New Companies ActNew Companies ActSalient Features of importance to the Industry and Opportunities / Critical Risks to the Chartered Accountants

1

Salient featuresSalient features

2

Salient Features…Salient Features…New ConceptsBusiness StructuresBoard and ManagementBusiness FriendlyAccounts Audit and AuditorsDispute ResolutionCSRCross Border MergersOthers

3

New ConceptsNew Concepts One person Company Concept of Small Company and Dormant Company “Provisions of entrenchment” in AOA National Financial Reporting Authority (NFRA) from NACAS

◦ More than advisory; Charged with monitoring and enforcement◦ Investigate into professional or other misconduct

CSR obligations on companies◦ Covered company to spend 2% of its average NP for 3 years

Provision for cross border mergers Registered Valuers CG empowered to prescribe restrictions on layers of

subsidiaries New Act is highly rule driven

4

Business structuresBusiness structures

5

Structuring AdvisoryStructuring AdvisoryNew formats of business

◦One Person Company (OPC)◦Dormant Companies◦Small Company

Option to use these formats for business Especially, potential to convert proprietorship into

OPCNumber of members enhanced from 50

to 200 for private limited companies Effect on control and management Potential to advice on structuring revolving

around terms an conditions to be placed on members

6

Chapter ISec. 2 (62), 2 (85), 455

New StructuresNew StructuresICAI could take up measures to develop

◦Simplified format for financials◦Accounting Standards for small companies◦Simplified format of Audit report including

CARO requirementsICAI could also help provide support in

terms of prescribing process for registration, monitoring etc., of these type of companies◦Especially, considering the experience India

has had with a huge lot of vanishing companies!

7

Chapter ISec. 2 (62), 2 (85), 455

Restriction on layer of Restriction on layer of subsidiariessubsidiariesStep down subsidiaries restricted

to two layers going forwardScope for advisory to groups

which have significant number of subsidiaries across multiple layers

8

Chapter XIISec. 186 (1)

Directors and ManagementDirectors and Management A person can be a director in 20 companies (incl. 10 public

companies) Duties and liabilities of directors has been prescribed Max. Directors – 15 (more through special resolution) At least one woman director mandatory for certain class of

companies Every company to have at least one director who has stayed

in India for over 182 days in the PY Independent Directors prescribed for class of companies

◦ Also tenure (10 years) and liability codified◦ Nominee director cannot be an independent director◦ Stringent requirements for independence

Statutory recognition to audit committee, remuneration committee and stakeholders relationship committee as well as CEO, CFO and CS as KMP

9

Directors and ManagementDirectors and ManagementShares cannot be issued at a discountUse of securities premium

Inter corporate loans will include loans to and investment into “any person”◦Minimum interest on ICD to be G Sec

ratesMore disclosures on related party

transactions

10

Business Friendly - ProcessBusiness Friendly - ProcessSpeedy incorporation processPrivate limited members limit enhanced to

200Simpler and single forum approval for M&A

◦ Simple and short process for holding and WOS or small companies

◦ Concept of deemed approval in some casesSqueeze out provisions – purchase of

minority shareholding when 90% holding reached

Simplified process for voluntary removal of name from register

11

Business Friendly - E-enableBusiness Friendly - E-enableVoting through electronic means by

members at meetingBoard meetings can be held by video

conferencing / electronic means◦Such participation will count for quorum

tooMaintenance and allowing inspection

of documents by companies in electronics form

12

Business Friendly – DeletedBusiness Friendly – Deleted Certificate of Incorporation is the conclusive evidence Provisions relating to certificate of commencement of

business Statement in lieu of prospectus Statutory meeting and statutory report Share warrants Public trustee Payment of interest out of capital Transfer to general reserve for declaration of dividend Special audit Share qualification Restrictions on appointment and remuneration of sole

selling / sole-purchasing agents Employee’s Security and PF amounts Receivers and Managers

13

AccountsAccountsConsolidated Financials made mandatoryCompany’s financial year made standard – 1st

April to 31st March (except for exceptional cases)No need to attach full annual reports of

subsidiariesProvision for revision of accounts

◦ On being ordered by the authority◦ Voluntary revision

Internal audit by members of professional body being made mandatory

Mandatory secretarial audit for bigger companies including listed companies

14

Audit and auditorsAudit and auditors

15

NFRANFRANew oversight body for the

accounting and auditing professionFunctions hitherto with NACAS will

also move over to NFRANFRA will deal with

◦Prescribing Standards based on ICAI’s standard setting – Accounting as well as Auditing

◦Monitor compliance with the accounting and auditing standards

◦For prescribed class of companies / auditors deal with disciplinary mechanism

16

Chapter IXSec. 132

Audit RotationAudit RotationRotation of auditors after 5 / 10 years for CA /

firm◦ Rotation of team and partner if the members so

resolve5 year tenure for auditors appointed in AGM

◦ Automatic reappointment in AGM where no auditor is appointed / reappointed

Scope to move into Statutory Audits for more firms

Opportunity to specialise in specific industries by firms to become the automatic choice for such rotation

17

Chapter XSec. 139 (2)

Onerous Responsibility…Onerous Responsibility… 245 (1) (g) (ii) and 245 (2) – Class Action

suits a major area of concern for CA professionals

143 (3) (i) – to be limited to internal financial controls that would materially impact the financial statements (like ICOFAR under SoX)

18

Chapter X and XVISec. 245, 143

Audit Execution and Audit Execution and ReportingReporting143 (3) (a) – Details of

◦How audit to be performed to be left to Auditing Standards

◦Discretion on reporting issues to Auditor’s judgement

19

Chapter XSec. 143

Fraud and Auditor’s Fraud and Auditor’s ResponsibilityResponsibility143 (12) and 143 (15) – To be limited to

fraud, if identified in the course of the audit◦Audit is only seeking reasonable

assurance◦Primary responsibility to protect from

fraud and error lies with Management and TCWG

◦Audit procedures May be effective to identify material errors But not to identify all frauds

20

Chapter XSec. 143

Auditor’s Eligibility and Auditor’s Eligibility and DisqualificationsDisqualifications 141 (1) - Firms / LLP with majority partners

being Chartered Accountants can be auditors◦Could lead to non professionals and foreign

entities taking advantage◦Only multi disciplinary firms under CA Act

to be permitted 141 (3) (d) – Relatives to be redefined as

“financially dependent relatives” 141 (3) (e) – Arms length transactions in

the ordinary course of business to be permitted

141 (3) (e) - “Business relationship” should exclude permitted professional services

21

Chapter XSec. 141

Audit and AuditorAudit and AuditorTribunal can direct change of auditors

if it is satisfied that the auditors have colluded in a fraud…

LLPs may be appointed as auditorsAuditing Standards to be made

mandatory

22

Prohibited ServicesProhibited Services

Differentiate “public interest entities” and others

Can provide for safeguards where applicable (like ICAI code of conduct)

Clarity needed on its application on services rendered outside India

Services prohibited to be specifically defined for their meaning

Over stringent norms could lead to services slipping away from CA professionals to other professionals

23

Chapter XSec. 144

Dispute ResolutionDispute ResolutionClass Action SuitsDisgorgement provisions in such casesResigning directors to also notify ROC with

detailed reasons Investigation into the affairs by SFIOVigil mechanism (whistle blowing…)Mediation and Conciliation PanelProhibition of insider tradingPersonal and unlimited liability on directors,

promoters, experts etc., in case of fraudulent purpose

Special court to deal with offences under the Act

24

CSRCSR Companies requiring to constitute a CSR committee

◦ Networth of Rs.500 crore or more◦ Turnover of Rs.1,000 crore or more◦ Net profit of Rs.5 crore or more in any financial year

CSR committee to have◦ Three or more directors◦ At least one is to be an independent director

CSR committee will◦ Formulate CSR policy and recommend to board◦ Recommend the amount of expenditure to be incurred◦ Monitor CSR policy from time to time

Schedule VII lists out the activities which can be considered

Company to give preference to local areas / areas around which it operates

25

Cross Border MergersCross Border MergersCritical look required into the

following aspects:◦India shareholder’s interest◦Implications of FEMA and other such

regulations◦Indian worker interest◦Dual listing◦Implication to Indian tax revenue

scenario

26

Chapter XVSec. 234

OthersOthersRevival and Rehabilitation Provisions for

Sick CompaniesSickness to be determined not based on

negative networth but based on ability to repay debts

Stringent control over Not for profit companies

Companies which can raise public deposits restricted

Dividend claim not extinguished after 7 years

27

OthersOthersRelaxation that association /

partnerships could have up to 100 persons◦No ceiling on partners / members in case

of associations of persons / partnerships for professionals regulated by special acts

28

AS vs. Companies ActAS vs. Companies ActThe definitions in Bill different from

Accounting Standard◦ Control◦ Associate◦ Subsidiary◦ Related Party

Recommend ◦ For preparation of CFS, definition as per AS

will prevail and ◦ For regulatory purposes definition as per

Act will apply

29

Chapter ISec. 2 (6), 2 (27), 2 (76), 2 (87)

New opportunitiesNew opportunities

30

Valuation – Registered Valuation – Registered ValuersValuersIntroduction of registered valuerCA in practice could take benefit

of this requirementAlso, to look into more areas

where such registered valuer services could be made mandatory

31

Chapter XVIISec. 247

Serious Fraud Investigation Serious Fraud Investigation OfficeOfficeICAI could work with SFIO

◦Opportunities to work on forensic investigations

◦Development of early warning systems for being implemented for online monitoring and tracking

◦SFIO being viewed as a large employment provider for CA professionals

32

Chapter XIVSec. 211

Uniform Financial YearUniform Financial YearHelp companies with the

transitionIdentify feasibility of a different

financial year where scope exists and the company would find it beneficial

33

Chapter ISec. 2 (41)

Consolidated Financial Consolidated Financial StatementStatementRequirement to file consolidated

financial statements extended to more companies◦Opportunity to advice groups into a

relook at their structures and implications

◦Automatic requirement for more professional services in view of this

34

Chapter IXSec. 129 (3)

Independent DirectorsIndependent DirectorsMore opportunities for

independent directorsNeed to create a database and

panel as a professional development initiative

Focused training sessions to make CA’s as the choice for independent directors

35

Chapter XISec. 149 (4)