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Companies Act 2013

The 29th of August, 2013 would always be commemorated in the history of Corporate India since on this day the Companies Bill, 2013, got the Presidential assent for enactment as the Companies Act, 2013.

The 29th of August, 2013 would always be commemorated in the history of Corporate India since on this day the Companies Bill, 2013, got the Presidential assent for enactment as the Companies Act, 2013. The Lok Sabha passed the bill on December 18, 2012 and the Rajya Sabha on August 8, 2013. This Act replaced the old Companies Act, 1956, which was considered to be inadequate and redundant for the changing corporate environment.

The old Companies Act had been amended around 25 times but was still insufficient in many ways for the corporates in comparison to legislations that govern corporates in other jurisdictions. The new Act contains 470 sections, 29 Chapters and 7 schedules while the old Act had 658 sections, 12 Chapters and 15 Schedules.

In the Companies Act, 2013, it has been attempted to reduce the content of the old Companies Act substantially. The Companies Act, 2013 took four long years in its implementation after being introduced as the Companies Bill, 2009, in the Parliament. However, all of the provisions of the new Companies Act were not made effective immediately. Only 98 sections out of a total of 470 were made effective with the implementation of the Act. This meant that the businesses would have to comply with the relevant effective provisions of both the Acts. It was initially argued that the new Companies Act should have been made effective completely since applicability of the provisions of both the Acts was likely to cause confusion.

The Companies Act, 2013 is likely to have extensive implications that would change the way in which the business houses operate in India. The new Companies Act has been designed in a manner to remove the shortcomings of the old Companies Act and at the same time bring about a positive change in the business environment of the country by catering to the contemporary needs of the corporates.

The new Companies Act is futuristic and progressive in its approach and is likely to bring positive changes in corporate governance norms, transparency and disclosures, responsible entrepreneurship, auditor and management accountability, protection of interests of shareholders and corporate social responsibility.

The new Law is more stringent in regards to punishment of corporate crimes, thereby creating a new path to creating more responsible Company Law professionals. The corporate professionals like CA’s and CS’s are more geared up than ever to implement the new Companies Act in its letter and spirit.

Till date, a total of 282 sections of the Companies Act, 2013 have been made effective.

The Companies Act, 2013 was implemented to do away with the shortages of the Companies Act, 1956. The new Act is majorly different from the old Act on the following:

Financial Year: As per the Companies Act, 2013, every company shall have its financial year ending on March 31st, every year. This time period is the same as required for tax reporting purposes. However, an Indian company which is a holding company or is a subsidiary of a foreign company and requires consolidation outside India has the option to follow a different financial period as its financial year after making an application to the National Company Law Tribunal. The other existing Indian companies were given a time frame of two years for aligning their financial year in consonance with the requirements of the new Companies Act.

Corporate Social Responsibility: The Companies Act, 2013 has made Corporate Social Responsibility mandatory for those Indian companies that have, in a financial year:

  • a net worth of INR 500 crores or more, or
  • have a turnover of INR 1,000 crores or more, or
  • have net profit of INR 5 crores or more.

Any Indian company that fulfills one of the above conditions shall mandatorily create a CSR committee, whose responsibility would be formulation of CSR policies and making recommendations in regards to the expenditure to be made on CSR projects. The company shall be required to spend a minimum of 2% of its average annual net profits over the previous three financial years on social and charitable matters annually, which are as per its CSR policy.

One Person Company and Small Company: The Companies Act, 2013 has introduced the concepts of a one person company and a small company. These companies shall not be required to certain provisions that relate to board meetings, reporting and related procedural matters. As per Section 1(62), a one person company is a company which has only one person as its member. One person company can be incorporated only by a natural person who is a resident and citizen of India. A maximum of five one person companies can be incorporated by an individual.

Section 1(85) defines a small company as a company (other than a public company), that:

  • has a paid-up share capital of not more than INR 50 lakhs; or
  • its turnover does not exceed INR 2 crores or such higher amount as may be prescribed up to the limit of INR 20 crores.

The conditions of a small company do not apply to a holding company, a subsidiary company, a charity or a corporate that is governed by a special Act.

Entrenchment Provisions: An entrenchment provision is a provision that makes amendments or removal difficult. As per the Companies Act, 2013, it is a provision that can be amended or removed by vote of such number of shareholders exceeding which a special resolution by that number would be required.

The new Companies Act gives the companies to include entrenchment provisions along with their Articles of Association. Asa consequence of this, provisions related to minority protection such veto rights, tag-along rights, can be included in the articles of association without fearing that the may be amended or removed by special resolution. This has increased and safeguarded the rights of the minority shareholders. Earlier the rights of the minority shareholders were reflected only in shareholders’ agreement.

When an entrenchment provision is adopted, the same must be notified within 30 days to the Registrar of Companies.

Auditor Rotation: As per the new Companies Act, an auditor appointed by a company shall hold office until the sixth AGM post appointment, thereby making the tenure of auditor office of 5 years. The appointment of the auditor, however, would still require sanction at every AGM. As per the old Companies Act, the auditors were appointed on an annual basis and would hold the office till the time the next AGM was concluded.

However, the provisions for auditor rotation as per new Companies Act are different for listed companies and companies that belong to prescribed classes of companies. These companies can appoint or reappoint auditors for:

  • more than two consecutive five years term if the auditor is an audit firm;
  • more than one consecutive five years term if the auditor is an individual.

If an auditor has retired, he/she may not be reappointed for the next term of five years. The term of the auditor shall be counted from the time period he/she has served prior to the beginning of the new Companies Act.

The auditor rotation provisions do not apply to small companies and one person companies.

Directors: As per the provisions of the new Companies Act, any Indian company can have a maximum of 15 directors. This number may be further increased by passing a special resolution. Earlier under the old Companies Act, a public company or a private company which was a subsidiary of a public company could have up to 12 directors. An approval of the Central Government was required to increase the number of directors beyond the statutory limit.

Under the new Act, appointment of a female director has been mandatory for the certain classes of companies.

The new Act also states that every company is required to have a director who, in the previous year, has stayed in India for a minimum period of 182 days.

Investments: A new requirement pertaining to investments has been introduced in the Companies Act, 2013. As per this requirement, a company desirous of making an investment cannot make it via more than two layers of investment companies, provided the company’s principle business involves acquisition of shares, debentures and other securities). These provisions will, however, not apply to:

  • the acquisition of companies outside India if the target company has subsidiaries beyond two layers as per the legal regulationsof thecountry where it is located; or
  • any subsidiary from having any investment company for the purpose of meeting any requirement of any law that is presently in force.

Mergers and Amalgamations: As per the new Companies Act, no approval is required to be taken from the National Company Law Tribunal in case of mergers between two or more small companies and between their holding companies and their wholly owned subsidiaries, provided the relevant compliances have been made in accordance with the prescribed procedures. Similar permission has also been granted to mergers of Indian companies with companies of other jurisdictions, which is subject to determination by the Central Government from time to time.

Related Party Transactions: The new Companies Act grants permission to the directors for giving approval to entry of related party transactions into the company. On the contrary, in the old Companies Act, the company required the sanction of the Central Government for entry into related party transactions.

As per the Companies Act, 2013, for entry into related party transactions, a special resolution has to be passes if:

  • the paid-up share capital of the company is INR 1 crore or more; or
  • the transaction that is to be entered into with the related party:
  • exceeds the higher – 20% of the net worth of the company or 5% of the annual turnover;
  • is in relation to appointment to any office whose monthly remuneration exceeding INR 1 lakh;
  • remuneration for underwriting any subscription of securities and derivatives exceeding INR 10 lakh.

Loans to Directors: The Companies Act, 2013 puts restrictions on advancing loans to a director or any other person in whom the director may be interested. Under the provisions of the old Companies Act, exemption was granted for loans to subsidiaries by the holding company. However, the same has been discontinued in the new Act, which means that if the holding and the subsidiary company have common directors, the holding company cannot give loan, guarantee or security on behalf of the subsidiary company.

Summary

Matter

Companies Act, 2013

Companies Act, 1956

Financial Year

Companies are required to have financial year ending on March 31st every year

Companies were allowed to have a financial year ending as per company’s choice

Corporate Social Responsibility

Mandatory for certain classes of companies

Not mandatory

One Person Company and Small Company

Defined

Non-existent

Entrenchment Provisions

Allowed along with AOA

No such provision

Auditor Rotation

Auditor serves for a period of 5 years

Annual rotation

Directors

Maximum of 15 directors, can be increased by special resolution

Maximum 12 directors

Investments

Maximum of two-layer investment companies

No such provision

Mergers and Amalgamations

No approval required for small companies

No such provision

Related Party Transactions

Director can give permission

Sanction of Central Government was required

Loan to Directors

No permission to grant loans, even for common directors of holding and subsidiary company

Loan could be granted by holding company to directors of subsidiary company

What is SPICE?

SPICE stands for Simplified Proforma for Company Electronically. It was introduced in October 2016 by the Ministry of Corporate Affairs. This platform has been introduced as a simplified integrated process to make incorporation of companies easier. The forms required for the same are – Form INC- 32 with e-MOA in form no. INC-33 and e-AOA in form no. INC-34.

Is it possible for a non-resident to become a member of an OPC (One Person Company)?

As per the Rule 3 of the Companies (Incorporation), an OPC can be incorporated only by an Indian citizen who is resident in India. Hence, it is not possible for a non-Indian resident to become either a member or a nominee of an OPC.

Resident in India, for this purpose, means a person who has resided in India in the previous year for a period of not less than 182 days.

Is there a requirement of passing of a special resolution for altering its MOA?

Yes, a company is required to pass a special resolution for altering its MOA as per Section 13(1) of the Companies Act, 2013. However, as per Section 61 of the Companies Act, 2013, the capital clause of the MOA can be changedvia an ordinary resolution.

For alteration in MOA in relation to change in place of registered office from one state to another, is an approval of the Central Government required?

Yes, according to Section 13(4) of the Companies Act, 2013, the alteration of MOA in regards to change in place of registered office from one state to another will not be effective till the time the same has been sanctioned by the Central Government. An application would be required to be made to the RD, as the RD holds the delegated powers of the Central Government in this aspect.

What is the limit on number of members for forming an association or partnership of persons?

As per Rule 10 of the Companies (Miscellaneous) Rules, 2014, an association or partnership of members can be formed with a maximum of 50 members.

Is it compulsory to issue share certificates of the company under the common seal?

As per the Companies (Amendment) Act, 2015 read with Companies (Share Capital and Debentures) Second Amendment Rules, 2015, all the share certificates of the company shall be issued under the common seal only if the company has a common seal. Hence, the issuance of the share certificates under common seal is subject to whether the company has a common seal.

Is it possible for a subsidiary company to hold shares in its holding company?

According to Section 19 of the Companies Act, 2013, a subsidiary company cannot hold shares in its holding company except in case of the following circumstances:

  • when the subsidiary company holds shares of the holding company as the legal representative of a deceased member of the holding company.
  • when the subsidiary company holds shares in the holding company prior to becoming the subsidiary.
  • the subsidiary company holds shares in the holding company as a trustee.

Can the decision pertaining to issue of preference shares be taken by the Board of Directors?

No, the directors cannot take the decision of issuing preference shares. According to Rule 9(1)(a) of the Companies (Share Capital and Debentures) Rules, 2014, approval of the shareholders via special resolution is mandatory for issuing preference shares. The Board of Directors can only make recommendation to the shareholders and provide them with a detailed explanatory statement for approval.

Is it possible for a private company to issue debentures to the public?

No, a private company cannot issue debentures to the public. Private placement is the only way via which a private company can issue debentures.

What are sweat equity shares? To who can these be issued?

As defined in Section 2(88) of the Companies Act, 2013, sweat equity shares are shares that are issued at a discount or for consideration other than cash to the employees or Directors of the company. The shares are issued as a reward to the employees for making available certain new knowledge which could be beneficial to the business or intellectual property rights.

According to Rule 8(1) of the Companies (Share Capital and Debentures) Rules, 2014, sweat equity shares can be issue to the following classes of employees:

  1. permanent employees who have been working with the company for a at least one year, be it outside or in India;
  2. a Director- whether whole time or not;
  3. As mentioned above in a) and b), a director or an employee of a subsidiary or a holding company.

Who can be appointed as a Director?

According to Section 152 of the Companies Act, 2013, an individual holding a valid DIN can be appointed as a director. This individual should not be disqualified from being appointed as a Director as per Section 164. The individual chosen for acting as a Director shall have to give written consent for acting as the same. He would also be required to disclose his interests and give a declaration that he is not disqualified to be a director.

How is a Director appointed?

A Director is appointed in the following manner:

  • The director has to obtain Digital Signature Certificate (DSC);
  • The director has to obtain Director Identification Number (DIN) by filing Form DIR-3.
  • A declaration by the director that he is not disqualified to be appointed as a Director (Form DIR-8);
  • Written consent of the Director for appointment as a Director (Form DIR-2);
  • Interest of the Director, if he has in any other entity (Form MBP-1);
  • Approval of Board of Directors through Board Resolution;
  • Approval of Shareholders via Ordinary Resolution;
  • Intimating the ROC regarding appointment of director in Form DIR-12.

Can the Board of the company appoint a Director?

Section 152 requires shareholder approval for appointment of a Director. However, a Director can be appointed by the Board only if the same is authorized by the Articles of Association (AOA) of the Company, in case of following:

  • Appointing an additional director;
  • Appointing an alternate director;
  • Appointing a nominee director;
  • Appointing a director for filling up of a casual vacancy.

Can a director of a company be removed?

Yes, the shareholders of a Company can remove a Director by passing an ordinary resolution in a general meeting. For passing this resolution, a special notice is required. The Director must be provided with a reasonable opportunity of being heard. A Director who has been removed by the shareholders cannot be reappointed by the Board.

Which matters cannot be considered or discussed at a meeting held via video conferencing or other audio-visual means?

The Rule 4 of the Companies (Meetings of the Board and its Powers) Rules, 2014, the following matters cannot be discussed via video conferencing or other audio-visual means:

  • Approval of annual financial statements;
  • Approval of prospectus;
  • Approval of Board’s Report;
  • Approval on issues related to merger, amalgamation, demerger, acquisition and takeover;
  • Audit Committee Meetings for consideration of financial statements.

For which transactions no approval of the shareholders under Section 188 is required?

The following transactions do not require the consent of the shareholders:

  • Transactions that form part of the ordinary course business;
  • Transactions on arm’s length basis;
  • Transactions between a holding company and wholly owned subsidiary whose accounts are consolidated and presented before the shareholders at AGM.

Who can be appointed as the Auditor of the company?

According to Section 138 of the Companies Act, 2013 read with Companies (Accounts) Rules, 2014, a Chartered Accountant or a Cost Accountant, whether in practice or not, or any other professional as decided by the Board, may be appointed as Internal Auditor. The internal auditor is not necessarily required to be the employee of the company.

Which Companies are required to have a Secretarial Audit mandatorily?

According to Section 204(1) of the Companies Act, 2013 read with Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, secretarial audit and getting a secretarial audit report is mandatory for the following companies:

  • Every listed company;
  • Any public company that has an annual turnover of INR 250 crores or more;
  • Any public company that has a paid-up share capital of INR 50 croresor more;

For more information on any provision of the Companies Act, 2013, contact us at:LawyerINC.

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