value added to the shareholders by generating operating profits in excess of the cost of capital employed in the business.

Return on capital employed

NOPAT/Average capital employed*100

Debt to equity ratio(Gross gearing)

(Total debt/Net worth)*100

Net Gearing ratio= Net Debt/Net worth*100

Net Debts= Gross debt-cash and cash equivalent

Interest coverage ratio=EBIT/Interest Expenses( 3 no is adequate)

Profit ratio

Gross Profit Margin=GP/Net sale*100

Operating Profit Margin=EBIT/sales*100

Cash Profit Margin=Operating Profit margin

Operating efficiency ratio

Total assets TO ratio= Net sales/average total Assets

Fixed Assets TO ratio=Net sales/Average FA

Working Capital TO ratio= Net Sales/ Average working capital

Inventory TO ratio=Net sales /Average inventory

Working capital ratio

Current ratio= CA/CL (should be more than 1)

Quick ratio= (CA-Inventories)/CL

Corporate frauds including case studies
1 Case Study – WorldCom The case study WorldCom accounting scandal reflects upon the financial frauds committed by WorldCom, the leading US telecommunications giant. It also discusses the role of CEO, board and board culture.

After going through this case study, you will be able to:

• Identify the people and reasons behind WorldCom scam

• Understand how this scam was uncovered during internal audit

• State the impact of this debacle on overall corporate governance practices

2 Case Study – Enron Corporation The case reflects upon the largest corporate bankruptcy of the west. It analyses the case for poor corporate governance, dishonest culture, conflict of interest and unethical behaviour of the board.

After going through this case study, you will be able to:

• Understand how the case of corporate mis-governance was unearthed in Enron

• Identify the different steps that could have taken to stop the scandal

• Explain the lessons learned from the Enron Corporation Case

3 Case Study – VOLKSWAGEN The case reflects upon the Emission Scandal and tampering of technology, threatening of organizational culture, deliberate cheating and governance lapses.

After going through this case study, you will be able to:

• Explain one of the worst cases of emission scandal

• Understand how this scandal was uncovered

• Identify the impact of this debacle on boardroom of Volkswagen

4 Case Study – Olympus The case reflects upon the corporate governance weakness at Olympus Japan by the introduction of Tobashi Scheme. The failures occurred due to inappropriate accounting and usage of funds.

After going through this case study, you will be able to:

• Understand one of the classic cases of the corporate debacle of modern Japan

• Identify the reasons behind this scam

• Explain the impact of this scam on corporate governance practices

5 Case Study – Hydro One The case reflects upon the application of Enterprise Risk Management at HydroOne as a best practice for enhancing the standards of corporate governance.

After going through this case study, you will be able to:

• Understand the case of Enterprise Risk Management at Hydro One

• Identify the government policies that created problems for the company

• Explain the lessons learned from this case

6 Case Study – Satyam The case reflects upon creative accounting scandal in Indian context by falsification of accounts, duping the governance practices by a promoter driven company.

After going through this case study, you will be able to:

• Understand the reasons behind the debacle of Satyam

• Identify how Satyam scandal was uncovered

• Explain how this scam affected confidence of minority shareholders

7 Case Study – Maruti Suzuki The case reflects upon the role of Independent Directors and their intervention in the best interest of the company while working on the strategic decisions.

After going through this case study, you will be able to:

• Identify the response of Independent Directors of Maruti Suzuki to activists

• List down different reasons behind the mismanagement

• Describe the impact of this case on the corporate governance practices in India

Others
1 Mergers Amalgamation (M&As) (Reconstructing and reorganizing of business of a company is a perennial, expansive and exhaustive activity, whereby a competitive company intends to target towards increasing revenue through capital and business restructuring, changing corporate entity, through mergers, acquisitions and take-over.)

• Define merger, its significance, and types
• Outline legal frameworks governing M&As
• Describe merger and cross-merger procedure

2 Due Diligence Before Joining a Board (To understand the importance of the role of Independent Director and to place due diligence before joining a board. The topic will help understand the questions an Independent Director needs to ask before accepting the Honorius responsibility of directorship.)

• Identify board responsibilities before joining a board
• Explain key functions of a board
• Outline due diligence questions about the company, board, and self

3 Professional Ethics (This topic will help you in understanding and conceptualizing the business ethics for Independent Directors. This topic will all help you enumerate the meaning of ethical and unethical behavior, meaning of poor governance, and steps to avoid poor governance.)

• Define and conceptualize business ethics for Independent Directors
• Describe what is poor governance and how to avoid it
• Understand ethical and unethical behavior
• Identify several challenging situations when you need to ensure credibility

For clarity of provisions related to Good Corporate governance, you may refer my Published Article on Tax guru. Link is being given below for your ready reference.

https://taxguru.in/sebi/good-corporate-governance.html

(The views expressed herein are personal views of the Author. The views expressed herein in not intended and shall not be taken as, legal advice. For any further queries, the author can be reached at following Email id: caankit02@gmail.com)

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