Auditors’ Responsibilities under Companies Act 2013 - …eirc-icai.org/admin_panel/background_Material/7th April Companies... · Page 4 The Companies Act, 2013 – Key impact area

Auditors’Responsibilities

under CompaniesAct 2013

- CA Sanjay Agarwal- CA Amit Lodha

Page 2

► 29 Chapters, 470 Clauses,7 Schedules

► Various new concepts /definitions introduced –

• one man company• Independent

directors,• CEO, CFO,• Class action lawsuits,• Small companies,• Dormant companies,• Woman director

► 283 sections notified

Highlights of the Companies Act 2013

► MCA has further notified 183 sections on 26 March 2014,which comes into effect from 1 April 2014

► Significant changes in financial reporting requirements –Moved closer to International best practices

► The Companies (Audit and Auditors) Rules, 2014 has alsobeen notified effective from April 1, 2014

► Significant change in auditors’ reporting requirementsand also making auditor rotations mandatory

► Significant responsibilities on Independent directors andrestrictions on certain transactions with directors.

► Corporate social responsibility rules are defined which ina way mandates the prescribed class of companies tospend 2% of net profits on social cause

► Significant penalties and imprisonment is prescribed atseveral places

► Rules on Mergers and Acquisitions are simplified as wellas redefined

Companies Act 2013 - Overview

Page 3

The Companies Act, 2013Key Impact area

Page 4

The Companies Act, 2013 – Key impact area

Chapters Areas Potential Impact*

FinancialAccounting

Fixed Assets – Depreciation and component HighConsolidated financial statement HighChange in the definition of control HighAuthentication of BOD report and FS HighUtilisation of Security premium HighRight to Copies of Audited FS MediumDeclaration and payment of dividend MediumRegistered Valuer MediumNational Financial Reporting Authority (NFRA) MediumUniform financial year - April to March LowPreparation of Financial statement LowReopening of accounts LowAcceptance of public deposit LowIssues of bonus shares Low

*Impacts shall depend upon the complexity of operations in an entity

Page 5


Chapters Areas PotentialImpact*

Audit andAuditors

Appointment of Auditor HighRotation of auditor HighProhibited services HighReporting responsibilities HighReporting on Internal Financial Control System (IFSC) HighFraud reporting responsibilities HighPenalties on auditor HighCost audit MediumInternal audit Medium

CorporateGovernance

Corporate social responsibility HighDirectors HighIndependent directors HighLoan to Directors and Subsidiaries HighLoans and investments by company HighRestrictions on non-cash transactions involving directors MediumAudit Committee MediumOther Committee Medium


Page 6


Chapters Areas Potential Impact*

CorporateGovernance

Class action HighRelated party definition HighRelated party transactions HighVigil Mechanism HighManagement remuneration MediumDisclosure of interest by directors Medium

Mergers &Acquisitions

Inbound and outbound cross-border transactions MediumScheme should be in compliance with notifiedaccounting standards Medium

Auditors report MediumSimplified procedures in case of holding andwholly owned subsidiaries, and small companies Medium


Page 7

Auditors’ Responsibilities

Page 8

Appointment of auditors

Overview and key changes► Auditor’s appointment for 5 years term instead of the

current requirement of annual appointment at each AGM► Ratification required at every AGM► Need to obtain prior written consent and certificate from

auditor that it satisfies criteria for such appointment► All companies, that are required to constitute an Audit

Committee under section 177, will consider therecommendations of the audit committee beforeappointing an auditor.

► Board is required to give reasons for not accepting therecommendation of the audit committee in the Board’sreport. To avoid such disclosures, there would bepressure on the board of directors to accept the auditcommittee recommendations.

► The audit committee or the Board shall consider thecompleted and pending proceedings against the auditorbefore ICAI or NFRA or Tribunal or any Court of law.

Key impact► Central government approval and

special resolution required toremove auditor before his term.Also company will need to passspecial resolution at the AGM

► Hence the company may like toconsider long-term perspective forappointing auditors

► Double jeopardy in terms ofpunishment accorded by ICAI,NFRA, Tribunal or other Courtand additional punishment of non-appointment as auditor.

Page 9

Rotation of auditors

Overview and key changes► All listed companies and the unlisted public companies

with a paid up share capital of Rs.10 crores or more,private limited companies with a paid up share capitalof Rs.20 crores or more, and companies with publicborrowings from financial institutions, banks or publicdeposits of Rs.50 crores or more will have to complywith the auditor rotation requirements. The aforesaidcompanies cannot appoint or re-appoint:► An audit firm as auditor for more than 2 terms of 5

consecutive years► An individual as auditor for more than 1 term of 5

consecutive yearsPeriod for which an auditor is holding the office prior tothe commencement of the 2013 Act shall be taken intoaccount in calculating the period of 5 years or 10 years.Existing companies to comply with the aboverequirement within 3 years.

► Cooling off period of continuous 5 years for auditorswho has completed the above term

► Incoming auditor should not be associated withoutgoing auditor under the same network/trademark/brand.

Key impact

► More time involvement required from seniormanagement in the first year of rotation

► Challenges for global companies havinglisted subsidiaries

► Cost of audit is likely to increase as learningcurve experience is not available to the newauditors

► Rotation requirement will apply retrospectively

► If no auditor is appointed/re-appointed at AGM,the existing auditor may not continue if it hasalready completed its maximum tenure

Page 10

Prohibited services

Overview and key changes• Mandatory requirement of approval for permissible services by Board of Directors or

the audit committee, as the case may be.

► Auditor is not allowed to render the following services either directly or indirectly tothe company, its holding or subsidiary company:► Accounting and book keeping services► Internal audit► Design and implementation of any financial information system► Actuarial services► Investment advisory services► Investment banking services► Rendering of outsourced financial services► Management services► Any other kind of services as may be prescribed

► Compliance to be ensured before closure of first financial after enactment of 2013 Act

Page 11

Prohibited services

► Terms such as investment advisory services, management services and investmentbanking services are not defined. This may give rise to diverse practices.

► Restrictions apply to the audit client and its parent and subsidiary company, whetherthe parent and/or subsidiary company is located within or outside India.

► Restrictions under section 144 of the Act do not apply to sister concerns of audit clientsand investor/investees of audit clients.

► In case the same auditor audits both parent and subsidiary company and proposepermissible services to the subsidiary company, then Board or audit committeeapproval is required from subsidiary company only and not the parent company.

Page 12

Removal/ resignation of the auditor

Overview and key changes► Auditor appointed may be removed from his office before expiry of his term:

► After obtaining previous approval of the Central Government and► By passing a special resolution at the general meeting

► An auditor who has resigned from the company will file:► A statement indicating reasons and other facts with regard to his resignation within

30 days with Company and registrar.► Tribunal may direct change of auditors, if it believes that :

► Auditor has acted in a fraudulent manner, or► Abetted or colluded in any fraud in relation to the company or its directors or

officers► Tribunal may pass the order suo-moto, or on application of Central Government or any

person concerned

Page 13

Reporting responsibilities

Overview and key changes► Auditor of holding company will have access to records of all subsidiaries for consolidation► Auditor’s report to include additional matters such as:

►Observations/comments on financial transactions or matters having adverse effect onthe functioning of the company

►Whether the company has adequate internal financial controls systems in place and theoperating effectiveness of such controls

►Whether the company has disclosed the effect of pending litigations on its financialposition in its financial statement

►Whether the company has made provision for foreseeable losses on long term contractsincluding derivative contracts

►Whether there is delay in depositing money in IE&P fund

Page 14


Overview and key changes► If the auditor, in the course of audit, has reasons to believe that an offence

involving, is being or has been committed against the company by its officers oremployees, he will report the matter to the Central Government immediately but notlater than 60 days of his knowledge.

► He will also report to the Board or AC, immediately and seeking their reply orobservations within forty-five days, which will also forward to CG.

► Confidentiality by auditor, not to apply for reporting matters under any regulation.► Attendance at AGM mandatory for auditor or his authorized representative

Key impact► Negative comment or reporting on internal control or fraud may have significant

legal consequences including winding up and /or cause reputational damage► An auditor is to report to the Central Government if it has reason to believe that an

offence involving fraud is being committed against the company. It is not clearwhether the reference to “is being committed” includes suspected fraud?

► Even immaterial frauds can be reported to CG, if board or audit committee is nottaking action

Page 15


Key impact► Reporting on internal financial controls beyond CARO requirement will lead to increase

in time and cost of audit► Internal financial control is defined in a very wide manner. This scope of reporting by

auditor is much wider than even the requirements under SOX 404 under US.► Requirement to report “financial transactions or matters” is not clear. MCA/ ICAI may

clarify that intention is not to require auditor to challenge and report on management’sjudgment and propriety with regards to business decision

► No access to books of associates and joint ventures in case of CFS► Reporting requirement will apply to CFS► Difficulty in predicting the foreseeable losses on the derivative contracts.

Page 16


Companies Act , 2013 Companies Act , 1956

AuditingStandards

Compliance with auditingstandards to beprescribed by the CentralGovernment orrecommended by ICAI as thecase may be

No provision for compliancewiththe auditing standards theprovision states for thecompliance of accountingstandards

Report Fraud Report to CG and to Board No provision for reporting tocentral Government of anyfraud committed against thecompany

Reporting on additionalmatters

As discussed before Additional matters discussedwere not required to bereported

Page 17

Penalties on auditor

On contravention of law (of Section 139 to 146)► Auditor may be subjected to all of the following liabilities on contravention of any related

provision of the new law:► Fine not less than Rs. 25 thousand but extendable upto Rs. 5 lacs► In case of willful default with an intention to deceive the company or its shareholders,

creditors, tax authorities:► Imprisonment for a term upto 1 year and► Fine which will not be less than Rs. 1 lacs but which may be extended upto Rs. 25 lacs

► Incase auditor is convicted as above then he shall be liable to:► Refund of remuneration received► Payment of damages to the company, statutory body/authorities or any other person

for loss arising from incorrect or misleading statement in audit report► Where the auditor is a firm and partners or partners have acted in a fraudulent manner,

liability for such act will be of the partner or partners concerned and of the firm jointly andseverally

Class action► Members or depositors or any class of them may claim damages or compensation or demand

any other suitable action from or against the auditor including audit firm for any improper ormisleading statement made in his audit report or for any fraudulent, unlawful or wrongful act orconduct.

Page 18

Penalties on auditor

Overview and key changesProsecution by NFRA► NFRA may investigate, on its own or on reference by Central Government, matters of professional

or other misconduct by any member/firm of Chartered Accountants► ICAI cannot initiate or continue proceedings in such cases

► If professional or other misconduct is proved, NFRA may impose :► In case of individual : Minimum penalty of Rs.1 lacs but which may be extent to 5 times of the

fee received► In case of firm : Minimum penalty of Rs.10 lacs but which may be extent upto 10 times of the

fee received► Debar the member or the firm from practice for period upto 10 years.

LLP► Benefits of LLP form of partnership is not likely to be available to audit professionals in the case of a

fraud or fraudulent behavior.Key impact

► Difficult to attract talents, as the younger generation would be put off by the innumerableimperilments.

► Auditors in order to protect their own liability may end up over auditing their clients.

Page 19

Understanding Companies Act 2013 – Loansand Investments by Company and RelatedParty Transactions

Page 20

Agenda

► Background – The Companies Act, 2013

► Section 295 of the Companies Act ,1956

► Section 185 of the Companies Act, 2013 – An overview ofthe key requirement and key impact.

► Section 372A of the Companies Act, 1956

► Section 186 of the Companies Act, 2013 – An overview ofthe key requirement and key impact.

► Related Party Transactions.

Page 21

Section 295 of the Companies Act, 1956

Section 295 of the Companies Act, 1956► No company ("the lending company") without obtaining the previous approval

of the Central Government in that behalf shall, directly or indirectly, make anyloan to, or give any guarantee or provide any security in connection with a loanmade by any other person to, or to any other person by-

► (a) any director of the lending company, or of a company which is► its holding company or any partner or relative of any such

director;► (b) any firm in which any such director or relative is a partner;► (c) any private company of which any such director is a director

or member;► (d) any body corporate at a general meeting of which not less than twenty-five per

cent of the total voting power may be exercised or controlled by any such director,or by two or more such directors, together; or

► (e) any body corporate, the Board of directors, managing director or managerwhereof is accustomed to act in accordance with the directions or instructions ofthe Board,

Page 22


Section 295 not applicable in following cases

(a) any loan made, guarantee given or security provided-(i) by a private company unless it is a subsidiary of a public

company,or

(ii) by a banking company;

(b) any loan made by a holding company to its subsidiary company;

(c) any guarantee given or security provided by a holding company inrespect of any loan made to its subsidiary company.

Page 23


Applicability of the Section

► Section 185 of the Companies Act, 2013 is applicable on private company as well as publicCompany.

► Section 185 of the 2013 Act replaces Section 295 of the 1956 Act, governingloans/guarantees to directors by a company.

Overview and key changesØ 2013 Act contains restriction on advancing of loan/guarantee/providing security to any director

or any person in whom director is interested.Ø Person in whom director is interested includes:

Ø any body corporate, the Board of directors, managing director or manager, whereof isaccustomed to act in accordance with the directions or instructions of the Board, or of anydirector or directors, of the lending company.

Ø Unlike 1956 Act, no possibility for seeking Central Government approval for makingprohibited loans/guarantees

Ø Unlike the 1956 Act, the 2013 Act does not contain specific exemption with regard toloan/guarantee/security given by private company.

Page 24


Ø Restriction on loan does not apply to :Ø Making of loan to managing/whole-time director as part of service

condition extended by company to all its employees or pursuant toany scheme approved through special resolution

Ø A company, which in ordinary course of its business providesloans/guarantees/ securities and interest charged is not less thanthe bank rate declared by RBI.

Ø The 1956 Act does not contain this exemption.

Page 25


Key impact► Whether the holding company will be able to give loan /guarantee/security on behalf of its

subsidiary?

Explanation (e) to Section 185 of the 2013 Act inter alia defines theterm ‘other person in whom the director is interested’ to include abody corporate, the board of directors, managing director or manager,whereof is accustomed to act in accordance with the directions orinstructions of the Board, or any director or directors of the lendingcompany. This brings into the question the validity of loans andguarantees between holding and subsidiary companies irrespectiveof the fact that there are common directors present in the companies,since subsidiary companies may be interpreted to be accustomed toact in accordance with the directions or instructions of the board ofthe holding company.

Page 26


► Extract of Chapter XII of the Companies Rules, 2014

► Any loan made by a holding company to its wholly owned subsidiarycompany or any guarantee given or security provided by a holding companyin respect of any loan made to its wholly owned subsidiary company isexempted from the requirements under this section; and

► Any guarantee given or security provided by a holding company in respect ofloan made by any bank or financial institution to its subsidiary company isexempted from the requirements under this section:

► Provided that such loans made under sub-rule (1) and (2) are utilised by thesubsidiary company for its principal business activities.

Page 27


Other ambiguities around the section :-

► What will happen to the existing loan?

► What does the term “indirectly” represent in Section 185?

Page 28


Penalty on contravention of provisions of this section :-

- the company shall be punishable with fine which shall not be lessthan five lakh rupees but which may extend to twenty-five lakhrupees, and- the director or the other person to whom any loan is advanced orguarantee or security is given or provided in connection with any loantaken by him or the other person, shall be punishable withimprisonment which may extend to six months or with fine whichshall not be less than five lakh rupees but which may extend totwenty-five lakh rupees, or with both.

Reduction in imprisonment in case of full and part repayment of loanas envisaged in Section 295 of the old companies act has been doneaway with.

Page 29

Section 372A of the Companies Act,1956

► The section applies to the following type of transactions :—► Loan by any public Company to any other body corporate. "Loans" include inter-

corporate deposits and debentures.► Giving by any public Company of guarantee of provision of security in connection with

a loan made by:—► (i) Any other person to any other body corporate of► (ii) To any other person by any other body corporate.► Acquisition by any public Company , by way of subscription, purchase or otherwise the

securities of any other body corporate. "Securities" for this purpose would be asdefined under section 2(h) of the Securities Contracts (Regulation) Act.

► Applicability► The section applies to public companies only and thus not to private companies. The

section also does not apply loans, etc. made by the following companies:—► Banking, insurance or housing companies, in the ordinary course of their business;► Companies established with the object of financing industrial enterprises or of providing

infrastructural facilities.► Company whose principal business is the acquisition of shares, stock, debentures or

other securities.

Page 30


► The section also does not apply to the following transactions:—► Investment in shares allotted pursuant to section 81(1)(a).► Loans by holding companies to its wholly owned subsidiary.

guarantees/securities by holding companies for loans to its wholly ownedsubsidiary. Investments in securities by holding company of its wholly ownedsubsidiary.

► A company make loans, etc. up to the higher of the following:—► 60% of its paid-up share capital and free reserves.► 100% of its free reserves.► "free reserves" for this purpose means reserves free for distribution as

dividends and share premium but excluding shares application money.

► For loans, etc. beyond the limit above the company would need approval byway of special resolution where the prescribed disclosures should be made inrespect of the proposed loan, etc.

Page 31


► For any loans, etc., approval shall be taken of the company at a Board meetingwith the consent of all the directors present at the meeting and also the priorapproval of the public financial institution whose term loan to the company issubsisting. However, where the loan, etc. is not beyond 60% of the company’spaid-up share capital and free reserves and there is no default in repayment loanor payment of interest, the prior approval of the public financial institution wouldnot be required.

► Loans shall not be made at lower than the prevailing bank rate, as defined.

► Companies that have subsisting defaults of section 58A cannot make loans, etc.

► The company should maintain a register of loans, etc. with prescribed details.

► For contravention of provisions of this section (other than the requirementsrelating to maintenance of register), imprisonment or fine is provided for.However, such term of imprisonment/ amount of fine would be reduced to theextent to which the loan, investment, etc. is recovered.

►

Page 32


ApplicabilityThe section is effective from April 1,2014.

Overview and key changes► Company cannot make investment through more than 2 layers of investment companies. However

requirement not to effect:► Acquisition of company incorporated outside India if such company has investment subsidiaries

beyond two layers as per law of that country► Subsidiary company having investment subsidiary for meeting law requirement.

“Investment Company” means a company whose principal business is the acquisition of shares,debentures or other securities.

► Prohibits company from giving loans/guarantees/security to other corporate or acquiring securities ofother corporate exceeding higher of► 60% of paid up capital, free reserves and securities premium or► 100% of free reserves and securities premium

► 2013 Act allows to provide loan/guarantee exceeding the limit by prior approval through specialresolution.

► The 1956 Act allows to provide guarantee exceeding the limit without prior approval if the same isconfirmed within 12 months at general meeting. This aspect is not there in the 2013 Act.

► Full disclosure in the financial statement of the loans given, investments made or guarantee given/security provided along with purpose.

Page 33


Overview and key changes

► The rate of interest cannot be lowerthan prevailing yield on one year,three year, five year or ten yearGovernment security closest to tenorof loan. Under 1956 Act, the ratecannot be lower than prevailing bankrate i.e., the standard rate madepublic under section 49 of theReserve Bank of India Act, 1934.

Key impact► Prohibition on more than two layers of investment

may require many groups to reconsider theirinvestment structures

► The disclosure of transactions in the financialstatements will also be subject to audit

► No specific transitional provision have beenprescribed

► Change regarding interest may apply only to newloans or upon change in terms.

► Prohibition on having more than two layer ofinvestment may apply to existing investments also

► Whether interest rate prescribed meets the test ofthe “arm’s length principle” under the IT Act.

Page 34



Where a loan or guarantee is given or security has beenprovided by a company to its wholly owned subsidiarycompany or a joint venture company ,or acquisition ismade by a Holding company, by way of subscription,purchase or otherwise of , the securities of its whollyowned subsidiary company, the requirement of sub-section (3) of section 186 shall not apply:

Provided that the company shall disclose the details ofsuch loans or guarantee or security or acquisition in thefinancial statement as provided under subsection (4) ofsection 186

Page 35


No Company registered under section 12 of the SEBI Act or which arecovered under the class of companies which may be notified by the Centralgovernment in consultation with SEBI,shall take any inter-corporate loan ordeposits , in excess of the limits specified under the regulations applicable tosuch companies pursuant to which they are registered with SEBI.Section 12 of the SEBI Act relates to the registration of stock-brokers, sub-brokers, share-transfer agents, banker to an issue, trustee of trust deed,registrar to an issue, merchant banker, underwriter, portfolio manager,investment adviser , custodian of securities, foreign institutional investor,credit rating agency and such other intermediary who may be associated withsecurities market


Page 36


Penalty on contravention of the provision of this Section

If a company contravenes the provisions of this section,- - the company shall be punishable with fine which shall not be

less than twenty-five thousand rupees but which may extend tofive lakh rupees and

- - every officer of the company who is in default shall bepunishable with imprisonment for a term which may extend to twoyears and with fine which shall not be less than twenty-fivethousand rupees but which may extend to one lakh rupees.

Page 37

Related Party Transaction

Page 38

Relative

Overview and key changes► Definition: With reference to any person means anyone who is related to another if

► They are member of HUF► They are Husband and wife► They are related in any manner as prescribed in the list of relatives under the rules

► 1956 Act also has similar definition but there are certain differences in the list ofrelatives which have been prescribed

Key impact► Prescribed list of relation will have significant impact on aspects such as appointment,

qualification and disqualification of auditors and independent directors► A person may not be able to control/ influence other person if the other person is not

financially dependent on him/her even if they are covered in specific list of relations.► Consider an estranged relative, who is financially independent. He can buy shares in a

company audited by the person to whom he is related and deliberately or inadvertentlydisqualify the person from being the auditor of the company.

► Many relatives covered in the 1956 Act e.g. Daughter’s son, Daughter’s daughter,Brother’s wife, Sister’s husband are not covered in the list of relatives prescribed in the2013 Act.

Page 39

Related party

The definition of "related party" with reference to a company -director or key managerial personnel of the holding company orrelative with reference to a company, shall be deemed to be a relatedpartyA person shall be deemed to be relative of another if he or she usrelated to another in following mannerFather including step fatherMother including step motherSon including step sonSon’ wifeDaughterDaughter’s husbandBrother including step brotherSister including step sister

Page 40

Definition – Related partyNotified AS 18 Companies Act 2013

a) Enterprises that directly/ indirectly control, orare controlled by, or are under common controlwith, the reporting enterprise (holding company,subsidiaries and fellow subsidiaries)

b) Associates and joint ventures and the investingparty in respect of which the reportingenterprise is an associate/ joint venture

c) Individuals owning, directly or indirectly, aninterest in the voting power of the reportingenterprise that gives them control or significantinfluence over the enterprise, and relatives ofany such individual

d) Key management personnel and relatives ofsuch personnel

e) Enterprises over which any person described in(c) or (d) is able to exercise significantinfluence. This includes enterprises owned bydirectors or major shareholders of the reportingenterprise and enterprises that have a memberof key management in common with thereporting enterprise.

i. Director, KMP or their relative in relation to thecompany

ii. Firm, in which director, manager or his relative ispartner

iii. Private company in which director/ manager is amember/ director

iv. Public company in which a director/ manager is adirector and holds along with his relatives, more than2% of its paid-up share capital

v. Body corporate whose board, managing director ormanager is accustomed to act in accordance with theadvice, directions or instructions of a director ormanager, except advice given in professional capacity

vi. Any person on whose advice/ directions/ instructions adirector or manager is accustomed to act, exceptadvice given in professional capacity

vii. Any company which is:i. Holding, subsidiary or associate of such companyii. Subsidiary of holding company to which it is also

subsidiaryviii. Directors and key managerial personnel or his/her

relative in relation to its holding companyix. .

Page 41

Clarification of the definition of “relatedparty”The definition of "related party" given in section 2(76) of the Act,among other matters, provide that a public company in which adirector or manager is a director or holds along with his relatives,more than 2% of its paid up share capital will be related party. Toremove difficulties in the application of definition, the MCA hasclarified that a public company in which a director or manager is adirector and holds along with his relatives, more than 2% of its paidup share capital will be related party.

Consequent to the clarification, a public company in which a directoror manager is a director will be treated as related party only if thedirector along with his relatives holds more than 2% of its paid upshare capital. It will come into force on the date of its publication inthe Official Gazette

Page 42

Related party transactions

Companies Act 2013

1. Change in the definition of relative2. Director, his relatives, firm in which director or his relative is partner, any other

partner in the firm, Private company of which the director is a member ordirector.

3. KMP to be treated as related parties4. Almost every transaction is covered5. Board Resolution required for all transactions6. For specific companies previous special resolution is required7. Member who is a related party cannot vote at GM8. Transaction at arms length not covered9. All transactions to be reported to shareholders in Board report

Page 43


Section 188 of the Companies Act, 2013 has been inserted in place of section297 of the Companies Act, 1956.ApplicabilityIt is effective from April 1,2014.

Approval

The following approval is required for entering transactions with Related Party:-1- Board Approval

For entering Transactions as mentioned in this section, the board approval isrequired along with some other conditions as may be prescribed.

2- General Meeting

For entering Transactions as mentioned in this section, the special resolution isrequired in the meeting subjected to the prescribed share capital or Turnover.

Page 44


Companies Act 1956 Companies Act 2013

Relations covered

► Director of the company or his relative

► Firm in which such a director/ relative is apartner

► Any other partner in the firm

► Private company of which the director is amember or director

► All persons covered under the definition of relatedparty

Transactions covered

► Sale, purchase or supply of any goods,material or services

► Underwriting the subscription of any shares in,or debentures of, the company

► Sale, purchase or supply of any goods or materials

► Selling or otherwise disposing of, or buying, property

► Leasing of property

► Availing or rendering of any services

► Appointment of any agent for purchase or sale ofgoods, materials, services or property

► Appointment to office/ place of profit in the company,its subsidiary or associate

► Underwriting the subscription of any securities orderivatives thereof, of the company

Page 45


Companies Act 1956 Companies Act 2013

Central government approvalrequired for entering intospecified contracts, wherepaid-up capital of the companyis not less than Rs.1 crore

► Prior special resolution at general meeting required incase of thefollowing:► Company having paid-up share capital of at least Rs. 10 croresfor any transaction.► Different transaction amount limits prescribed for varioustransactions where the share capital is less than Rs 10 crores.

► No member of the company who is related party can vote onspecial resolution.

► In case of wholly owned subsidiary, the special resolution passedby the holding company shall be sufficient for the purpose ofentering into the transactions.

No such provision Central government has prescribed additional conditions

Restriction applies for onlytransaction with specifiedpersons/ parties

Restriction applies for transaction with all related parties

Similar exemption in 1956 Act Restrictions don’t apply to transactions in ordinary course ofbusiness except if not at arm’s length

No specific disclosure requiredin the board report.

Disclose in board report along with justification.

Page 46


Key impact► No Central Government approval required for related party

transactions. Only special resolution of disinterested parties ingeneral meeting required

► Closer scrutiny by shareholders of related party► Related party transactions entered at arm’s length may also require

reporting in the Board Report along with justification for entering intosuch transactions

► Need to align the scope of related party transactions with that of ITAct e.g. specified domestic transactions, arms length principles.

Page 47

Restriction on non-cash transactionsinvolving directors (Section 192)Overview and key changes

Ø Without prior approval at general meeting, a company cannot enter into arrangementby which:Ø Director of the company, its holding/subsidiary/associate company or person

connected with director acquires or is to acquire assets for consideration other thancash from the company or

Ø The company acquires or is to acquire any assets for consideration other than cashfrom such director or person so connected.

► If director or connected person is director of holding company then approval ofholding company is also required.

► If arrangement is entered by the company or holding company without requisiteapproval then the arrangement is voidable at the instance of the company.

Key impact► The 2013 Act does not explain who will be treated as person connected with director

for this clause?► Applicability of transfer pricing provision under the IT Act on the non-cash transactions

involving directors.

Page 48

Thank you

Documents

Auditors’ Responsibilities under Companies Act 2013 - …eirc-icai.org/admin_panel/background_Material/7th April Companies... · Page 4 The Companies Act, 2013 – Key impact area