The new
Companies Bill has received President's assent, that will make it into a law
replacing the nearly six-decade old regulations that govern corporates in the
country.The Companies Bill 2013 received assent from the President
Pranab Mukherjee on August 29, 2013.
The 2013 act is more concise as compared to the 1956 Act. There are XXIX chapters, 470 sections and 7 schedules whereas in the 1956 Act there are XIII parts, 700+ sections and 15 schedules. There are over 300 references in the 2013 act to the rules that are yet to be prescribed. So full impact of the 2013 Act can only be understood when the related rules get finalized and the two are read together.
Ministry of Corporate Affairs already notified 98 sections w.e.f from 12 September 2013. So at present the 2013 act and the 1956 act co-exist.Rules are to be issued under the 2013 Act.
The 2013 act is more concise as compared to the 1956 Act. There are XXIX chapters, 470 sections and 7 schedules whereas in the 1956 Act there are XIII parts, 700+ sections and 15 schedules. There are over 300 references in the 2013 act to the rules that are yet to be prescribed. So full impact of the 2013 Act can only be understood when the related rules get finalized and the two are read together.
Status:
Ministry of Corporate Affairs already notified 98 sections w.e.f from 12 September 2013. So at present the 2013 act and the 1956 act co-exist.Rules are to be issued under the 2013 Act.
Important Changes in the Act in
comparison to prior Act:
1) Inclusive CSR Agenda:
a)Every
company having net worth of rs. 500 crores or more; turnover of rs. 500 crores
or more; net profit of Rs. 5 crores or more during any financial year shall
constitute CSR committee of Board consisting of 3 or more directors, out of
which atleast one Independent director
b)Board
to ensure company spends atleast 2% of average net profit it made during the 3
immediately preceding financial year in pursuance of its CSR policy. Net profit
means net profit before tax as per books of accounts and shall not include
profits arising from branches outside India.
c)Eligible
CSR spend are provided in Schedule VII of the act.
2)Changes in Provisions related to
Director and Management Responsibility:
a) Maximum
number of director changed from 12 to 15. This can be enhanced by special
resolution without CG approval.
b) At
least one director should have stayed in India for total period of not less
than 182 days in previous calendar year.
c) Every
listed company and other public company having either paid up share capital of
more than 100 crs. or turnover of more than 300 crs. to appoint a women
director.
d) Every
listed public company shall have atleast 1/3rd of total number of
directors as independent directors
e) Disqualification
of directors under present section of sec 274(1)(g) extended to companies other
than public companies also.
f) Concept
of Independent director (ID) introduced in new Act which is different from
clause 49 of Listing Agreement. New definition is wider in scope as relatives
are also included for some of the restrictions or criteria. ID shall not be
entitled to stock option, remuneration except sitting fee, reimbursement of
expenses for participation in Board meeting and other meetings and profit
related commission as may be approved by members. Provision with respect to
retirement or rotation will be applicable to Independent director. Appointed
for 5 years and can be reappointed on passing special resolution and disclosure
in Board’s report
g) In
case of rotation of directors, the words”private company which is subsidiary of
Public company” is removed which means the provision apply only to Public
company.
h) Non
holding of qualification shares, non attendance of 3 consecutive meetings are
no longer a criteria for vacation of office by directors. The office of a
director would become vacant if he remains absent for all meetings of the board
for a period of 12 months, even when the leave of absence has been obtained.
i) Maximum
directorship limit increased to 20(overall) from 15 earlier (public). Private
companies will now be considered in the overall limit. Include alternate
directorships which were earlier excluded. Maximum number of public companies
in which a person can be appointed as a director shall not exceed 10, which
includes private companies which are holding or subsidiary company of a public
company.
j) First
board meeting to be held within 30 days of the date of its incorporation. At
least 4 meetings to be held every year and not more than 120 days elapse
between 2 consecutive meetings. At least 7 days notice in writing is required
to call a board meeting.
k) Stakeholders
Relationship Committee to be formed by every company with more than 1000
shareholders, debenture holders, deposit holders and any other security holders
at any time during a financial year consisting a chairperson who is a non
executive director and such other members as may be decided by board.
l) Nomination
and Remuneration committee consisting of 3 or more non executive directors , of
which at least half shall be independent directors to be formed by every listed
company and prescribed class of companies.
m) The
act prohibits insider trading in company or prohibits forward dealings in
securities of company by any director or key managerial personnel.
3) Changes Related to Reporting
Framework:
a) Mandatory requirement for consolidated
financial statement for all
companies that have one or more subsidiaries (previously only for listed
companies under SEBI regulations) (Section 129). Here subsidiary includes
associates and joint ventures. Moreover, at present preparation of consolidated financial statement (CFS) is mandatory only when company has a subsidiary i.e. if company has
only an associate or joint venture no need for preparation CFS under the 1956 act. But now after the 2013 act implementation
companies would need to prepare CFS even if they have only associate or joint
venture.
b) Definition
of subsidiary, associate inserted which is different from Accounting standard.
Now it is based on total share capital in Companies Act whereas in Accounting
standard it is based on voting power.
c) Schedule
III provides general instructions for preparation of financial statement (FS).
Interesting feature is it requires disclosure for each joint venture of amounts
as per proportionate consolidation/investment as per equity method but AS 27
does not permit equity method for joint venture.
d) Revision of Financial Statement (sec 130 and
131) - Voluntary
revision permitted subject to certain conditions. Moreover, accounts can be
reopened on court’s or tribunal’s order.
e) Financial year to be uniform (sec 2(41)) - from April 1 to 31st
March with limited exception to a holding company or company which is
subsidiary of company incorporated outside India. All exception to seek
approval from Tribunal. Transition provision to change accounting year within 2
years.
f) NACAS renamed as National Financial Reporting
Authority (NFRA).
g) Director Responsibility statement include
additional statement indicating
development and implementation of a risk management policy for the company
h) Changes in Depreciation Regulation (Schedule
II and section 123(2)). Component approach introduced to compute depreciation. Systematic
allocation of depreciable amount over assets’ useful life unlike schedule XIV
of existing companies act which prescribed minimum depreciation rate.
i) Mandatory Internal Audit and reporting on
Internal Financial controls: Can
be a Chartered accountant or cost accountant or such other professional as may
be decided by the board.
j) CFO has been recognised as KMP as well as Related Party.
k) Financial statement to include cash flow
statement as well.
l) Existing
regulatory regime governing transfer of profits to reserves before declaring
dividends dispensed with.
m) Provisions
with respect to submission of statement of fact and reasons in case of non
adoption of financial statements with the registrar have been deleted in the
bill.
4)Changes in Auditors Responsibility:
a) Rotation of auditors in every 5
years. Firms can be appointed as auditor for not more than 2 consecutive terms
of 5 years each (in case of individual, one term of 5 years).
b) Cooling period of 5 years.
c) Companies need to be compliant with
the provisions relating to rotation within 3 years from the date of
commencement of the act.
d) Change of auditor before 5 year term
would require special resolution after obtaining prior approval of central
government.
e) Prohibition on auditor rendering non
audit services to the auditee company/ its subsidiary/holding company.
f) Reporting requirement have been
extended.
g) Auditing standards have been given
legal recognition under the Act.
5)Investor Protection Related Changes:
a)Related
party definition has been widely defined and significant amendments has been
made.
b)Provisions
relating to caps on inter corporate loans and investments extended to include
loan to any person. Rate of interest not to be lower than prevailing yield of
one year, three year, five year or 10 year Government security closest to the
tenor of the loan.
c)Loans,
guarantees and investments by private company or holding company to or in its
wholly owned subsidiary would also be covered.
d)Concept
of Class Action Suits has been introduced to prevent oppression and
mismanagement (sec 241-246).
6)Restructuring Provision:
a)Cross border Merger (sec 234) - The new act provides for amalgamation
of/demerger from a foreign company, whether having its place of business in
India or not, with an Indian company and vice-versa. Under old act merger of a
foreign company with an Indian company was allowed but not vice-versa.
b)Fast track merger (sec 233) -New act introduced concept of fast
track merger which at the option of companies involved can be used for merger
of 2 or more small companies or merger between holding company and its wholly
owned subsidiary company or such other classes of companies as may be
prescribed. Approval of tribunal not required. Auditor’s certificate of
compliance with applicable accounting standards is not required. Positive
confirmation required from 90% of shareholders and creditors holding 90% value.
c)Minority Buy out (Sec 236) - New provision inserted for purchase
of minority shares at price determined by registered valuer in case an acquirer
or person acting in concert with the acquirer becomes registered holder of 90%
or more of the issued equity share capital of the company by virtue of any
amalgamation, share exchange, conversion of securities or any other reason.
d)Registered Valuer (sec 247) - Valuation in respect of any property,
stock, shares, debentures, etc required under any provision of the act shall be
carried out only by a registered valuer.
e)Rationalising Multilayered Structures
(sec 186) - A company
cannot unless otherwise prescribed, make investment through more than 2 layers
of investment companies except to comply with the law and in case of
acquisition of a foreign company. The objective is to provide transparency
about the real owners of the companies.
7)Other changes-
a)New types of companies permitted- One
person company which will be a separate and distinct entity from the promoter
of the company. Small company which would be a private company whose paid up
share capital does not exceed Rs 0.5 crore or whose turnover does not exceed
Rs. 2 crore. A holding or a subsidiary company cannot be a small company.
Dormant company for a future project or to hold an asset or intellectual
property and having no significant accounting transactions.
b)Limit on number of members in a partnership
firm or association of persons increased from recent 20 to such number, not
exceeding 100. As may be prescribed.
c)Free reserve definition inserted. It does not
include unrealised gains, notional gains or revaluation of assets, change in
carrying amount of assets or liability recognised in equity on measurement at
fair value.
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