I would like to discuss some of the major changes which have major impact on corporate

workings and corporate should be aware and take necessary action at the earliest and make
policy with respect to restructuring of Board of Directors, acceptance of deposits, allotment of
shares, alteration of objects and Memorandum/Articles of Association, constitution of Audit
committee, vigil mechanism and expenditure on CSR etc. The thrust of Ministry is more on
compliance mechanism by public companies having paid up share capital of Rs.Ten crore or
turnover exceeding Rs.one hundred crore or borrowings exceeding Rs.50 crore in aggregate by
constitution of Audit Committee, Nomination and remuneration committee, internal audit
requirement and vigil mechanism.
Alteration of Objects clause
One of the effects of implementation of new Companies Act, 2013 is that the Companies can
carry on business activities which are mentioned in its Main Objects clause of Memorandum of
Association. In the earlier Act, the Companies which have diversified in other activities used to
pass resolution in the Board of Directors meeting or in the General Meeting whereby the
activities mentioned in other Objects i.e. at Clause III-C were invoked. The Private Companies
used to pass the resolution and keep record in Minutes Book whereas the Limited Companies
used to pass Special Resolution and file the declaration as required under the provisions of
Section 149(2A) of the Companies Act, 1956 with the office of Registrar of Companies and
carry on such activities. Now, with effect from Ist April 2014 all such Companies who were/are
carrying of activities other than principal business activities as mentioned in the Other objects are
required to alter the main objects and include such activities therein otherwise such business
activity shall be treated as ultra virus. Consequently, owing to multiple business activities, the
Companies may also be required to change its name.
CIN to be mentioned in letter heads, invoices etc:
Section 12(3) (c) of new Act provides that every company shall get its name, address of its
registered office and the Corporate Identity Number along with telephone number, fax number, if
any, e-mail and website addresses, if any, printed in all its business letters, billheads, letter
papers and in all its notices and other official publications.
Register of members
As per section 88 of the Act, register of members is to be kept in new format. Now companies to
mention Pan Number, email ID and other particulars besides particulars of share capital or
debenture. The Companies required to update the same within a period of six months from 1-4-
2014.
Acceptance of unsecured loan by Private Limited Companies
Majority of Private Limited Companies have accepted unsecured loans from Directors relatives
or from its members as allowed Ist April 2014 all such Companies now have to refund such
unsecured loan/deposit immediately under the provisions of Companies Act, 1956. As per
Companies (Acceptance of Deposit) Rules, 2014 as applicable from. As per rule 2(viii) of
Companies (Acceptance of Deposit) Rules, 2014, the Companies [private and Limited both] can
accept unsecured loan or deposit from Director of the company provided further that such
amount is not a borrowed amount and can accept inter corporate loan(s) from another body
corporate and not from any other person. As per companies Act 2013, if the private company has
accepted any loan from any person except director, then they have to file a statement in
prescribed form up to 30th June 2014 with the ROC. The Companies which fails to refund such
unsecured loans already accepted from Directors relatives or members immediately shall be
treated as deposit and as a consequence defaulting Companies and its officer in default may face
penalty/prosecution proceedings under the provisions of Section 73 to 76 of the Companies Act,
2013.
One of the basic criteria of forming the Private Companies is that such Companies should
arrange its means of finance through private resources. The thrust of promoters to include
directors relatives and close friends and associates as members so that they can finance the
project through internal resources by accepting unsecured loan interest free or at lower rate or by
allotting them shares. One side the new Companies Act, 2013 have raised the limit of members
of Private Companies from 50 (fifty) to 200 (two hundred) and on another side restricted the
Companies from accepting unsecured loans from Directors relatives or members. This
restriction is not understandable. This also gives inference that the Corporate should approach
Banks for their needs instead private resources which may be costlier affair for the corporate
than arranging the funds through private resources. The author is of the view that the Ministry
should review for lifting of these restrictions and restore the previous provisions.
DEPOSITS
As per provisions of Section 73 to 76 of new Act read with Companies (Acceptance of Deposits)
Rules, 2014, the Companies which have accepted deposit from public are required to report
outstanding deposits, interest thereon by filing a return with the office of Registrar of Companies
up to 30
th
June 2014. These Companies have to refund the outstanding deposit with interest
within a period of one year i.e. on or before 31.3.2015. Meanwhile, the company cannot accept
or renew the deposits. The acceptance of new deposits can be made only after refund of existing
deposits and by strict adherence of guidelines notified under said Rules like credit rating, deposit
insurance and creation of charge to secure the deposits. This is welcome step..In case of default,
penalty can be Rs.one crore up to Rs.10 crore
SHARE APPLICATION MONEY, ALLOTMENT AND VALUATION OF SHARES
Similarly the Companies wherein Share Application money standing in the books of accounts as
on 31
st
March 2014 are required to refund such amount immediately. As per provisions of rule
2(vii) of Companies (Acceptance of Deposit) Rules, 2014, Companies have to allot the share
application subscription money to the subscriber within 60 days from the date of receipt of
money and in case advance is not refunded to the subscribers within fifteen days from the date of
completion of sixty days, such amount shall be treated as a deposit under these rules. In case non
refund of share application money, another impact would be to transfer the amount including
interest to Investor Education and Protection Fund of Central Government under the provisions
of sub-section 2(h) of Section 125 of Companies Act, 2013.
Introduction of valuation of shares by independent value is a welcome step. Now, the Directors
cannot undervalue the share and the existing shareholders may get appropriate return if the
Company grows. Presently provisions of independent valuer have not been made effective and
till then valuation of shares may be done through Merchant Banker or Chartered Accountant
having experience of more than 10 years. The valuation of shares is also mandatory in case there
is allotment other than cash basis. The Companies now should offer the shares to existing
shareholders on proportionate basis as if a right issue or has option to issue the shares on private
placement. While allotting the shares Companies have to comply the provisions of Section 42
and 62 of new Act read with Rule 14 under Companies (Prospectus and Allotment of Securities)
Rules 2014. In private placement, the companies have to sent letter of offer to specified persons
with pre-numbered share application form and keep the share application amount in separate
account. The Company has to intimate the same to the office of Registrar of Companies in
prescribed form within 30 days from the date of closure. Further, the Company has to file the
return of allotment in prescribed form within 60 days from the date of receipt of share
application money and file the return within 30 days from the date of allotment. The Companies
cannot accept the amount in cash. There are strict guidelines for private placement and any
violation or irregularity in allotment may attract penalty of Rs.two crore or the amount of
allotment which is higher.
Directors position
A director has fiduciary position in the Company and Board of Directors collectively responsible
for affairs of the Company. The Act defines different position and role of Directors such as
Managing Director, whole time director, independent director, nominee and shadow director.
Section 2(60) of the Companies Act, 2013 defines officer in default which includes the above
referred categories and persons responsible for compliance. The Board may also specify certain
directors who can be held as officers-in default by giving separate charge of some department or
work specified. Even a director who is aware of the contravention owing to participation in
Board meeting or otherwise and who did not object to the contravention on such receipt or on
such participation is held as officer-in-default and liable for such acts. The Act expects every
director to act diligently and to take due care of compliances. Therefore, the director including
independent director may not be an offender in true sense but having knowledge and non-diligent
attitude may attract penal provisions.
No person can be a director exceeding twenty companies and out of which ten can be public
companies.
The provisions of Section 166 of the new Act has specifically defined the duties of directors like
to act in good faith in order to promote the objects; shall exercise his duties with due and
reasonable care, skill and diligence etc.
Every Listed Company shall have at least one-third of total number of directors as independent
directors and public company having paid up share capital of Rs.10 crore or more or turnover of
Rupees One hundred crore or more or having aggregate outstanding loans, debentures or deposits
exceeding Rs.50 crore shall have at two independent directors. The independent director has
been defined under proviso 149(6) of new Act. The independent director has crucial role in audit
committee, nomination and remuneration committee
Every listed company and companies having paid up share capital of Rs.100 crore or turnover of
Rs.300 crore are required to appoint women director.
Further, every company should have at least one resident director who stayed in India for
minimum of 182 days in corresponding previous year.
It is duty of every director to participate in the Board Meetings and take care of compliances. He
should not be a silent spectator where he has knowledge of irregularities. As per new provisions
of Section 167, in case he absents himself from all meetings of the Board held during a period of
twelve months with or without seeking leave of absence of board or where he fails to disclose his
interest in any contract or arrangement in which he is directly or indirectly interested, in
contravention of the provisions of Section 184 of the Act, he is deemed to vacate the office of
directorship.
Key Managerial person/CFO
Every listed company and every other public company having a paid-up share capital of ten crore
rupees or more shall have whole-time key managerial personnel i.e. (i) Managing Director,
Whole Time Director, CEO, Manager (ii) Company Secretary, and (iii) Chief Financial Officer
who shall be officer in default and shall be liable for offence punishable under the provisions of
Companies Act, 2013.
The author is of the view that the applicable limit should be reduced to Rs.five crore and private
companies or some turnover criteria should be there.
Sitting fee
As per provisions of Companies (Appointment and Remuneration of Managerial Personnel)
Rules, 2014, the Company pursuant to the provisions of Articles of Association and by passing
the resolution may pay the sitting fee to directors except Managing and Whole Time Directors
(which are being considered as employee of the Company) up to Rs.one lac per meeting. This is
welcome step and now independent directors and technical directors may get the adequate
remuneration for their professional advice.
Board Report and Annual Return
As per provisions of Section 134 of new Act, Board report has been made more informative and
describes the Companys performance and various compliances. The Companies are now
required to give more disclosures besides Companys general state of affair, financial
performance, conservation of enery, technology absorption, foreign exchange ingo and outgo and
other material information including extracts of Annual return as per Section 92(3) which
includes principal business activities, details of holding, subsidiary and associates companies,
capital structure, indebtness, changes in members, managerial remuneration to key persons,
meetings of Board, penalty or punishment imposed on company and its officers, matters relating
to certification of compliances and other disclosures as may be prescribed. The Board report is
basically a performance report of the Company and one can overview level of compliances and
management policies. Every company now requires extra care in drafting board report instead a
stereotype standard report as was being in erstwhile Act. This is a good step and companies now
can shape it like a governance report. Annual return also contains lot of information and
disclosures as required under the provisions of Section 92 of new Act.
As per provisions of Section 92(2) of new Act, Annual Return of listed companies and every
such Company having paid-up capital of Rs.10 Crores or more or turnover of Rs.50 Crores or
more are required to certify the same from Practicing Company Secretary.
Financial year and AGM
There should be uniform financial year i.e. 31
st
March and annual return is also required to be
prepared on that date.
Proceedings of AGM is also required to be filed with the office of ROC within 30 days from the
date of AGM duly signed by the Chairman
Consolidation of accounts
The company is also required to prepare consolidated financial statements taking into
consideration of consolidation of accounts of subsidiary and associate companies.
Disclosure of subsidiary and associate companies in Board report also required
Notice by electronic mode and voting at AGM electronically
The Board meetings and AGM notices can be given electronically through email at their
registered address.
The Board meeting can be convened through video conferencing. There are separate guidelines
for video conferencing for example entry should be through secured gateway and proceedings
should be records and kept in safe custody.
For convening AGM, it is necessary for listed companies to give notice to members who have
registered their email id. The Company should make provision for electronic voting through
Registrar and Share Transfer Agent or through some software in the Companys website.
However, this is optional for non-listed Companies
Disclosures by a director of his interest.- (1) Every director shall disclose his concern or
interest in any company or companies or bodies corporate (including shareholding interest),
firms or other association of individuals, by giving a notice in prescribed form.
It is also necessary for companies to enclose consent of Director with the prescribed form and the
director concern on resignation is also required to intimate the fact with justification to the
concerned Registrar of Companies.
Related party transactions [Section 188]
The definition of related party has been widened in new Act and now Companies should take
reasonable care in entering related parties transactions with respect to
(a) Sale, purchase or supply of any goods or material
(b) Selling or otherwise disposing of, or buying, property of any kind;
(c) Leasing of property of any kind
(d) Availing or rendering of any services;
(e) Appointment of any agent for purchase or sale of goods, materials, services or
property;
(f) Such related partys appointment to any office or place of profit in the company, its
subsidiary company or associate company; and
(g) Underwriting the subscription of any securities or derivatives thereof, of the company
In the earlier Act there were provisions that in case Companies having paid up share capital of
Rs.one crore or more have to obtain prior Central Govt. approval while entering into related
party transactions. The transitional exemption was just Rs.5000/- which has now been increased
to Rs.five lac in a year. In the new Act, this condition of prior approval has dispensed with and
now the Companies are required to take permission of Board provided the transactions are being
made on arm length basis meaning thereby entering into transaction on market price as if done
with some unrelated party. The prior approval by way of special resolution by members is
required only where the paid up share capital of the Company exceeds Rs. Ten crore. There is
further relaxation in the rules if the contract or arrangement with respect to clauses (a) to (e) of
sub-section (1) of section 188 are made within the prescribed limits i.e. up to 25% of its annual
turnover for sale, purchase of goods and material; up to 10% of its net worth in respect of sale,
purchase or lease of property or availing of services directly or through agent and payment of
remuneration to related person up to the limit of Rs.2.50 lac per month.
This is welcome amendment and the corporate sector is relieved to some extent of getting
approval of central government. However, the Company may get some difficulty in getting
approval of Board of Directors and members in general meeting as the member of the board who
is interested cannot cast his vote on that matter and to sit outside and similarly the member who
is interested cannot vote being interested. In fact in most of the Private companies or closely held
public companies, the directors and members are related to each other and in case of vote on
resolution of interested person, proper quorum may not be available. In such circumstances, role
of independent directors is vital.
Borrow money by Private Companies
Now, the private Limited Companies which have borrowed money in excess of its paid up
capital and free reserves are required to pass special resolution and members have to decide up to
which limit the Company can borrow. As per provisions of Section 180 of the Companies Act,
2013 every such company has to comply this provision immediately.
Loan to Directors etc.
Like a Public Limited companies now the Private Companies have been put under restrictions on
giving loan/advance to Director or companies/firm in which Director is interested. We should
welcome these restrictions but this is also hard to some extent. Practically every middle size or
big Company have its subsidiary or associate Company. Further, loans are being borrowed from
Banks/Financial Institutes on providing equitable mortgage of some property and corporate
guarantee by the holding Company. Every subsidiary or associate Company generally does not
own adequate assets which are sufficient for securing the loans, hence Banks/FIs are insisting to
provide extension of charge on properties of Holding Company or corporate Guarantee of
holding Company or associate Company. These restrictions have been put by enacting the
provisions effecting from 12
th
September 2013. However, on representation from various
Corporate, the Ministry has some given relief by giving exemption to such Companies provided
loan or corporate guarantee is given by Holding Companies to its wholly owned subsidiary
effective from Ist April 2014. The Ministry has not clarified about loans or guarantees given after
12
th
September 2013 till 31
st
March 2014. Further, there is no relief to subsidiary or associate
Companies. The author is of the view that in numerous cases and as a matter of general practice
of bankers, substantial amount of loans/corporate guarantee are under stake for refund or for
substitution which are taken by the subsidiary or associate companies based upon corporate
guarantee of holding Companies and also in cases where renewal of corporate guarantee is due.
The author is of the view that these provisions need review and reconsideration by the Ministry.
Loan and Investment by a Company
These provisions are now applicable to private companies which are similar to erstwhile
provisions of Section 372A of the Companies Act, 1956. Now, as per provisions of Section 186
of Companies Act, 2013, the Companies are required to comply with the provisions. In part I,
companies can make investment through not more than two layers in down-word subsidiaries.
For example, A Company can make investment in B and B in C Company but C Company
cannot make further investment in D or any other Company which was not there in earlier Act.
However, a company can have many subsidiaries but there is restriction on downward
subsidiaries.
In Part B No Company can give any loan or give any guarantee or provide security or to acquire
by way of subscription, purchase or otherwise the securities of any other body corporate
exceeding sixty per cent of its net worth or one hundred percent of its free reserves and securities
premium account whichever is more.
Now, every Company has to review total amount of loan, advances, provide security or to make
investment within the aforesaid limits. For any transaction exceeding the above limit, the
company has to pass special resolution and to obtain prior approval of Bank/FIs from whom the
loans are subsisting.
Audit Committee, Nomination and Remuneration Committee
Section 178 of The Companies Act, 2013 read with Companies (Meetings of Board and its
Powers) Rules, 2014 has mandated the constitution of Audit Committee, Nomination and
Remuneration Committee and Stakeholders Relationship committee for every listed company
and public companies having paid up capital of Rs.10 crore or turnover of Rs.100 crore or having
in aggregate, outstanding loans or borrowings or debentures or deposits exceeding Rs.50 Crores.
The Committee should have three or more non executive directors and half of them should be
independent directors. The audit committee shall have all the powers to review the accounts,
accounting policies, related party transactions, internal audit system, internal auditors review etc.
The nomination and remuneration committee shall have the authority to make policy for
remuneration to managerial persons and key managerial persons. Stakeholders Committee is
required where number of members are more than 1000. These provisions are in line with
provisions of clause 49 of Listing Agreement which is a welcome step.
Companies required to appoint internal auditor.- (1) The following class of companies shall
be required to appoint an internal auditor or a firm of internal auditors, namely:-
(a) Every listed company;
(b) Every unlisted public company having-
(i) paid up share capital of fifty crore rupees or more during the preceding financial year; or
(ii) Turnover of two hundred crore rupees or more during the preceding financial year; or
(iii) Outstanding loans or borrowings from banks or public financial institutions exceeding one
hundred crore rupees or more at any point of time during the preceding financial year; or
(iv) Outstanding deposits of twenty five crore rupees or more at any point of time during the
preceding financial year;
Provided that an existing company covered under any of the above criteria shall comply with the
requirements of section 138 and this rule within six months of commencement of such section.
Establishment of vigil mechanism.- (1) Every listed company and the1
companies (a) which accepts deposits; or (b) which borrowed money from Banks/FIs in excess
of fifty crore shall establish a vigil mechanism for their directors and employees to report their
genuine concerns or grievances.
The author is of the view that where there is Audit Committee in existence, it should be
implemented through audit committee which has sufficient number of independent directors.
However, in respect of other companies, provisions for appointment of director to head vigil
mechanism are not sufficient. The ministry should review the heading of vigil mechanism
committee through independent directors where there is no Audit Committee otherwise this may
not achieve the purpose for which it is established. The action to be taken by the vigil mechanism
committee is also not clear.
Secretarial Audit Report. As per provisions of Section 204(1) of
New Act ever Every public company having a paid-up share capital of fifty crore rupees or
more; or
(b) Every public company having a turnover of two hundred fifty crore rupees or more are
required to conduct secretarial audit from practicing Company Secretary.
This is a welcome step. The author is of the view that these provisions should be made applicable
to all companies except one person company and small companies. Further the format of
Secretarial Audit Report is too general in nature which should be in respect of specific provision
of various laws as may be applicable to the Companies.
ROC filing of documents
Maximum time for filing the returns is now 300 days. The documents which are older than 300
days cannot be filed in normal circumstances.
Corporate Responsibility Statement
Every company having net worth of Rs.500 crore, turnover of Rs.1000 crore or net profit of
Rs.5.00 crore are required to make provision for 2% of its net profits for CSR. The disclosures
are to be made in Board Report. The Company can make the expenditure as per Schedule VII of
the Act i.e. for social purposes like eradication of poverty, promotion of education, women and
children welfare schemes, environmental and pollution reduction scheme etc.
FTE Scheme under section 560 of the Companies Act, 1956
The Ministry has not made effective provisions of Section 248 to 252 of the Companies Act,
2913 regarding removal of name of the Company from record of Registrar or striking off name
of the Companies. It is a good opportunity for the corporate to apply for striking off name of the
Company under FTE scheme in respect of companies which are not in operation for the last one
year or more or the companies which are running in losses and their capital has been eroded. For
availing this scheme the Directors have to give affidavit and indemnity to the effect that in case
of liability, if any, in future, they would be liable personally. By not giving effect to new
provisions for the time being, the Ministry has given opportunity to virtually defunct companies.
Penalties
Section 447 to 454 of new Act deals with provisions of penalty. Penalty for fraud i.e. an act of
omission or abuse of position with an intend to gain undue advantage or wrong gain or to
deceive other person(s) more particularly specified in that Section and for false statement under
Section 448, the offence is punishable with imprisonment for a period not less than six month
and up to ten years and also liable to fine which may extent to three time of the amount involved.
For offences where penalty is not specifically defined the Company and every officer is liable for
fine up to Rs.ten thousand and if offence is continuing Rs.one thousand for every day. The
penalty for wrong or irregular allotment and deposit has been prescribed hereinabove.
Conclusion
The new Companies Act 2013 is a welcome step. It is more stringent and requires strict
compliance by corporate sector. The non compliance or irregularity in compliances may attract
heavy penalties.
(Author Anil Kumar Popli, FCS, LLB is a Company Secretary in Practise from Delhi and can
be contacted at akpopli@rediffmail.com)
Disclaimer: The entire contents of this document have been prepared on the basis of relevant
provisions and as per the information existing at the time of the preparation. Though utmost
efforts has made to provide authentic information, it is suggested that to have better
understanding kindly cross-check the relevant sections, rules under the Companies Act, 2013.
The observations of the author are personal view and the author do not take responsibility of the
same and this cannot be quoted before any authority without the written consent of the author