Key Effects Of New Companies Act, 2013

Anil Kumar Popli, FCS

I would like to discuss some of the major changes which have major impact on corporate workings and corporate should be aware and take necessary action at the earliest and make policy with respect to restructuring of Board of Directors, acceptance of deposits, allotment of shares, alteration of objects and Memorandum/Articles of Association, constitution of Audit committee, vigil mechanism and expenditure on CSR etc. The thrust of Ministry is more on compliance mechanism by public companies having paid up share capital of Rs.Ten crore or turnover exceeding Rs.one hundred crore or borrowings exceeding Rs.50 crore in aggregate by constitution of Audit Committee, Nomination and remuneration committee, internal audit requirement and vigil mechanism.

Alteration of Objects clause

One of the effects of implementation of new Companies Act, 2013 is that the Companies can carry on business activities which are mentioned in its Main Objects clause of Memorandum of Association. In the earlier Act, the Companies which have diversified in other activities used to pass resolution in the Board of Directors meeting or in the General Meeting whereby the activities mentioned in other Objects i.e. at Clause III-C were invoked. The Private Companies used to pass the resolution and keep record in Minutes Book whereas the Limited Companies used to pass Special Resolution and file the declaration as required under the provisions of Section 149(2A) of the Companies Act, 1956 with the office of Registrar of Companies and carry on such activities. Now, with effect from Ist April 2014 all such Companies who were/are carrying of activities other than principal business activities as mentioned in the Other objects are required to alter the main objects and include such activities therein otherwise such business activity shall be treated as ultra virus. Consequently, owing to multiple business activities, the Companies may also be required to change its name.

CIN to be mentioned in letter heads, invoices etc:

Section 12(3) (c) of new Act provides that every company shall get its name, address of its registered office and the Corporate Identity Number along with telephone number, fax number, if any, e-mail and website addresses, if any, printed in all its business letters, billheads, letter papers and in all its notices and other official publications.

Register of members

As per section 88 of the Act, register of members is to be kept in new format. Now companies to mention Pan Number, email ID and other particulars besides particulars of share capital or debenture. The Companies required to update the same within a period of six months from 1-4-2014.

Acceptance of unsecured loan by Private Limited Companies

Majority of Private Limited Companies have accepted unsecured loans from Director’s relatives or from its members as allowed under the provisions of Companies Act, 1956. As per Companies (Acceptance of Deposit) Rules, 2014 as applicable from Ist April 2014 all such Companies now have to refund such unsecured loan/deposit immediately. As per rule 2(viii) of Companies (Acceptance of Deposit) Rules, 2014, the Companies [private and Limited both] can accept unsecured loan or deposit from Director of the company provided further that such amount is not a borrowed amount and can accept inter corporate loan(s) from another body corporate and not from any other person. As per companies Act 2013, if the private company has accepted any loan from any person except director, then they have to file a statement in prescribed form up to 30th June 2014 with the ROC. The Companies which fails to refund such unsecured loans already accepted from Directors’ relatives or members immediately shall be treated as deposit and as a consequence defaulting Companies and its officer in default may face penalty/prosecution proceedings under the provisions of Section 73 to 76 of the Companies Act, 2013.

One of the basic criteria of forming the Private Companies is that such Companies should arrange its means of finance through private resources. The thrust of promoters to include director’s relatives and close friends and associates as members so that they can finance the project through internal resources by accepting unsecured loan interest free or at lower rate or by allotting them shares. One side the new Companies Act, 2013 have raised the limit of members of Private Companies from 50 (fifty) to 200 (two hundred) and on another side restricted the Companies from accepting unsecured loans from Director’s relatives or members. This restriction is not understandable. This also gives inference that the Corporate should approach Banks for their needs instead private resources which may be costlier affair for the corporate than arranging the funds through private resources. The author is of the view that the Ministry should review for lifting of these restrictions and restore the previous provisions.

DEPOSITS

As per provisions of Section 73 to 76 of new Act read with Companies (Acceptance of Deposits) Rules, 2014, the Companies which have accepted deposit from public are required to report outstanding deposits, interest thereon by filing a return with the office of Registrar of Companies up to 30^th June 2014. These Companies have to refund the outstanding deposit with interest within a period of one year i.e. on or before 31.3.2015. Meanwhile, the company cannot accept or renew the deposits. The acceptance of new deposits can be made only after refund of existing deposits and by strict adherence of guidelines notified under said Rules like credit rating, deposit insurance and creation of charge to secure the deposits. This is welcome step..In case of default, penalty can be Rs.one crore up to Rs.10 crore

SHARE APPLICATION MONEY, ALLOTMENT AND VALUATION OF SHARES

Similarly the Companies wherein Share Application money standing in the books of accounts as on 31^st March 2014 are required to refund such amount immediately. As per provisions of rule 2(vii) of Companies (Acceptance of Deposit) Rules, 2014, Companies have to allot the share application subscription money to the subscriber within 60 days from the date of receipt of money and in case advance is not refunded to the subscribers within fifteen days from the date of completion of sixty days, such amount shall be treated as a deposit under these rules. In case non refund of share application money, another impact would be to transfer the amount including interest to Investor Education and Protection Fund of Central Government under the provisions of sub-section 2(h) of Section 125 of Companies Act, 2013.

Introduction of valuation of shares by independent value is a welcome step. Now, the Directors cannot undervalue the share and the existing shareholders may get appropriate return if the Company grows. Presently provisions of independent valuer have not been made effective and till then valuation of shares may be done through Merchant Banker or Chartered Accountant having experience of more than 10 years. The valuation of shares is also mandatory in case there is allotment other than cash basis. The Companies now should offer the shares to existing shareholders on proportionate basis as if a right issue or has option to issue the shares on private placement. While allotting the shares Companies have to comply the provisions of Section 42 and 62 of new Act read with Rule 14 under Companies (Prospectus and Allotment of Securities) Rules 2014. In private placement, the companies have to sent letter of offer to specified persons with pre-numbered share application form and keep the share application amount in separate account. The Company has to intimate the same to the office of Registrar of Companies in prescribed form within 30 days from the date of closure. Further, the Company has to file the return of allotment in prescribed form within 60 days from the date of receipt of share application money and file the return within 30 days from the date of allotment. The Companies cannot accept the amount in cash. There are strict guidelines for private placement and any violation or irregularity in allotment may attract penalty of Rs.two crore or the amount of allotment which is higher.

Director’s position

A director has fiduciary position in the Company and Board of Directors collectively responsible for affairs of the Company. The Act defines different position and role of Directors such as Managing Director, whole time director, independent director, nominee and shadow director. Section 2(60) of the Companies Act, 2013 defines officer in default’ which includes the above referred categories and persons responsible for compliance. The Board may also specify certain directors who can be held as officers-in default’ by giving separate charge of some department or work specified. Even a director who is aware of the contravention owing to participation in Board meeting or otherwise and who did not object to the contravention on such receipt or on such participation is held as officer-in-default and liable for such acts. The Act expects every director to act diligently and to take due care of compliances. Therefore, the director including independent director may not be an offender in true sense but having knowledge and non-diligent attitude may attract penal provisions.

No person can be a director exceeding twenty companies and out of which ten can be public companies.

The provisions of Section 166 of the new Act has specifically defined the duties of directors like to act in good faith in order to promote the objects; shall exercise his duties with due and reasonable care, skill and diligence etc.

Every Listed Company shall have at least one-third of total number of directors as independent directors and public company having paid up share capital of Rs.10 crore or more or turnover of Rupees One hundred crore or more or having aggregate outstanding loans, debentures or deposits exceeding Rs.50 crore shall have at two independent directors. The independent director has been defined under proviso 149(6) of new Act. The independent director has crucial role in audit committee, nomination and remuneration committee

Every listed company and companies having paid up share capital of Rs.100 crore or turnover of Rs.300 crore are required to appoint women director.

Further, every company should have at least one resident director who stayed in India for minimum of 182 days in corresponding previous year.

It is duty of every director to participate in the Board Meetings and take care of compliances. He should not be a silent spectator where he has knowledge of irregularities. As per new provisions of Section 167, in case he absents himself from all meetings of the Board held during a period of twelve months with or without seeking leave of absence of board or where he fails to disclose his interest in any contract or arrangement in which he is directly or indirectly interested, in contravention of the provisions of Section 184 of the Act, he is deemed to vacate the office of directorship.

Key Managerial person/CFO

Every listed company and every other public company having a paid-up share capital of ten crore rupees or more shall have whole-time key managerial personnel i.e. (i) Managing Director, Whole Time Director, CEO, Manager (ii) Company Secretary, and (iii) Chief Financial Officer who shall be officer in default and shall be liable for offence punishable under the provisions of Companies Act, 2013.

The author is of the view that the applicable limit should be reduced to Rs.five crore and private companies or some turnover criteria should be there.

Sitting fee

As per provisions of Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, the Company pursuant to the provisions of Articles of Association and by passing the resolution may pay the sitting fee to directors except Managing and Whole Time Directors (which are being considered as employee of the Company) up to Rs.one lac per meeting. This is welcome step and now independent directors and technical directors may get the adequate remuneration for their professional advice.

Board Report and Annual Return

As per provisions of Section 134 of new Act, Board report has been made more informative and describes the Company’s performance and various compliances. The Companies are now required to give more disclosures besides Company’s general state of affair, financial performance, conservation of enery, technology absorption, foreign exchange ingo and outgo and other material information including extracts of Annual return as per Section 92(3) which includes principal business activities, details of holding, subsidiary and associates companies, capital structure, indebtness, changes in members, managerial remuneration to key persons, meetings of Board, penalty or punishment imposed on company and its officers, matters relating to certification of compliances and other disclosures as may be prescribed. The Board report is basically a performance report of the Company and one can overview level of compliances and management policies. Every company now requires extra care in drafting board report instead a stereotype standard report as was being in erstwhile Act. This is a good step and companies now can shape it like a governance report. Annual return also contains lot of information and disclosures as required under the provisions of Section 92 of new Act.

As per provisions of Section 92(2) of new Act, Annual Return of listed companies and every such Company having paid-up capital of Rs.10 Crores or more or turnover of Rs.50 Crores or more are required to certify the same from Practicing Company Secretary.

Financial year and AGM

There should be uniform financial year i.e. 31^st March and annual return is also required to be prepared on that date.

Proceedings of AGM is also required to be filed with the office of ROC within 30 days from the date of AGM duly signed by the Chairman

Consolidation of accounts

The company is also required to prepare consolidated financial statements taking into consideration of consolidation of accounts of subsidiary and associate companies.

Disclosure of subsidiary and associate companies in Board report also required

Notice by electronic mode and voting at AGM electronically

The Board meetings and AGM notices can be given electronically through email at their registered address.

The Board meeting can be convened through video conferencing. There are separate guidelines for video conferencing for example entry should be through secured gateway and proceedings should be records and kept in safe custody.

For convening AGM, it is necessary for listed companies to give notice to members who have registered their email id. The Company should make provision for electronic voting through Registrar and Share Transfer Agent or through some software in the Company’s website. However, this is optional for non-listed Companies

Disclosures by a director of his interest.- (1) Every director shall disclose his concern or interest in any company or companies or bodies corporate (including shareholding interest), firms or other association of individuals, by giving a notice in prescribed form.

It is also necessary for companies to enclose consent of Director with the prescribed form and the director concern on resignation is also required to intimate the fact with justification to the concerned Registrar of Companies.

Related party transactions [Section 188]

The definition of related party has been widened in new Act and now Companies should take reasonable care in entering related parties transactions with respect to

(a)                 Sale, purchase or supply of any goods or material

(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

In the earlier Act there were provisions that in case Companies having paid up share capital of Rs.one crore or more have to obtain prior Central Govt. approval while entering into related party transactions. The transitional exemption was just Rs.5000/- which has now been increased to Rs.five lac in a year. In the new Act, this condition of prior approval has dispensed with and now the Companies are required to take permission of Board provided the transactions are being made on arm length basis meaning thereby entering into transaction on market price as if done with some unrelated party. The prior approval by way of special resolution by members is required only where the paid up share capital of the Company exceeds Rs. Ten crore. There is further relaxation in the rules if the contract or arrangement with respect to clauses (a) to (e) of sub-section (1) of section 188 are made within the prescribed limits i.e. up to 25% of its annual turnover for sale, purchase of goods and material; up to 10% of its net worth in respect of sale, purchase or lease of property or availing of services directly or through agent and payment of remuneration to related person up to the limit of Rs.2.50 lac per month.

This is welcome amendment and the corporate sector is relieved to some extent of getting approval of central government. However, the Company may get some difficulty in getting approval of Board of Directors and members in general meeting as the member of the board who is interested cannot cast his vote on that matter and to sit outside and similarly the member who is interested cannot vote being interested. In fact in most of the Private companies or closely held public companies, the directors and members are related to each other and in case of vote on resolution of interested person, proper quorum may not be available. In such circumstances, role of independent directors is vital.

Borrow money by Private Companies

Now, the private Limited Companies which have borrowed money in excess of its paid up capital and free reserves are required to pass special resolution and members have to decide up to which limit the Company can borrow. As per provisions of Section 180 of the Companies Act, 2013 every such company has to comply this provision immediately.

Loan to Directors etc.

Like a Public Limited companies now the Private Companies have been put under restrictions on giving loan/advance to Director or companies/firm in which Director is interested. We should welcome these restrictions but this is also hard to some extent. Practically every middle size or big Company have its subsidiary or associate Company. Further, loans are being borrowed from Banks/Financial Institutes on providing equitable mortgage of some property and corporate guarantee by the holding Company. Every subsidiary or associate Company generally does not own adequate assets which are sufficient for securing the loans, hence Banks/FIs are insisting to provide extension of charge on properties of Holding Company or corporate Guarantee of holding Company or associate Company. These restrictions have been put by enacting the provisions effecting from 12^th September 2013. However, on representation from various Corporate, the Ministry has some given relief by giving exemption to such Companies provided loan or corporate guarantee is given by Holding Companies to its wholly owned subsidiary effective from Ist April 2014. The Ministry has not clarified about loans or guarantees given after 12^th September 2013 till 31^st March 2014. Further, there is no relief to subsidiary or associate Companies. The author is of the view that in numerous cases and as a matter of general practice of bankers, substantial amount of loans/corporate guarantee are under stake for refund or for substitution which are taken by the subsidiary or associate companies based upon corporate guarantee of holding Companies and also in cases where renewal of corporate guarantee is due.

The author is of the view that these provisions need review and reconsideration by the Ministry.

Loan and Investment by a Company

These provisions are now applicable to private companies which are similar to erstwhile provisions of Section 372A of the Companies Act, 1956. Now, as per provisions of Section 186 of Companies Act, 2013, the Companies are required to comply with the provisions. In part I, companies can make investment through not more than two layers in down-word subsidiaries. For example, A Company can make investment in B and B in C Company but C Company cannot make further investment in D or any other Company which was not there in earlier Act. However, a company can have many subsidiaries but there is restriction on downward subsidiaries.

In Part B No Company can give any loan or give any guarantee or provide security or to acquire by way of subscription, purchase or otherwise the securities of any other body corporate exceeding sixty per cent of its net worth or one hundred percent of its free reserves and securities premium account whichever is more.

Now, every Company has to review total amount of loan, advances, provide security or to make investment within the aforesaid limits. For any transaction exceeding the above limit, the company has to pass special resolution and to obtain prior approval of Bank/FIs from whom the loans are subsisting.

Audit Committee, Nomination and Remuneration Committee

Section 178 of The Companies Act, 2013 read with Companies (Meetings of Board and its Powers) Rules, 2014 has mandated the constitution of Audit Committee, Nomination and Remuneration Committee and Stakeholders Relationship committee for every listed company and public companies having paid up capital of Rs.10 crore or turnover of Rs.100 crore or having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding Rs.50 Crores. The Committee should have three or more non executive directors and half of them should be independent directors. The audit committee shall have all the powers to review the accounts, accounting policies, related party transactions, internal audit system, internal auditors review etc. The nomination and remuneration committee shall have the authority to make policy for remuneration to managerial persons and key managerial persons. Stakeholders Committee is required where number of members are more than 1000. These provisions are in line with provisions of clause 49 of Listing Agreement which is a welcome step.

Companies required to appoint internal auditor.- (1) The following class of companies shall be required to appoint an internal auditor or a firm of internal auditors, namely:‑

(a)  Every listed company;

(b)  Every unlisted public company having‑

(i) paid up share capital of fifty crore rupees or more during the preceding financial year; or

(ii)   Turnover of two hundred crore rupees or more during the preceding financial year; or

(iii)    Outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees or more at any point of time during the preceding financial year; or

(iv) Outstanding deposits of twenty five crore rupees or more at any point of time during the preceding financial year;

Provided that an existing company covered under any of the above criteria shall comply with the requirements of section 138 and this rule within six months of commencement of such section.

Establishment of vigil mechanism.- (1) Every listed company and the

companies (a) which accepts deposits; or (b) which borrowed money from Banks/FIs in excess of fifty crore shall establish a vigil mechanism for their directors and employees to report their genuine concerns or grievances.

The author is of the view that where there is Audit Committee in existence, it should be implemented through audit committee which has sufficient number of independent directors. However, in respect of other companies, provisions for appointment of director to head vigil mechanism are not sufficient. The ministry should review the heading of vigil mechanism committee through independent directors where there is no Audit Committee otherwise this may not achieve the purpose for which it is established. The action to be taken by the vigil mechanism committee is also not clear.

Secretarial Audit Report. – As per provisions of Section 204(1) of

New Act ever Every public company having a paid-up share capital of fifty crore rupees or more; or

(b) Every public company having a turnover of two hundred fifty crore rupees or more are required to conduct secretarial audit from practicing Company Secretary.

This is a welcome step. The author is of the view that these provisions should be made applicable to all companies except one person company and small companies. Further the format of Secretarial Audit Report is too general in nature which should be in respect of specific provision of various laws as may be applicable to the Companies.

ROC filing of documents

Maximum time for filing the returns is now 300 days. The documents which are older than 300 days cannot be filed in normal circumstances.

Corporate Responsibility Statement

Every company having net worth of Rs.500 crore, turnover of Rs.1000 crore or net profit of Rs.5.00 crore are required to make provision for 2% of its net profits for CSR. The disclosures are to be made in Board Report. The Company can make the expenditure as per Schedule VII of the Act i.e. for social purposes like eradication of poverty, promotion of education, women and children welfare schemes, environmental and pollution reduction scheme etc.

FTE Scheme under section 560 of the Companies Act, 1956

The Ministry has not made effective provisions of Section 248 to 252 of the Companies Act, 2913 regarding removal of name of the Company from record of Registrar or striking off name of the Companies. It is a good opportunity for the corporate to apply for striking off name of the Company under FTE scheme in respect of companies which are not in operation for the last one year or more or the companies which are running in losses and their capital has been eroded. For availing this scheme the Directors have to give affidavit and indemnity to the effect that in case of liability, if any, in future, they would be liable personally. By not giving effect to new provisions for the time being, the Ministry has given opportunity to virtually defunct companies.

Penalties

Section 447 to 454 of new Act deals with provisions of penalty. Penalty for fraud i.e. an act of omission or abuse of position with an intend to gain undue advantage or wrong gain or to deceive other person(s) more particularly specified in that Section and for false statement under Section 448, the offence is punishable with imprisonment for a period not less than six month and up to ten years and also liable to fine which may extent to three time of the amount involved. For offences where penalty is not specifically defined the Company and every officer is liable for fine up to Rs.ten thousand and if offence is continuing Rs.one thousand for every day. The penalty for wrong or irregular allotment and deposit has been prescribed hereinabove.

Conclusion

The new Companies Act 2013 is a welcome step. It is more stringent and requires strict compliance by corporate sector. The non compliance or irregularity in compliances may attract heavy penalties.

(Author – Anil Kumar Popli, FCS, LLB is a Company Secretary in Practise from Delhi and can be contacted at akpopli@rediffmail.com)

Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Though utmost efforts has made to provide authentic information, it is suggested that to have better understanding kindly cross-check the relevant sections, rules under the Companies Act, 2013. The observations of the author are personal view and the author do not take responsibility of the same and this cannot be quoted before any authority without the written consent of the author