Companies Act, 2013Draft Rules

The first set of draft rules that accompany the new Companies Act 2013 (the ‘2013 Act’) were released on 7 September 2013, all of which are currently live for public comment on the Ministry of Corporate Affairs (‘MCA’) website. MCA expects to release further draft rules over the course of this month. To recap, the 2013 Act replaces the Companies Act, 1956, a much-awaited change that has been brewing for at least a decade. In over 185 sections, the 2013 Act prescribes rules to be released from time to time, and these draft rules fulfill this aim.

The currently released rules cover 16 of the 29 chapters of the 2013 Act, and the main areas where one can now better understand the full impact of the 2013 Act plus the rules are - appointment of auditors, fraud reporting by auditors, composition of the board, Corporate Social Responsibility and some minor additions / modifications to concepts like One Person Company, related party definition and preparation of consolidated financial statements. In this bulletin we list down some of the draft rules released for public comments.

Companies Act, 2013: Draft Rules

Draft rules that accompany the remaining 13 Chapters of the 2013 Act are expected to be released for public comment over this month. This is a great opportunity for us to be a part of defining what rules are applicable to corporate India, and I hope we all take the opportunity to comment on these rules and contribute our part to the shaping of corporate governance in India.

– Vishesh C Chandiok National Managing Partner Grant Thornton India LLP

Governance• Threshold for having one woman director on the board defined -

listed companies within one year and other public company with share capital of Rs 100 crore or more; or turnover of Rs 300 crore or more within 3 years from the commencement of its charging section

• Threshold for having independent directors on the board defined for other public companies with share capital of Rs 100 crore or more, turnover of Rs 300 crore or more or public companies with loans/ deposits exceeding Rs 200 crore

• Requirements and procedures for conducting a Board meeting through video conferencing and other visual means prescribed, including mandating every director to attend at least one Board meeting in a financial year in person

Databank for Independent

directors posted on the MCA

website shall be publicly accessible

at the specified website

Accounts, Audit and Auditors • Listed companies and public companies, having net worth more than

Rs 10 crore, given a choice of sending financial statements to members by electronic mode

• In case of revision of financial statements and where there has been a change in auditor, consent will be required from previous auditor for the said revision

• Rotation requirements apply retrospectively i.e. period prior to the commencement of the 2013 Act, included in computing 5/10 consecutive years

• For auditor’s disqualification with respect to business relationships, the term ‘business relationships’ defined to construe any transaction entered into for a commercial purpose

Auditor rotation mandatory for all

companies, except for One

Person Company and

small companies

• Matters compulsorily to be dealt with in a physically convened meeting prescribed- approval of the annual financial statements and the Board’s report

• Revised requirement to constitute an Audit Committee and requirement to constitute Nomination and Remuneration Committee applicable for listed companies and other public companies with share capital of Rs 100 crore or more or public companies with loan/borrowings/debentures/deposits exceeding Rs 200 crore

• Establishment of vigil mechanism mandated for listed companies, deposit accepting Companies and Companies with borrowing from banks and public financial institutions exceeding Rs 50 crore

• Incoming auditor/audit firm disqualified for appointment, if associated with the outgoing auditor/audit firm under the same network of audit firms or operating under the same trade mark or brand

• Additional comment in auditor’s report - disclosure of the effect of pending litigations, provision for foreseeable losses on long-term contracts and delay in depositing money into the Investor Education and Protection Fund

• For fraud reporting by auditors, the materiality threshold defined- report to Central Government if fraud is happening frequently or amount involved is not less than 5% of net profits or 2% of the turnover

• Internal audit made mandatory for listed companies, public companies with paid up share capital of Rs 10 crore or more or outstanding loans or borrowings exceeding Rs 25 crore or with acceptance of deposits of Rs 25 crore or more at any point of time during the last financial year

• Corporate Social Responsibility (CSR):- Tax treatment to be in accordance with the Income Tax Act,

1961 as may be notified by the Central Board of Direct Taxes- CSR activities to be undertaken within India- Should not be exclusively for the benefit of employees of the

company or their family members- Net profit shall not include profits from overseas branches

• Related parties to include personnel who are members of core management team excluding Board of directors comprising all members of management one level below the executive directors, including the functional heads

The Ministry of Corporate

Affairs' online portal open for

public comments till October 8,

2013

Important information• The 2013 Act is a great opportunity for India to make its corporate law

contemporary and a model to emulate for other economies with similar characteristics

• Having rules outside the 2013 Act provides a great opportunity for the Act to focus on principles, and the rules to stay relevant and be capable of revision without the need to go back to parliament. It is praiseworthy that the first set of draft rules have been released within one month of the 2013 Act receiving Rajya Sabha approval (8 August) and within ten days of Presidential assent (29 August).

• The Ministry of Corporate Affairs has currently made available16 Chapters out of the 29 Chapters for public comments. Ffollowing is the link to access the Online suggestion portal -http://14.140.191.91/ui/Suggestions.aspx

Proposed Draft of CSR Rulesunder Section

135 of the Companies Act, 2013 available

• Where the paid up share capital of a One Person Company exceeds Rs 50 lakh or its average annual turnover during the relevant period exceeds Rs 2 crore, it shall cease to be entitled to continue as a One Person Company and convert itself into a private or a public company

• Limit on association or partnership defined to be 50 persons for the purpose of carrying on any business unless it is registered as a company under the 2013 Act or is formed under any other law for the time being in force

• Class action suits by members- not less than one hundred members of the company or not less than ten percent of the total number of

its members, whichever is less, or - any member or members singly or jointly holding not less than ten percent of the issued share capital

of the company

• Class action suits by depositors - the number of depositors shall be not less than one hundred depositors or not less than ten percent of

the total number of depositors, whichever is less; or - any depositor or depositors singly or jointly holding not less than ten percent of the total value of

outstanding deposits of the company

• We would be sending a consolidated list of suggestions to the Ministry of Corporate Affairs on the draft rules and would like to seek your contribution. Accordingly those who wish to send us their suggestions can write to us at CompaniesAct@in.gt.com.

Other provisions

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For more information on the Companies Act 2013, visit http://www.grantthornton.in/companiesact2013 or write to us at CompaniesAct@in.gt.com

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