Very Short Notes of Company Act 2013

HIGLIGHTS OF COMPANIES ACT, 2013 INTRODUCTION Background Companies Bill, 2012 was passed by the Lok Sabha on 18th December, 2012 and by the Rajya Sabha on 8th August, 2013. On receiving the assent of the Hon’ble President of India on August 29, 2013, it was notified on August 30, 2013 as the Companies Act, 2013. It may be noted that only Section 1 of the Companies Act, 2013 has come into force with effect from 30th August, 2013. As far as the remaining provisions of this Act is concerned, they shall come into force on such date as the Central Government (Ministry of Corporate Affairs) may, by notification in the Official Gazette, appoint and different dates may be appointed for bringing into force different provisions of the Companies Act, 2013. For instance, Central Government has made, 98 Sections and part thereof of the Companies Act, 2013, effective from 12th September, 2013. Thus, Companies Act, 2013 is all set to replace the existing 56 year old company law, i.e., Companies Act, 1956, very soon. It moves from the regime of control to that of liberalisation or self-regulation.

Purpose/Objective of the Act The Act broadly seeks to achieve the following objectives: a.

b. c. Arun :)

d. e. f.

To promote the development of the economy by encouraging entrepreneurship and enterprise efficiency and creating flexibility and simplicity in the formation and maintenance of companies; To encourage transparency, accountability and high standards of corporate governance; To recognize various new concepts and procedures facilitating ease of doing business while protecting interests of all the stakeholders; To enforce stricter action against fraud and gross non-compliance with company law provisions; To set up institutional structure in the form of various authorities, bodies and panels as well as by including recognition of various roles for professionals and other experts; and To cater to the need for more effective and time bound approvals and compliance requirements relevant in the present context.

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SANGEET KEDIA [F.C.S., LL.B.]

Structure of the Act The Companies Act, 2013 has 470 Sections (covered in 29 Chapters) and 7 Schedules as against 658 Sections (covered in 13 Parts) and 15 Schedules of the Companies Act, 1956. It may be noted that the number of Sections has been drastically reduced, but at the same time the Central Government has been empowered, in number of Sections, to prescribe various aspects in the form of Rules, thereby recognizing the more importance of delegated legislation. It can be said Companies Act, 2013 has been structured on skeleton approach. This has been done for ensuring that the law remains relevant at all times in the changing economic environment. Applicability of the Act Section 1 provides that the Companies Act, 2013 applies on whole of India. Companies Act, 1956 also applies on whole of India. However, proviso to Section 1(3) of the Companies Act, 1956 empowers the Central Government to modify the provisions of the Act, while applying this Act on the State of Nagaland. Similarly, Sections 620B and 620C of the Companies Act, 1956 empowers the Central Government to, modify, or exempt from, the provisions of the Act, while applying this Act on the States of Goa, Daman, Diu and Jammu & Kashmir respectively. These kind of powers of the Central Government has been taken away by the Companies Act, 2013. Thus, the 2013 Act puts an end to the power of the Central Government under the 1956 Act to exempt companies from provisions of Companies Act based on regional considerations.

IMPORTANT HIGHLIGHTS Following are the important highlights of Companies Act, 2013 : Preliminary  New definitions have been introduced, some of which are auditing standards, associate company, CEO, CFO, control, employee stock option, financial statement, global depository receipt, Indian depository receipt, independent director, interested director, key managerial personnel, promoter, one person company, small company, turnover, voting right, etc.  Number of existing definitions have been modified, for example, definitions of abridged prospectus, body corporate, director, expert, managing director, officer in default, etc.  Definition of private company changed - the limit on maximum number of members increased from 50 to 200.  The concept of One Person Company introduced. It will be a private limited company.  The concept of Small Company introduced. It will be subject to lesser stringent regulatory framework. 2 HIGHLIGHTS OF COMPANIES ACT, 2013

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Capital Raising  Money raised through a prospectus cannot be used for dealing in equity shares of another company. If a company changes terms of the prospectus or objects for which money is raised, it shall provide dissenting shareholders an exit opportunity.  Shares, other than Sweat Equity Shares, cannot be issued at a discount. It means the practice of issuing shares at a discount with the approval of CLB, as provided in Section 79 of Companies Act, 1956, has been discontinued.  Public companies can accept deposit from public on complying with certain conditions like credit rating. Management & Administration  All companies to follow uniform financial year, running from April to March. Exceptions to be made only for certain companies with the approval of NCLT.  First Annual General Meeting of the Company shall be held within 9 months from the closure of its first financial year instead of 18 months from the date of incorporation, as provided in the Companies Act, 1956.  Quorum of general meeting for a public company will now depend upon the numbers of the company. For companies with up to 1000 members, 5 members personally present; for companies with members more than 1000 but up to 5000, 15 members personally present; and for companies with more than 5000 members, 30 members personally present, shall be the quorum. The Companies Act, 1956 prescribes a fixed quorum of 5 members personally present.  Postal Ballot to be applicable to all the companies, whether listed or unlisted.  The National Advisory Committee on Accounting Standards renamed as The National Financial Reporting Authority (NFRA). Auditors & Financial Statements  Every company is required at its first annual general meeting (AGM) to appoint an individual or a firm as an auditor. The auditor shall hold office from the conclusion of that meeting till the conclusion of its 6th AGM and thereafter till the conclusion of every 6th meeting. The appointment of the auditor is to be ratified at every AGM.  Individual auditors are to be compulsorily rotated every 5 years and audit firm every 10 years in listed companies & certain other classes of companies, as may be prescribed.  A company’s auditor shall not provide, directly or indirectly, the specified services to the company, its holding and subsidiary company.

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SANGEET KEDIA [F.C.S., LL.B.]

Arun :) Directors  Prescribed class or classes of companies are required to appoint at least one woman director (Woman Director).  At least one director should be a person who has stayed in India for a total period of not less than 182 days in the previous calendar year (Resident Director).  At least one-third of the total number of director of a listed public company should be independent directors. Government may prescribe requirement of Independent Directors for certain unlisted public companies also.  Liability of independent directors and non-executive directors not being promoter or key managerial personnel to be limited.  A person can hold directorship of up to 20 companies, of which not more than 10 can be public companies.  Companies can have maximum of 15 directors. More can be appointed after passing a special resolution. Governance  Companies with more than 1,000 shareholders, debenture-holders, and any other security holders at any time during a financial year to constitute a Stakeholders Relationship Committee, with a non-executive director as a chairperson.  The provisions on inter-corporate loans and investment (372A of Companies Act, 1956) extended to include loan and investment to any person.  A company cannot, unless otherwise prescribed, make investment through more than 2 layers of investment companies.  No central government approval required for entering into any related party transactions.  No central government approval required for appointment of any director or any other person to any office or place of profit in the company or its subsidiary.  The Act makes provision for cross border amalgamation between Indian Companies and companies incorporated in the jurisdictions of such countries as may be notified from time to time by the central government.  The authority CLB is being replaced by National Company Law Tribunal (NCLT). Miscellaneous  The Act provides provisions related to Corporate Social Responsibility (CSR).  The Act provides for class action suit by specified number of members or depositors against the company except the banking company, which is prevalent in developed countries.  Where any valuation is required to made of any property, stocks, shares, debentures, securities or goodwill or any other assets or net worth of a company or its liabilities under the Act, it shall be valued by a registered valuer. 4 HIGHLIGHTS OF COMPANIES ACT, 2013

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ARUN :) CONCEPTS OMITTED MAJOR OMISSION /DELETIONS S. No.

Section of Provisions of the Companies Act, 1956 which have been deleted in Companies the Companies Act, 2013 Act, 1956

1.

43A

Private company to become public company in certain cases.

2.

44

Filing of Prospectus or statement in lieu of prospectus by private company on ceasing to be private company.

3.

58AA

The provisions of section 58AA relating to acceptance of deposits from small depositors and intimation of default in repayment of deposits thereof has been dropped.

4.

58AAA

Section 58AAA which makes any offence connected with or arising out of acceptance of deposits u/s 58A or 58AAas cognizable has been done away with.

5.

120

The concept of perpetual debentures has been omitted.

6.

121

The concept of re-issue of redeemed debentures has been omitted.

7.

153A

Appointment of public trustee.

8.

165

Statutory meeting and statutory report of company.

9.

224A

Auditor not to be appointed except with the approval of the company by special resolution in certain cases.

10.

233A

Power of Central Government to direct special audit in certain cases.

11.

258

Right of company to increase or reduce the number of directors.

12.

270

Time within which share qualification is to be obtained and maximum amount thereof.

13.

294AA

Power of Central Government to prohibit the appointment of sole selling agents in certain cases.

14.

417

Employees’ securities to be deposited in post office savings bank or Scheduled Bank.

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SANGEET KEDIA [F.C.S., LL.B.]

NEW CONCEPTS One Person Company Companies Act, 2013 defines ‘One Person Company’ (OPC) as sa Company which has only one person as member. Further, Section 3 of the Act provides that a company may be formed for any lawful purpose by one person. One person Company is a Private Company formed by subscribing the name of such one person to the Memorandum and complying with the requirements of the Act in respect of registration. As regards the name of a One Person Company, the Act provides that the words “One Person Company” or ‘OPC’ shall be mentioned in brackets below the name of such Company, wherever its name is printed, affixed or engraved. The concept of OPC provides a more flexible and less compliance structure of a company. Independent Directors With a view to add transparency, fairness and independence in decision making to safeguard of stakeholders’ interest, the concept of Independent Directors was introduced. While the concept was till date applicable on Listed Public Companies, the New Company Law proposes to introduce the same upon big Public Companies as well. It is much likely that rationalism and objectivity would be inducted in the processes of the Company with this initiative. Dormant Company Dormant Company means a company which is not carrying on any significant accounting transaction for a period of two years. It can apply to Registrar of Companies for getting declared itself as Dormant Companies. It may be noted that ROC may, suo moto, also declare a company as a Dormant Company. In today’s economic environment, a lot of Companies are formed for the purpose of holding any assets particularly real assets or any IPR or for a future project and such Company just keeps on complying with the laws even if no actual business is being done or transacted. Class Action Class action is a right to members or deposit holders or representative of such members or deposit holders to file an application before National Company Law Tribunal (NCLT) for restraining the Company from some specified acts. The most important part of such class action is that such members as prescribed can claim damages or compensation against Company, Directors, Auditors, Experts, Advisors for wrongful conduct of them.

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SANGEET KEDIA [F.C.S., LL.B.]

Corporate Social Responsibility This is a new initiative of Ministry of Corporate Affairs to ask corporate to contribute towards society. It is a paradigm shift in this area since earlier there were only voluntary guidelines for CSR and now there is a mandatory provision of CSR by some prescribed companies which is expected to cover a huge number of companies in India. It may add sense of responsibility and contribution among corporate. It is expected to be beneficial to different class of people such as children, women, uneducated, unemployed etc towards which such CSR activities may be focused. There is social security system in most of developed countries and mandating CSR is a step towards creating some social security for citizens of India with focused contribution from Corporates. In case of non-compliance of requirement of CSR, the Board shall, in its report, explain the reasons for the same. The approach is to ‘comply or explain’. Rotation of Auditors Under the extant Companies Act, 1956, there is no provision for compulsory Rotation of Auditors. As a result, an auditor in some Companies continue for over 10-15 years and even more. To overcome this hitch, Companies Act has provided for Rotation of Auditors after a specific time frame to ensure independence of Auditor and strengthen diligence in their role and conduct. Compulsory rotation of audit partners is a global practice prevailing in developed countries also like USA. Secretarial Audit The Companies Act, 2013 provides for compulsory Secretarial Audit by certain class of companies and annexing of audit report with Board Report, which is circulated to all the shareholders. The present Companies Act, 1956 provides for Compliance Certificate to be issued by a Company Secretary in practice and annexed to Board Report by certain class of Companies. The government must be thinking of widening the scope of such Compliance Certificate’ so introduced the concept of Secretarial Audit. The Board of Directors also has to explain in its Board Report to every qualification, reservation or adverse remark or disclaimer made by the Company Secretary in his Secretarial Audit Report. National Financial Reporting Authority In the Companies Act, the Central Government has introduced a new authority named as National Financial Reporting Authority with wide powers to recommend and monitor and enforce the compliance of accounting and auditing standards. The Present Companies Act, 1956 gives powers to Central Government to form a committee for giving a recommendation on Accounting Standards is National Advisory Committee on Accounting Standards.

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SANGEET KEDIA [F.C.S., LL.B.]

Arun :) IMPACT ON COMPANY SECRETARY PROFESSION The Companies Act, 2013 has incorporated a framework which is based on self-regulation but with enhanced disclosures and accountability on the part of companies and their managements. The corporate sector will be required to exhibit responsible self-regulation and corporate governance on their part, which necessitates the services of independent, competent and responsible governance professionals. From this perspective, company secretaries, would be required to play a very important role in implementation of the Act. The Act expects the company secretary to play a wider role in terms of guiding the activities of a company, in addition to certifying its compliance-oriented actions. The Act has substantially strengthened the role and position of the company secretaries. In particular, it considers a company secretary as a key managerial personnel. While this is expected to enhance the position of a company secretary, it also casts responsibility on him for due compliance with the provisions of law. It should also be noted that for non-compliance of the provisions of law, he is also an “officer-in-default” thus, subject to liability under relevant penal provisions. Some of the key areas contained in the Act which will directly impact the role of company secretaries in employment or in practice are discussed below: (a) Declaration of Compliance at the time of Incorporation (Section 7) A company secretary in practice engaged for the incorporation of a company shall be competent to give a declaration that all requirements of the Act and rules in respect of registration and the matters precedent or incidental thereto have been complied with. (b) Annual Return (Section 92) Under the Companies Act of 1956, the annual returns of listed companies are required to be signed by company secretary in practice. Section 92 of the Act has further widened this requirement by providing that annual return of certain other unlisted companies shall also be required to be certified by a company secretary in practice. (c) Secretarial Standards (Section 118) Till date, the Secretarial Standards are recommendatory in nature. The Act gives statutory recognition to the Secretarial Standards specified by the ICSI. Section 118(10) mandates that every company shall observe Secretarial Standards with respect to general and board meetings as specified by the ICSI and approved by the Central Government. (d) Appointment of Whole-time Key Managerial Personnel (Section 203) Section 203 provides for compulsory appointment of whole-time Key Managerial Personnel (KMP) in respect of certain class of companies to be prescribed by Central Government. A company secretary is covered under the term “whole-time KMP”. Thus, the appointment of company secretary will become mandatory in certain companies. 8 HIGHLIGHTS OF COMPANIES ACT, 2013

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(e) Introduction of Secretarial Audit (Section 204) Secretarial Audit is an audit to check compliance of various provisions of all the corporate laws, by a company. Secretarial Audit has been introduced for the first time in section 204 of the Companies Act, 2013. Under the section, every listed company and a company belonging to such class as may be prescribed in the rules, shall annex with its Board’s report a Secretarial Audit Report, given by a company secretary in practice. (f)

Functions of Company Secretary (Section 205) For the first time, the functions of the company secretary have been specified in the Companies Act. He has to report to the Board about the compliance of the provisions of the Act, rules and other laws applicable to the company. He has also to ensure that the company complies with the Secretarial Standards (as issued by the ICSI and approved by the Central Government) as applicable to the company. Other duties will be prescribed in the Rules to be framed by the Central Government. This provision casts an onerous responsibility on company secretaries in employment in the discharge of their duties and they are expected to exhibit a proactive and responsible role to meet the expectations of the respective companies and regulatory authorities.

(g) Professional Assistance to Company Liquidator (Section 291) With the sanction of the Tribunal, the Company Liquidator may appoint one or more professionals, including company secretaries, to assist him in the performance of his duties and functions under the Act. (h) Qualifications of Members of Tribunal (Section 409) The constitution of the National Company Law Tribunal offers opportunities to company secretaries in practice to become Technical Members of the Tribunal. Amongst others, a company secretary in practice is eligible to become a Technical Member of National Company Law Tribunal, if he is in practice for at least fifteen years. (i)

Appearance before Tribunal (Section 432) A party to any proceedings or appeal before the NCLT or the NCLAT may authorize amongst others, a company secretary, to present the case before the Tribunal or the Appellate Tribunal, as the case may be.

(j) Others In addition to the areas listed above, company secretaries can also play a key role in the fields of valuation, corporate restructuring, winding up and in certification of areas of compliances specified in the Act. In view of the above, it can be said that the Companies Act, 2013 shall, to a large extent, widen the scope of profession of Company Secretaries. 9 HIGHLIGHTS OF COMPANIES ACT, 2013

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Good Luck Guys !

SANGEET KEDIA [F.C.S., LL.B.]