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Companies Act 2013Highlights and Key Features
ContentsIntroductionMajor ChangesNew types of companiesIncorporationManagement of companyBoard MeetingsCommittees of the BoardAccountsDividendAudit & AuditorsShare Capital and DebenturesRelated Party TransactionLoans and InvestmentDepositsWay Forward
Timeline
Companies Bill 2011
Lok Sabha18th Dec ‘12
Rajya Sabha8th Aug ‘13
Companies Act 2013
29 Aug ‘13
98 Sections12th Sep ‘13
183 sections26th Mar ’14*
• Rules corresponding to the above sections notified• E-forms available for filing from 28th April, 2014
(Effective 1st Apr ‘14)
Outline of the ActCompanies Act 2013
Companies Act 1956 Companies Act 2013:
• Concise
• Forward looking
• Subordination to Rules
• Uniformity
• Easy navigation
• Less number of sections and more number of rules to enable adaptation of changing economic technological environments
• New types of companies defined
• E forms numbered with reference to chapter
• Meetings through video conferencing allowed
• Penalties for non compliance increased manifold
• Increased compliances for Private Limited Companies (Deposits, Loans, Meetings, etc.)
Key Highlights
Entity Structure in new ActEntity Structure in the new Act
Access to capital
Listed
Unlisted
Members
One Person
Company
Private Company
Public Company
Control
Holding company
Subsidiary company
Associate company
Liability
Limited
Shares
Guarantee
Unlimited
Size
Small Company
Activity
Dormant Company
Others
Foreign company
Nidhi
Producer company
Government company
Not for Profit – Sec 8
Major changes
• Private Company: Maximum no. of members = 200• Public Company: Subsidiary of public company deemed to be
public company• Associate Company: Company in which significant influence is
held (except subsidiary, includes joint venture)• Holding Subsidiary relationship: Control of > ½ of total share
capital• Subsidiary Company: Not permissible to have more than 2 layers
of investment subsidiaries. Following are the exceptions:– Acquisition of company incorporated outside India (having more than 2 layers)
– Investment made to meet requirements of any law in force
Types of companies
• Books of Account: Allows maintenance of books of account in electronic form
• Financial Statements: Defined as a compilation of following:
– Balance Sheet
– Profit and loss account
– Cash Flow statement
– Statement of changes in equity
– Explanatory statement
• Financial Year: 1st April to 31st March (Companies with holding / subsidiary company outside India can make an application for change) [Transitional Period: 2 years i.e. by 1st April 2016]
Accounts
• Promoter: – Shareholder / director having direct / indirect control
– Company is accustomed to act on instructions (except prof. advise)
– Person named as promoter in prospectus
– First subscribers to memorandum
• Related Party: Scope of definition expanded (discussed later)
• ESOP:– Option to purchase shares at future date at predetermined price.
– Can be given to directors / employees / officers of company / holding co. / subsidiary co.
Management
• Maintenance of books of account
• Maintenance of documents / registers
• Meeting of the Board through video-conferencing
• Mandatory digital signature for all directors
Recognition of electronic mode
New types of companies
One Person Company (OPC)• Only one member / shareholder
• Minimum of one director
• Only one person as member (except minors)
• Requires nominee (except minors)
• Only a natural person can form / nominate
• Can be incorporated only with 1 Director but can have upto 15 directors
• Member / nominee to be citizen & resident
• One Person can incorporate a single One Person Company and a Nominee can act as such only in 1 OPC
• Compulsory conversion to Pvt. / Public company on meeting certain criteria
• Cannot be formed / converted into Section 8 Company
• Cannot carry out NBFC activities
One Person Company (under Pvt. Co.)
• No requirement of holding AGM / EGM
• Ordinary / special resolution need only be communicated by member to company and entered in minutes book
• Where there is only one director, the resolution of Board means communication by the director to the company and such resolution shall be entered in the minutes book
• Need not annex cash flow statement to its financials
• Annual return can be signed by only one person i.e. Company secretary, and in absence of company secretary, by the director of the company
Benefits / Relaxations
• Only one director needs to sign the financial statements
• Board’s report will only include the statement of director(s) on every qualification, reservation, adverse remark or disclaimer by auditor(s)
• Financial statements to be filed with the Registrar within 180 days of closure of financial year
• Board meetings: Only one in each half year and gap between two meetings not to be less than 90 days. (Not applicable in case of one director)
Benefits / Relaxations (cont’d.)
Small Company• Private company
• Paid up share capital ≤ 50 lakhs, or
• Turnover ≤ 2 crores
• Meaning:
– Paid up share capital ≤ 50 lakhs or
– Turnover as per last P&L ≤ 2 crores
• Exclusions:
– Holding company / subsidiary company
– Section 8 company (not for profit)
– Company / corporate governed by special Acts
Small Company (only for private company)
• Need not annex cash flow statement to its financials
• Annual return can be signed by only one person i.e. Company secretary, and in absence of company secretary, by the director of the company
• Board meetings: Only one in each half year and gap between two meetings not less than 90 days
Benefits / Relaxations
Dormant Company• Companies meeting eligibility criteria can
make application for dormant status
• Inactive companies not filing financials and annual return for 2 years
• Eligibility:
– formed for a future project, or
– to hold an asset / intellectual property
– and has no significant accounting transaction
• Companies fulfilling the above criteria can make application for change in status from “active” to “dormant”
• Change of status by ROC: Where a company does not file annual return / financial statements for 2 consecutive financial years, ROC can enter its name in Dormant Companies Register
Dormant company
• Need not annex cash flow statement to its financials
• Board meetings: Only one in each half year and gap between two meetings not less than 90 days
• Annual return for dormant companies carry less disclosure requirements
• Provisions related to rotation of auditors shall not apply
Benefits / Relaxations
Incorporation
• Forms of memorandum and articles for all types of companies given as Schedules
• Objects: (i) Main objects (ii) objects necessary for furtherance of main objects
• Entrenchment: Articles may provide for additional restrictions to make changes in Articles than that given by the Act
Memorandum & Articles
• ROC will carry out the following verification:– Trademark database
– Existing similar name
– Proposed name includes prohibited name (except where CG approval is taken)
• If proposed name conforms with above disqualifications, name will be rejected
• No automatic approval
• Approval valid for only 60 days; no extension possible
• No resubmission possible
Application for name
• In case place of registered office is not yet decided, facility to provide for temporary address for communication (valid for 15 days from incorporation)
• Payment of amount subscribed to be made upon registration
• List of companies having same registered address to be provided to ROC
• Interest of directors in other entities to be filed with ROC
• Additional procedural compliances required such as filing of affidavit etc
Changes in Incorporation Process
• No company with share capital can commence business or borrow money unless:
– A declaration has been filed with the Registrar that the subscribers to memorandum have paid the necessary amount
– Registered office has been verified
• If no declaration is filed within 180 days of incorporation, Registrar will initiate process for removal of name
Commencement of business
Every company shall:
• Paint / affix its name and address of registered office at each office / branch / business location in local language
• Name / address of Reg. Office /CIN / tel. no. / fax / email / website on all business letters, billheads, letter papers, notices, official publication
• In case name has been changed, former name to appear in all the above documents
Display of name, co. documents, etc.
Management of company[Sec 149, Sec 152, Sec 196 to Sec 205]
Appointment of DirectorsGeneral Provisions
Condition OPC Private Public
Min. 1 2 3
Max 15 for all cos. Can be increased by Special Resolution
Key Points
• Appoint resident director if all directors are NR
• If directors travel frequently, assess residential status
• Appoint additional / woman / independent director, if applicable
• 1 resident director must for all cos.
• Appointment of woman director & independent director
• Absence of director > 3 months => Alternate director by Board
Transitional Period: 1 year i.e. 1st April, 2015
• Max. no. of directorships = 20 (not more than 10 public cos.)
• Register of directors to include details of KMP
• Every change in director / KMP to be notified to ROC in DIR-12
• Absence from meetings for 12 months with / without leave of absence will vacate office
• Resigning director to intimate ROC within 30 days of resignation along with reasons for resignation
Other provisions
Independent Director• Applicable to public companies
• Better governance
• Rotation after max. 2 terms of 5 years
• Cooling period of 3 years
Type of company Number of independent directors
Listed public company 1/3rd of total number of directorsPublic companies meeting any of the following criteria:– Paid up share capital ≥ 10 crores– Turnover ≥ 100 crores– Outstanding loans + deposits +
debentures ≥ 50 crores
2 (two)
Independent Director
Transitional Provision:Every company meeting the above criteria shall appoint such number of independent directorswithin one year of commencement. i.e. by 1st April 2015.
• Director other than MD / WTD / nominee director,– person of integrity and posseses relevant expertise and experience
– is / was not a promoter of the company / holding / subsidiary company
– not related to promoter / directors of company / holding / subsidiary company
– no pecuniary relationship with company / holding / subsidiary company, or promoters / directors of above during immediately preceding 2 financial years
– no relative has pecuniary relationship with abovementioned parties in excess of 2% of gross turnover or 50 lakhs rupees (lower of the two) during immediately preceding 2 financial years
Eligibility Criteria of Independent director
– who / whose relative, during immediately preceding 3 financial years:
• has not been KMP / employee of company / holding / subsidiary company for immediately preceding 3 financial years
• is not / has not been employee / proprietor / partner of
• firm of auditors / company secretary / cost auditor of company / holding / subsidiary company
• legal / consulting firm with which company / holding / subsidiary company has had transaction amounting to more than 10% of gross turnover of such firm
– Does not hold (together with relatives) ≥ 2% of voting power of the company
– is not CEO / director of non-profit company which receives ≥ 25% of its receipts from company / promoter / directors of company / holding / subsidiary company
Eligibility Criteria of Independent director
• Possessing skills / expertise / knowledge in any or more of the below mentioned fields:
– management, law, finance, sales, marketing, administration, research, corporate governance
– technical operations / other disciplines related to company’s business
Qualification requirement
• Clause 49 of Listing Agreement prescribes requirement of appointment of independent director(s)
• Different eligibility criteria in Listing Agreement and Act
• Till such time as SEBI / MCA comes out with clarification, companies will have to follow stricter eligibility criteria
• Companies will have to reconsider their appointments in light of new provisions of Companies Act 2013
Requirement of Listing Agreement
Woman Directors Mandatory appointment by companies meeting specified criteria
Following companies are required to have at least one woman director on its Board:
• Every listed company
• Every other public company having:
– Paid up share capital ≥ 100 crores
– Turnover ≥ 300 crores
Appointment of woman director
Transitional Provision:Existing companies meeting above criteria shall fulfil requirement within 1 year i.e. by 1st April 2015
Key Managerial Personnel• Holds specified designations
• Stricter liabilities & responsibilities prescribed
Key Managerial PersonnelMeaning / Inclusions
• Defined to include CEO, MD, manager, CS, WTD, CFO
• Designations of CEO and CFO given recognition
• KMP included in the definition of “officer”, “officer who is in default” and “related party”
Key Points
• Disclosure of interest by KMP in the same way as directors
• Cannot enter into forward contracts / carry on insider trading
• Liabilities of officer / officer in default to be applicable to KMP
• KMP not to hold office in more than one company. However, with Board’s permission, can hold position of director in another company.
• Applicability:
– Listed Company
– Public company: Paid up cap. > 10 crore
• Cos. fulfilling above criteria to have:
– MD / CEO / Manager / WTD
– CS
– CFO
• Appointment of MD / CEO / chairperson to be authorized by articles (except in case of multiple businesses where each business can have a CEO)
• Authorization by articles required (except in case of multiple businesses where each business can have a CEO)
• Only Board resolution required except in case of a related party being appointed as such.
Appointment of KMP
• Functions:
– Compliance with Act / Rules
– Reporting to Board
– Secretarial standard compliance
– Facilitate and attend BM / CM / GM & maintain minutes
– Obtain approval from Board / GM / Govt. to represent before regulators, discharge duties on behalf of company
– Assist board for conducting affairs, good corporate governance
Company Secretary
• Provisions for appointment of MD/WTD are applicable to Private Companies also.
• MD and manager cannot be appointment at a time
• One Term limited to 5 years, maximum such terms not specified
• Reappointment possible only one year prior to end of term
• Board resolution & Special Resolution for appointment (mentioning terms of appointment, remuneration, etc.)
• CG Approval where applicable
• Disqualifications: Min. & Max. Age: 21 and 70 years; Undischarged insolvent; Suspended payment to creditors / composition with them; Conviction of offence (sentence > 6m) at any time
Appointment of MD / WTD
Remuneration
Remuneration to Other Directors
Where there is no MD / WTD = 3% Where there is a MD / WTD = 1%
Remuneration to a MD / WTD
Where there is only one MD / WTD = 5% Where there are more than one MD / WTD = 10%
Remuneration Payable by Profit making public company
Total Remuneration = 11%
Inadequate profits: Profits which are not sufficient to pay the remuneration to the managerial persons as per the employment contract with the managerial personnel and based on estimated profits.
Applicable to Private Companies also!!!
Higher of the two (A) or (B): (Requires ordinary resolution)
In the case of a managerial person who was not a shareholder (holding nominal value of Rs. 500,000), employee or a Director or a relative of a director or promoter of the Company at any time during the 2 years prior to his appointment as a managerial person, — 2.5% of the current relevant profit.
Special resolution: Limits get doubled. For more than double, CG approval required
Remuneration in case of inadequate profits
Where the Effective Capital (EC) is Yearly remuneration (Rs.)
Negative or less than 5 Crores 30 Lakhs
5 Crores and above but less than 100 Crores 42 Lakhs
100 Crores ad above but less than 250 Crores 60 Lakhs
250 Crores and above 60 Lakhs plus 0.01% of the EC in excess of Rs. 250 Crore
A
B
• Conditions:
– Resolution in general meeting as required (notice to contain details as per Rules)
– Approval of Board / NRC
– No default in repayment of debts / deposits / debentures for continuous period of 30 days in previous FY
– Special resolution for a period not exceeding 3 years has been passed
Remuneration in case of inadequate profits
• Unlisted public cos. and private cos. (above conditions to be fulfilled)
• Remuneration paid by either foreign co. or Indian co. with shareholders approval
• Remuneration 2 times the amount stated:
– Newly incorporated co. (7 years) : remuneration 2 times the amount stated
– 5 years from sanction of scheme of revival (BIFR / NCLT)
• Limits sanctioned by BIFR / NCLT in excess of mentioned in table + co. is regular in payment to creditors / depositors + Certified by CS / Auditor / PCS as applicable
• In case of a company in a SEZ: An amount up to Rs. 2.40 Crores PA (should not have raised money from public, no default in repayment of debts for continuous period of 30 days in previous FY)
No CG Approval for
• Listed Companies:
– Board’s report: Ratio of remuneration of each director to median of employees remuneration, other details as per Rules
– Name of every employee• Employed throughout the whole FY
• Employed for a part of year but drawing remuneration > Rs. 5 Lacs p.m.
• Employed throughout or for a part of year but was drawing remuneration at a > MD / WTD / manager and holds > 2% shares (himself / spouse / dependent children)
– Employees deputed outside India (not directors / relatives) and drawing a remuneration of Rs. 60 Lacs p a or Rs. 5 Lacs p m: Circulated to members in the Board’s report and filed with the ROC along with the financials and Board’s Report
– All appointments of KMP to be intimated to ROC within 30 days
Disclosure for remuneration
Board Meetings[Sec. 110, Sec. 173 to Sec. 175 & Sec. 179 to Sec. 184]
• First Board Meeting within 30 days of incorporation
• Min. 4 BM in a year (gap < 120 days)
• Notice of 7 days. (Shorter notice requires presence of independent director at the meeting)
• Quorum: 1/3rd of total directors or 2, whichever is higher
• In case of circular resolution: Notice to be sent to all directors with draft resolution, approval of majority required
• Circular resolution to be noted in general meeting
Board Meetings
• Board meetings through video conferencing allowed
• Record & storage must, for recognition of participation
• Chairperson / CS to ensure proper security / availability of equipment for recording & identification
• Director willing to attend by video conferencing during the year to intimate Board in beginning of each calendar year
• No video conferencing for following:
– Approval of Financial Statement & Board’s Report
– Approval of prospectus
– Audit committee for consideration of accounts
– Approval for amalgamation / merger / demerger / acquisition / takeovers
Video conferencing
• Securities– Make calls on amount unpaid on shares, authorize buy-back, issue securities within / outside
India
• Funds:– Borrow money, grant loans / guarantee / security, invest funds, political contributions
– Buy / sell investments (other than trade investments) > 5% of paid up cap. & free reserves
– Invite / accept / renew public deposits, change of terms
• Re-organization: Diversify business, amalgamation, merger, reconstruction, takeover
• KMP & their team, Directors:– Appointment, note of changes in level below KMP,
– Note disclosure of directors interest / shareholding
• Appoint internal & secretarial auditors
• Approve quarterly, half yearly, annual financial statements / reports
Matters to be considered at BM
• Matters requiring special resolution in GM
– Sell / dispose off whole / substantially whole undertaking
– Invest compensation of amalgamation / merger (except trust securities)
– Borrow money, after which total borrowings will exceed paid up cap. & free reserves (excludes temporary loans)
– Remit / give time for repayment of loans due by director
• All matters applicable to private company also
Matters not to be considered at BM
• Matters to be considered only through postal ballot (only public companies)
– alteration of Object clause,
– alteration of AOA – specifically relating to registered office,
– change in registered office outside local limits,
– issue of shares with differential rights,
– change in objects for which company has raised money but it is still unutilized,
– variation in rights of class of shares or debentures,
– buy-back of shares,
– election of director u/s 151,
– sale of an undertaking,
– giving loans / guarantee / security in excess of limits specified u/s 186 or
– Where any businesses in respect of which Directors or Auditors have a right to be heard at the meeting.
Matters requiring Postal Ballot
Directors interest and register
• Contracts > Rs. 500,000 to be entered in Register
• Director / KMP to disclose interest in Form MBP-1 within 30 days of appointment / relinquishment
• Director to give notice of interest in his first BM as director and every first BM of financial year and notify change in BM after every change
Entity Type of interest to be disclosed by director / KMP (not to participate in Board Meeting)
Body Corporate Director either:
• holds > 2% shareholding (incl. in association with any person)
• Is a promoter
• Is manager / CEO
Other than body corporate Director is a partner / owner / member
Committees of Board[Sec. 177 and Sec. 178]
• Applicability:– Listed Company;
– Public Company: Paid up cap ≥ 10 crores, turnover ≥ 100 crores, o/s borrowings ≥ 50 crores
• Composition and Conduct:– At least 3 directors (majority independent directors)
– Almost all directors should be capable to understand financials
– Auditor to be present when financials are being considered
– Scope includes: review of auditor’s independence, performance, remuneration, matters concerning financials
– Deleted from CA 1956: Compulsory half yearly review of financials; Compulsory attendance of chairman to general meeting
• Transit period : 1 year
• Composition & Recommendations to be part of Boards report along with reasons
Audit Committee
• Applicability:– Listed Company;
– Public Company: Paid up cap ≥ 10 crores, turnover ≥ 100 crores, o/s borrowings ≥ 50 crores
• Composition & Conduct:– Min. 3 non-exec. Directors (majority independent directors)
– Chairperson of company can be member but not chairperson of committee
– Role: Policy for qualification & appointment of Board & independent directors, remuneration of directors/ KMP / employees
– Policy to be disclosed in Board’s report
Nomination & Remuneration Committee
• Applicability:
– All Companies having more than 1000 shareholders
• Composition & Conduct:
– Non-executive Chairperson
– Members to be decided by Board
– Role: Solve grievance of stakeholders / members
– Chairperson (or member authorized) to attend general meeting
Stakeholders Relationship Committee
Accounts[Sec. 123 to Sec. 148]
Maintenance of records Provisions• Books to be kept at registered office
including for branch office
• May keep books at other place after resolution in Board Meeting
• Accrual basis
• Electronic mode of book-keeping recognized
• Open for inspection
• Maintenance for 8 financial years (excluding current FY) including vouchers… unless investigation is ordered
Key Points
• Can maintain electronic records
• Retain books for 8 years
• Pass Board resolution if books are kept at a place other than Registered Office
Books of branch officeProvisions
• To be kept at registered office
• May be kept at other place if resolution passed at Board Meeting
• In case of branch outside India, periodic returns to be sent to India and kept at Registered office or other place as mentioned above
Key Points
• Instead of sending returns at every 3 months, periodic returns should be sent. (reasonable judgment to be applied)
• Open for inspection.
Financial StatementsProvisions• Comply with prescribed accounting
standards
• Shall be laid before AGM
• Consolidated financials must for every company (Subsidiary includes associate and joint venture)
• Salient features (notes) for each subsidiary also to be attached
• Deviation from accounting standards to be given in notes along with explanations
• To be signed by chairperson of the company or by 2 directors (MD and CEO, if director), CFO and CS
Key Points
• Increased costs and compliances
• Multiple compliances: consolidated financials, notes
• Conflicting definitions of associate, joint venture, etc. in Companies Act and Accounting standards to pose dual compliances until NFRA prescribes accounting standards / comes out with clarification.
• Signatures as per Act, annex auditors report to financial statements
• Additional responsibilities for directors
– In case of listed companies
• internal financial controls followed by the company are adequate and were operating efficiently
– Devising proper systems ensuring compliance with all applicable laws
• Systems shall be adequate and operating efficiently
Director’s Responsibility Statement
• Internal financial controls shall mean
– Policies and procedures adopted by company for ensuring
• the orderly and efficient conduct of business
• Adherence to company’s policies
• Safeguarding of its assets
• Prevention and detection of frauds and errors
• Accuracy and completeness of accounting records
• Timely preparation of reliable financial information
Director’s Responsibility Statement (Cont’d)
Additional disclosures in the Board’s report with respect to
• Financials
– Extract of Annual Return
– Financial highlights
– Adequacy of internal financial controls with respect to financials
– Particulars of loans and investments u/s 186, contracts with related parties u/s 188
– CSR policy and responsibilities taken
• Board
– Number of meetings of the Board
– Independent director’s declaration
Board’s Report
– Company’s policy on appointment and remuneration in case it has NRC
– Annual evaluation of the performance of the Board, its committees and individual directors
– Details of directors and KMPs appointed or resigned during the year
• Others– Explanation and comments on qualification, reservation of CS
– Risk management policy of the company
– Change in nature of business
– Companies ceased to be subsidiaries, associates or JVs with reasons thereof
– Deposits accepted, remained unpaid and the reason for default
– Orders if any passed by the regulators
Board’s Report (cont’d)
Re-opening & revision of accountsRe-opening & Recasting• Conditions:
– Fraudulent accounts
– Mismanaged affairs
• Application by:– Central Govt.
– Income Tax Authorities
– SEBI, etc
• Implication:– Tribunal may order re-opening of
accounts
Revision• Conditions: Financial statements or
Board’s report do not comply with provisions of governing sections
• Application by: Director(s)
• Period: Any of the three (3) preceding financial years (only once in financial year)
• Implication:
– Tribunal may order re-casting of accounts
– Detailed reasons for revisions to be given in Board’s report
• Applicability– Any Company with net worth of 500 Crores or more, T/O of 1000 Crores or more, or Net Profit
of 5 Crores or more.
• Composition and Conduct of committee– It shall consist of at least three or more directors of which at least one shall be an
independent director
– The Committee shall formulate and recommend to the Board, a Corporate Social Responsibility Policy containing the details of activities to be undertaken and should also recommend the amount of expenditure to be incurred.
– The company shall spend 2% of its avg. net profits of the immediate preceding 3 FYs on CSR activities during the year.
• Preference to be given to local area and areas around which it operates for spending towards CSR
• Company can also undertake such activities through a registered Trust or society or Sec 8 company etc.
• Reasons for not spending amount to be mentioned in Board’s Report
Corporate Social Responsibility
Violation of Responsibility Minimum fine Maximum FinePreparation of books orfinancial statements
Company and KMP charged with responsibility of this compliance
For both:Rs. 50,000
For company:Rs. 500,000For KMP:Rs. 500,000Imprisonment of 1 yearOr both
Approval of financial statement by Board and Board’s Report
Company and officer
For both:Rs. 50,000
For company:Rs. 25,00,000For officer:Rs. 500,000Imprisonment of 3 years or both
Annual filing Company andofficer
For Company:Rs. 1000 per dayFor officer:Rs.100,000
For company:Rs. 10,00,000For officer:Rs. 5,00,000 Imprisonment of 6 months or both
Penalties
Schedules relating to accounts
• Applicable from FY 2014-15
• Useful life and rates of depreciation prescribed for different assets
• Residual value not to be > 5%
• No different rates for shift working. 2 shift: add 50%, 3 shift: add 100% of depreciation
• Depreciation on intangibles to be governed by Accounting Standards
• If any part of asset significant to total cost has a different useful life, useful life of such part shall be determined separately
• Disclosure – depreciation methods used and useful lives considered if they are different from those specified
Depreciation
Transitional Provision:• Carrying amount to be depreciated as per Schedule II• If remaining useful life is NIL, carrying amount to be transferred to retained earnings
NATURE OF ASSETSSchedule XIV Schedule II
W.D.V(%)
S.L.M(%) Useful Life Useful Life
Buildings (other than factory buildings) 5.00 1.63 58 30/60
Factory Building 10.00 3.34 28 30
Motor-cars 25.89 9.5 10 6
Furniture & Fitting 18.10 6.33 15 10
Data Processing Machines including computers 40.00 16.21 6 3
Plant and Machinery; other than continuous processplant for which no special rate has been prescribed
13.91 4.75 20 15
Plant and Machinery; continuous process plant, otherthan those for which no special rate has beenprescribed
15.33 5.28 18 8
Depreciation – current rates
• Accounting Standards (AS) to be followed
• Disclosure requirements in Act in addition to AS
• Rounding off as follows:
• Format similar to Schedule VI of CA 1956 (revised)
• Additional information in case of consolidation prescribed
Instructions to prepare BS / PL
Turnover Rounding off
Less than 100 crores Nearest hundreds, thousands, lakhs or millions
100 crores or more Nearest lakhs, millions or crores
Dividends
• Sources of dividends:
– Profit for the year (after dep.)
– Undistributed profits (after dep.)
– Money granted by CG / SG for declaration of dividend
• Transfer to general reserve not mandatory as in CA 1956
• Declaration only out of free reserves
• Inadequacy of profits(out of accumulated reserves):– Rate of dividend not more than last 3 yrs avg. rate (no dividend in last 3 years, no limits
applicable)
– Total amount drawn from reserves not more than 1/10th of paid up cap & free reserves
– Amount drawn to be set off against losses in the current year before declaration
– Balance of reserves not to fall below 15% of paid up capital
Dividends
• Interim dividend:
– Out of surplus profits of current year
– In case of loss, the conditions of “inadequacy of profits” to apply
• Amount declared to be transferred to separate account within 5 days
• Payment in electronic mode recognised
• Companies with default in deposit acceptance / repayment cannot declare dividend
Dividends (cont’d.)
Audit & Auditors
• All listed cos. and public cos. with
– paid up capital Rs. 50 Crores or more,
– T/O Rs. 200 Crores or more,
– O/s loans and borrowings Rs. 100 Crores or more, or
– O/s deposits of Rs. 25 Crores or more
• Shall appoint an Internal Auditor
• Who can be a CA, CWA, or such professional decided by the Board who may or may not be an employee of the company
• Transit period for existing companies is 6 months from the commencement of Sec. 138 of the Act. i.e., by 30th September, 2014
Appointment of Auditors - Internal
• First appointment for 5 years at the first AGM
• Rotation Applicability (other than listed):
• Rotation period:
• No audit firm having a common partner to other audit firm shall be appointed as an auditor during the cooling period of the company
• Transit Period: 3 years
Appointment of Auditors - Statutory
Company Paid up capital Borrowings
Public 10 Crore 50 crore
Private 20 crore 50 crore
Auditor type No. of Years Cooling Period
Individual 1 term of 5 years 5 years
Firm 2 terms of 5 years (10 years) 5 years
• Applicable to all companies (including foreign companies)
– Engaged in strategic sector
– Industry regulated by a Sectoral regulator or ministry or department of CG
– Other specified companies (railways, base metals, minerals, fuels (organic / inorganic)
– Providers of health care and educational (including philantrophy) services
– Net worth > Rs. 5 Crores
– T/O > Rs. 20 Crores
• Cost Auditor (CWA) & statutory auditor cannot be same, all qualifications / disqualifications apply mutatis mutandis
• Cost Auditor to be appointed by Board and Report to be submitted to the Board only
• Copy of report to be furnished to CG within 30 days with explanation on every reservation / qualification
• Provisions of punishment for contravention apply to cost audit / auditor also
Cost Audit
• List of disqualifications now include criteria based on relatives also
• Following non-audit services attract disqualifications:– Accounting and book keeping services
– Internal audit
– Design and implementation of financial information system
– Actuarial services
– Investment advisory services
– Outsourced financial services
– Management services
Eligibility, qualifications, disqualifications
• Details of issues where company has failed to provide information and explanations
• Observation on financial transactions / matters having adverse effect on functioning of company
• Qualification, reservation or adverse remark relating to maintenance of accounts
• Comment on adequacy of internal financial controls and its effectiveness
• Impact of pending litigations on financial statements
• Provision on material foreseeable losses on long term contracts
• Fraud reporting to Central government
• Transfer to IEPF
Additional reporting responsibility
Violation of Responsibility Minimum fine Maximum Fine
Duties of auditors CA / CS / CWA, as applicable
Rs. 1 lakh Rs. 25 lakhs
Appointment,eligibility, remuneration, duties, etc. with respect to statutory auditors or cost auditors
Company, officer and auditor
For company:Rs. 25,000For officer:Rs. 10,000For auditor:Rs. 25,000
For company:Rs. 5 lakhFor officer:Rs. 1 lakh or 1 yr. imprisonment or bothFor auditor:Rs. 1 lakh
Penalties
• Applicability
– All listed cos. and public cos. with capital more than Rs. 50 Cr., T/O more than Rs. 250 Cr. shall have a secretarial audit conducted
• Compliance
– The audit shall be conducted by a PCS
– The report of the same shall be annexed to the Board’s Report
– The Board of Directors, in their Report, shall explain in full, any qualification or observation or other remarks made by the PCS in its Audit Report
Secretarial Audit
Share capital & Debentures[Sec. 42, Sec. 43, Sec. 47, Sec. 48 and Sec. 62]
Raising capital• New company cannot commence business until confirmation
has been given regarding receipt of subscription money
• Share certificates to be issued within 2 months of incorporation, within 1 month of transfer / transmission
• Certificate to be issued within 3 months of allotment of debentures
• Shares, other than sweat equity, cannot be issued at a discount.
• Shares with differential rights will not exceed 26% of the total Post issue Paid up capital of the company.
• All offer to subscribe / allotment of shares otherwise than by public offer means private placement
• Applicable to both private & public companies & for all securities• Offer to not more than 50 persons at one point in time 200
persons in one year (excl. ESOP / QII) • Should be within Rs. 20,000 per person (face value)• Approval by special resolution for making offer• Person to whom the offer is made shall make the payment (only
bank account of offeree) (No cash payment allowed)• No further offer of shares unless allotment for previous offers
have been completed• Allotment within 60 days of receipt of application money (details
to be filed with ROC)
Private Placement
• Includes equity shares, fully / partly convertible debentures, other convertible securities
• To be approved by Articles & Special Resolution
• Detailed notice of meeting giving particulars of persons to whom offered, pre & post issue holding of promoter group, value, etc.
• It may / may not include existing shareholders or employees
• Consideration in cash / other than cash (fully paid at allotment)
• Valuation to be done by registered valuer (except listed co.)
• Conditions of private placement to apply
• To be completed within 12 months of passing special resolution
Preferential Allotment
• Special Resolution for issue
• Further issue in case the company is not in a position to pay dividend / redeem earlier shares to be consented by 3/4th preference capital holders and Tribunal
• No subsisting default in dividend payment / redemption at the time of issue of further issue
• Redemption – to be done within 20 years
Preference shares
• Preference shareholders can vote on reduction / repayment of equity / pref. capital; matters affecting pref. capital
• In case of unpaid preference dividend for 2 years, holders can vote on all resolutions placed before the meeting
• Proportion of voting rights in ratio of paid up capital
Voting rights
• Only sweat equity shares can be issued at discount
• Sweat equity can be issued to employees of subsidiary / holding company
• Approval by special resolution in case of unlisted companies issuing shares to directors / employees for providing intellectual property / knowhow
• Sweat equity capital not to exceed 25% of paid up cap.
• Value at which shares shall be issued to be carried out by Registered Valuer
• Valuation of intellectual property / knowhow to be carried out by Registered Valuer
• Disclosure in board’s report in the year of issue of sweat equity shares
Sweat Equity Shares
• Bonus shares can be issued out of:
– Free reserves
– Securities premium account
– Capital redemption reserve
• Conditions:
– Authorised by articles & approval in general meeting
– No default in repayment of deposits / debt securities
– No default in payment of PF / gratuity / bonus for employees
– Outstanding partly paid up shares to be made fully paid up
– No bonus in lieu of dividend
Bonus Shares
ESOP (for unlisted & pvt. co.)Can be issued to
• Permanent employee in India / outside India
• Director (excl. Independent director)
• Employee / director of holding / subsidiary / associate (excl. independent director), does not include
– Promoter group
– Director (along with relatives) holding > 10% of existing equity capital
Conditions
• Approved by special resolution• Separate resolution in case of grant of
option to employee of holding / subsidiary / associate; or in case grant of option to identified employees > 1% of existing paid up cap
• Minimum 1 year between grant and vesting of option
• No voting / dividend rights until option exercised
• Non transferable (except legal heirs)
• Disclosure in Board’s Report
Related Party Transaction[Sec. 2(76) and Sec. 188]
Related PartyHolding
company
Director / KMP / relative
Co-subsidiaryCompany
SubsidiaryAssociate Director / Manager / relatives
Firm Pvt. Co. Public company
Person
Other KMP / relatives
Body Corporate
Accustomed to act
Director / manager /
relatives are partner(s)
Director / manager is director / member
Director / manager is director / 2% holder of eq. shares
• Sale / purchase / supply of goods/material
• selling / disposing / buying of property of any kind
• leasing of property
• availing / rendering of services
• appointment of any agent for purchase or sale of goods, material, services or property
• appointment to any office or place of profit in the company, subsidiary or associate
• underwriting the subscription of any securities or derivatives thereof
Related Party Transaction
• The transaction should be entered in normal course of business and at arms length
• In case of transactions not at arms length, Board’s approval will be required
• In following cases, special resolution in members meeting is required:
– Paid up cap. > 10 crores
– Sale / purchase (incl. through agents) > 25% of annual turnover
– Selling / disposing / buying property (incl. through agents) > 10% of net worth
– Leasing of property > 10% of net worth
– Availing / rendering services (incl. through agents) > 10% of net worth
– Appointment at place of profit in co. / subsidiary / associate > 2.5 lakhs remuneration
– Underwriting remuneration > 1% of net worth
• Interested member not to vote at such meeting
• For all the transactions, the approval of Audit Committee is a must
• All related party transaction to appear in Board’s meeting
Conditions
• Full disclosure along with justification to be given in Boards report
• Ratification by Board in case previous approval not taken (ratification by shareholders after 3 m)
• Heavy penalties including disqualification to be appointed elsewhere if convicted for offence for related party transaction
Compliances
• In case of violation of the provisions of this section:
• In case of a listed Company : punishable with imprisonment upto 1 year or with fine < Rs. 25,000/- > Rs. 5,00,000 or both.
• In case of any other Company : fine < 25,000/- > 5,00,000/-
Penalties
Loans & Investment[Sec. 185 & Sec. 186]
• No loan (including loan represented by book debt) / guarantee / security to directors (or person in whom director is interested) except:
– MD / WTD as a part of service condition
– Pursuant to scheme approved by members
– Cos. in business of granting loans (ROI ≥ RBI rate)
– Loan / guarantee / security to subsidiary against own loan / bank loan / FI loan (amounts to be utilized for principal business activity)
• Applicable to directors of private companies also
Loans to Directors
Person in whom director is interested
DirectorFellow Director(s)
Director of holding company (incl. Partner /
Relative)
Relative
Partner of firm
Firm in which partner
Pvt. Co. in which director / member
Body Corporate
BOD / MD / manager accustomed to Act on instruction of Board / Director
Individually / together, controls 25% voting
power
Back
• In case of violation of the provisions of this section:
• Company shall be punishable with a fine < Rs. 5,00,000/- > Rs. 25,00,000 .
• Director or other person to whom loan is advanced: Imprisonment which may extend to 6 months or with fine < 5,00,000/- > 25,00,000/- or with both.
Penalties
• Total Loans / guarantees / security and Investments should not be more than higher of:
– 60% of its paid up capital, free reserves and securities premium account or
– one hundred percent of its free reserves and securities premium account
• For loans / guarantee / security / investment more than above limits: (Except Holding to Wholly owned Subsidiary)
– Special Resolution mentioning total amount that can be granted (incl. current levels)
– Approval from PFI from whom loans are taken
• Restrictions on investments:
– Max. 2 layers of subsidiaries, except:
• Acquisition of a company outside India (which has more than 2 layers of investment subsidiaries), or
• required to keep an investment subsidiary by any other law
Other loans & investments
• Restrictions on loans / guarantees / security and investments:
– Companies registered under SEBI Act to adhere to limits of loans prescribed by SEBI
– Default in payment of interest / principal for deposits: Cannot give loans / guarantee / security / takeover until default is made good
• The provisions of this section are made applicable to a private company also.
• Other conditions:
– Rate of Interest not to be lower than govt. security close to loan tenor
– Disclosure of all loans & investments & their purpose in financial statements
– If securities are not in name of company, maintain a special register
Other loans and investments
• Provisions not applicable to:
– Allotment of shares in pursuance of further issue of capital
– Banking / Insurance / housing co. in business of loans / investments
– Cos. in business of financing / infrastructural facilities
– NBFC (for inv. / lending) or co. in business of acquisition of securities
Other loans and investments
• In case of contravention of these provisions:
• Company shall be punishable with a fine < Rs. 25,000/-> Rs. 5,00,000
• Officer in default : Imprisonment which may extend to 2 years or with fine < 25,000/- > 1,00,000/-
Penalties
Deposits[Sec. 73 to Sec. 76]
Meaning - Includes receipt of money by way of deposit / loan / any other form but excludes receipts from:
– Banks and govt. authorities
– Foreign parties (incl. banks and govt. authorities)
– Other companies
– For issue of securities
– Directors [Declaration to be obtained that deposits are not placed out of borrowings]
– Non-interest security deposit from employee
– Business purpose
Deposits
Sr. No Particulars Eligible Companies Other Companies
1 Coverage Public Co. with NW> 100 Crores or T/O > 500 Crores
Companies other than Eligible Companies
2 Can Accept deposits from Public and Members Members Only
3 Limits Applicable*
10% for Members, 25% for Public & 35% in special cases** 25%
4Repayment of existingdeposits
Not Necessary to repay subject to certain conditions
Compulsory repayment within one year from the commencement of this Act.
5Conditions for accepting deposits
Same for both the cases
Eligible Companies and Others
*Limits are applicable to the aggregate of paid up capital and free reserves of the company**35% is applicable in case the company is a government company, the other limits are applicable for all eligible companies other than government companies
Conditions for accepting deposits• Issue Circular to members / public and file such circular with ROC where circular:
– To disclose financial details, credit rating, details of depositors and existing due deposits of the company
– Can be circulated by way of advertisement in newspapers also
– A copy signed by majority of directors to be filed with the ROC 30 days before such advertisement
– To be valid only for 6 months from the close of FY or until the presentation of financials in the AGM
• Deposit Repayment Reserve:
– Minimum sum of 15% of amt. of deposits maturing during FY and next FY in a separate bank account
• Deposit Insurance:
– Cos. to acquire deposit insurance 30 days before issue of advt. / date of renewal (insurance on principal + interest)
• Charge on assets:
– In case of secured deposits, charge to be created on assets other than intangibles
– Security by way of insurance / charge / both ≥ deposit + interest
– Register of deposits to be maintain as per Rules
• Rate of interest / brokerage:
– Rate of interest / brokerage <= max. rate prescribed by RBI for acceptance of deposits by NBFC
– Currently, max. int. rate = 12.5%,
– max. brokerage rate = 0.5%
• Period of deposits repayable on demand:
– 6 m to 36 m (except if < 10% of paid up capital + free reserves), and repayable not before 3 m
Conditions for accepting deposits (cont’d.)
• Existing Deposits unpaid on or becoming due after the commencement of this Act– File their details with ROC within 3 months from the
commencement of the Act i.e., 30th June 2014 under Form DPT-4
– Return of Deposits under Form DPT-3 to be filed on 30th June of every year is different from this statement
– Repay within 1 year of commencement (01/04/2015) or due date, whichever is earlier
• For Eligible Companies – if the re-payments of deposits till date are made on time and terms and conditions are in line with CA 1956, no repayment under this Act is required
Deposits existing prior to this Act
Milin MehtaPartner
Office: +91 265 3086 401Mobile: +91 98240 00926Email: [email protected]
Darshana MankadPartner
Office: +91 265 3086 412Mobile: +91 98244 53635Email: [email protected]
Dayavanti RanaManager
Office: +91 265 3086 456Mobile: +91 94262 10614Email: [email protected]
Stuti TrivediAssistant Manager
Office: +91 79 4032 6400Mobile: +91 99982 40000Email: [email protected]
Vishal DoshiPartner
Office: +91 265 3086 407Mobile: +91 98240 59901Email: [email protected]
