Introduction
The Companies Act, 2013 has replaced the 56 year old company
law, i.e. Companies Act, 1956. The Act has become fully operational
since 1 April, 2014. It moves from the regime of control to that of
liberalization or self-regulation. The Act, 2013 provides for
business friendly corporate regulation, e-governance initiatives,
good corporate governance, Corporate Social Responsibility,
enhanced disclosure norms, enhanced accountability of management,
audit accountability, protection for minority shareholders,
investor protection and activism and better framework for
insolvency regulation and institutional structure. Transparency
with self -reporting and disclosure is the foundation of new
Companies Act, 2013.
Enhanced Disclosure Norms
Annual Return
Every company shall prepare the annual return in the prescribed
form containing the particulars as they stood on the close of the
financial year. The information that needs to be included in the
annual return has been increased.The additional information
required includes the following. Particulars of holding Subsidiary
and associate companies Remuneration of directors and key
managerial personnel Penalty or punishment imposed on the company,
its directors or officers A statement containing information such
as share in profit/loss and net assets of each subsidiary,
associate and joint ventures will be presented as additional
information The list of subsidiaries or associates or joint
ventures, which have not been consolidated along with the reasons
for non-consolidation.
In terms of Section 92(2), the annual return filed shall be
certified by a company secretary in practice in the prescribed
form, stating that the annual return discloses the facts correctly
and adequately and that the company has complied with all
provisions of this Act. An extract of the annual return in such
form as may be prescribed shall form part of the Boards Report.
Board's Report
Section 134 of the Act seeks to make the board's report more
comprehensive by inserting disclosures to bring transparency in the
functioning of the Board.Important disclosures include: extract of
annual return in the prescribed form; company's policy on
director's appointment and remuneration including the criteria for
determining qualifications, positive attributes, independence of a
director etc. ; a statement of declaration by independent
directors; explanations or comments by the Board on every
qualification, reservation or adverse remark or disclaimer made by
the auditor in his report and by the company secretary in practice
in his secretarial audit report; particulars of loans, guarantees,
or investments made; particulars of contracts or arrangements
entered into; conservation of energy, technology absorption,
foreign exchange earnings and outgo in the prescribed manner;
Statement indicating development and implementation of a risk
management policy for the company; and Corporate social
responsibility initiatives taken during the year in case of listed
companies and other prescribed class of companies.
Section 197 of the Companies Act, 2013 requires every listed
company to disclose in the boards report, the ratio of the
remuneration of each director to the median employees remuneration
and such other details as may be prescribed with a view to bring
differences between director remuneration and average employee
remuneration to the public domain.The NRC will formulate criteria
for determining qualifications, positive attributes and
independence of a director and recommend to the board a policy,
relating to the remuneration for the directors, KMP and other
employees. Such policy will be disclosed in the boards report.
Disclosure on Directors Interest
The Companies Act, 2013 requires interested director to disclose
his interest in a contract/arrangement at the board meeting at
which such contract/arrangement is being discussed. It also
prohibits interested director from participating in such meetings.
In addition, the Companies Act, 2013 requires a director to
disclose his interest in a contract/arrangement entered/proposed to
be entered into with any other entity in which he has an
interest.Companies Act, 2013 requires that every director, at the
first meeting of the board in which he participates as a director
and thereafter at the first meeting of the board in each financial
year or whenever there is a change in the earlier disclosure, will
disclose his interest in companies, bodies corporate, firms or
other association of individuals.The Companies Act, 2013 requires
that every independent director, at the first meeting of the board
in which he participates as a director and thereafter at the first
meeting of the board in every financial year or whenever there is
any change in the circumstances, which may affect his status as an
independent director, will have to give a declaration that he meets
the criteria of independence. The listing agreement requires that
an independent director, prior to the appointment, disclose their
shareholding (both own or held by/for other persons on a beneficial
basis) in the listed company in which they are proposed to be
appointed.
Related Party Transactions
Changes to the related party transactions clause has shown a
shift from a control-based regime to a disclosure-based regime.The
proposed measures include the following: No company shall enter
into any contract or arrangement with a related party without the
consent of the board of directors. Transaction exceeding a certain
prescribed threshold limit shall be entered into only after prior
approval of the company in a general meeting by a special
resolution. No interested member shall vote on such special
resolutions. The ambit of related party transactions has been
widened to include leasing of property of any kind, appointment of
any agent for the purchase and sale of goods, material, services or
property, related partys appointment in the company, its subsidiary
and associate companies. Additionally, cash at prevailing market
price has now been substituted with arms length transaction. Every
related party transaction shall be reported in the boards report to
shareholders.The above measures will place increased responsibility
on the board of directors to ensure that the related party
transactions are at arms length. In addition, transactions with
related parties in the ordinary course of business that are not at
arms length will require shareholder approval at the general
meeting. These measures will give shareholders and investors a
better idea of the companys related-party transactions, its
monitoring and governance.
Issue of Prospectus
The 2013 Act introduces certain changes with respect to
prospectus and public offers aimed at enhancing disclosure
requirements as well as streamlining the process of issuance of
securities. Currently, the matters and reports to be included in
the prospectus are specified in parts I and II of Schedule II of
the 1956 Act. In the 2013 Act, the information to be included in
the prospectus is specified in Section 26 of 2013 Act. The 2013 Act
mandates certain additional disclosures: Any litigation or legal
action pending or taken by a government department or a statutory
body during the last five years immediately preceding the year of
the issue of prospectus against the promoter of the company.
Accounts
The 2013 Act has introduced certain significant amendments with
respect to accounts. It has also introduced several additional
requirements such as preparation of consolidated financial
statements, additional reporting requirements for the directors in
their report such as the development and implementation of the risk
management policy, disclosures in respect of voting rights not
exercised directly by the employees in respect of shares to which
the scheme relates, etc.To prevent misuse of specific provisions,
the section contains a proviso which states that such a revised
financial statement or report shall not be prepared or filed more
than once within a financial year and the detailed reasons for
revision of such financial statement or report shall also be
disclosed in the boards report in the relevant financial year in
which such a revision is being made (Section 131).
Specific Disclosures
Specific disclosure under the scheme of mergers or amalgamation
regarding the effect of merger on minority shareholders is to be
provided.The useful life or residual value of an asset have been
specified in Part C of the Schedule. Companies will be required to
give disclosure for cases where the useful life or residual value
is different from the useful life or residual value as specified in
Part C of the Schedule.
Conclusion
The new Indian Companies Act, 2013 is a positive and welcoming
step towards modernizing Indias company law and places India on par
with corporate legislation elsewhere in the globe. The Act is a
progressive and forward looking which promises improved corporate
governance norms, enhanced disclosures and transparency,
facilitation of responsible entrepreneurship, increased
accountability of company managements and auditors and stricter
enforcement processes. It goes a long way in protecting the
interests of shareholders and removes administrative burden in
several areas. Overall, the Act promises to significantly raise the
bar on Corporate Governance and will radically alter the framework
in a positive sense.
