Urgent Actions for Companies under Companies Act 2013

1. COMPANIES ACT 2013 – Urgent & Important actions before March 15 By CS Makarand Joshi makarandjoshi@mmjc.in

2. Coverage of Session • Borrowings / Deposit • Allotment of Shares / Securities • Fixed Assets • Group Company Loans • Other Loans / Investments • CSR • Related Party Transactions • Remuneration to Directors • ROC Filings

3. Borrowing

4. Who can approve borrowing? • Board of Directors can approve borrowing • Board can delegate this power to committee or to MD • If borrowing exceeds paid up capital + free reserves, it requires prior special resolution • All the resolutions [shareholders / directors] to be filed with ROC

5. Charge – secured loan • Means an interest or lien created on – • Property or • Asset of a company or • Any of its undertaking as a security and includes mortgage • Now requires charge registration for lien on FD or pledge of shares • Charge on vehicle is also required to be registered.

6. What if not complied? • If charge is not registered – secured lender is at part with unsecured lender • Penatly = 100,000 – 500,000 + imprisonment of 6 months • If borrowing made without special resolution, borrowing may be considered as ultra vires

7. Summary Check that all borrowings has board resolution AND filed with ROC Check that charges is registered for all secured loans Check that borrowing is within limits or Special Resolution is filed with ROC

8. Deposit

9. Repayment of Deposits • Deposits as on 1 April 2014 to be repaid till 31 March 2015 • Deposit under Old act or Under New Act? • Penalty for non repayment = 1cr >10 cr + officer liable for imprisonment >7 years and fine 25 lacs>2cr

10. What is ‘deposit’ under acceptance of deposit rules? • The major highlights of this definition are – • This is an inclusive definition. It says ‘deposit’ includes any receipt of money by way of deposit or loan or any other form, by a company, but does not include..... • There are 14 exclusions from the definition of deposit • Here any other manner has to be read in the context of receipt either as deposit or loan.

11. What are 14 exclusions? • Any amount received from government or from any other source whose repayment is guaranteed by central government • Any amount received from foreign source, so long as it is in compliance with Foreign Exchange Management Act • Any loan or facility received from Bank • Any loan or financial assistance received from public financial institutions • Any amount received against issue of commercial paper or any other instrument issued under guidance of RBI

12. What are 14 exclusions? • Any amount received from any other company • Any application money received under this act, against issue of any securities [so long as the allotment is done in 60 days of receipt of money] • Any amount received from Director of the Company [however the amount received should not be out of borrowed funds] • Any amount received against issue of secured bond or debentures OR Any amount received against issue of compulsory convertible bond or debentures [bond should be convertible into shares within a period of 5 years]

13. What are 14 exclusions? • Any security deposit received from employee of the company [not exceeding 12 months salary]. This deposit should be non interest bearing. • Any non interest bearing amount received or held in trust [by the company] • Any amount received in the course of and for the purpose of business of the company – • as an advance for the supply of goods or provisions of services accounted for in the manner, provided that such advance is appropriated against supply of goods or services within a period of 365 days from acceptance of deposit

14. What are 14 exclusions? • as advance accounted for in any manner, received in connection with consideration for property • as security deposit for performance of contract for supply of goods or services • as advance under long term projects for supply of capital goods • any amount brought by promoters in pursuance of stipulation imposed by the lending institution • any amount accepted by a Nidhi Company in accordance with section 406 of the Companies Act 2013.

15. Does it mean, if any amount falls under either category it is not deposit?

16. Acceptance of Deposit • Private Company can take deposit only upto 25% of paid up capital + free reserves, if – • Credit rating is obtained • deposit insurance is obtained • Special Resolution is passed • Only Public companies with min. networth of Rs.100 Cr or turnover of Rs.500 can accept Public Deposit [other than shareholders] • Limits may be relaxed to 100% of paid up capital for private companies!!

17. What is the solution? • Let money received fall under any of 14 exemptions ELSE • Repay the Deposits before March 15 OR • Convert Promoters Money into Capital and accept Deposit OR • Seek extension of time from CLB for repayment of Deposit

18. Compliances • On or before 30th Day of June, return of deposit – Registrar in Form DPT-3 • Depositing on or before 30th April of each year not less 15% of the amt maturing during the financial year and following year in a scheduled bank to be maintained separately as deposit repayment reserve • The Amt so deposited shall not be used for any purpose other than for repayment.

19. Share Capital

20. Share Capital

21. Share Capital • All Shares to be offered on rights basis; ELSE • It is Private Placement • Private Placement requires - Special Resolution + valuation report • Private Placement offer document!!! • Separate Bank account required in private placement • Funds can not be used till allotment is completed • Any mis statement in Offer document can be alleged as ‘Fraud’

22. What if loan is getting converted into Equity / Preference ?

23. What to do with respect to Share Application money carry forward from earlier years?

24. Prohibition of Loans, Guarantees and Securities

25. Prohibited Loan/ Guarantee/ Security • Section 185 prohibits loans / guarantee/ security to director or person in whom director is interested • Such loans can not be given • This section has become effective from 12 September 2013

26. What is the consequence of default? • For Company granting loan fine 5-25 lacs • For director / entity receiving loan – imprisonment upto 6 months OR fine 5-25 lacs • If director does not disclose his interest – vacation of directorship • Loan granted may be considered as ultra vires and person granting it may be personally responsible • Directors personal default in his duties

27. Section 185 • Provisions of section 185 prohibits loan / security guarantee given by any company to following entities – • Director of lending company • Director of holding company of lending company • Partner/ relative of such director • Firm in which such director is partner • Firm in which relative of such director is partner • Private company in which such Director is a Director or member

28. Section 185 • Body corporate at general meeting of which not less than 25% of total voting power may be exercised or controlled by such director or by two or more such directors together; • Body corporate, the board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company

29. How to comply with Section 185?

30. How to comply with Section 185? • Loan from company other than prohibited entity • Loan from exempted entities • Change Shareholding / Directorships • Don’t take loan. Take investment • Don’t take loan. Take business advance • Merge entities • Convert companies into LLP • Convert Partnership Firms to Company and change shareholding / directorship

31. Model - 1 Operating Cos provide loan to each other

32. Model - 2 1] A can provide to B & C 2] B & C can provide each other 3] B & C can not provide A

33. Whether section 185 covers all book debts?

34. Exemption: • Any loan given to MD as part of employee benefits OR under some scheme approved by shareholders • Advance loan, give guarantee or provide security in respect of loan made by any person to wholly owned subsidiary • Give guarantee or provide security in respect of loan made by any bank or financial institution to subsidiaries companies • NBFC can give loans/ provide guarantee / security • If borrowing party is anybody other than prohibited list

35. Investments, And Permitted Loans, Guarantees and Securities

36. Comparison

37. What is Investment? • Laying of money in such a manner that it would produce some revenue [dictionary meaning] • It may include following – • Shares, • Debentures • Property [which is not purchased for business] • Fixed Deposit is investment? – Yes, it can be said as Investment for the purpose of section 179

38. Investments – Who can approve? • Every Investment requires approval of the Board of Directors • If loans / investments / guarantee/ security made in excess of 100% of free reserves or 60% of paid up capital + free reserves, it requires prior approval of shareholders • Approval of public financial institutions, in certain cases, is required • Every such Board / Shareholder resolution to be filed with ROC

39. Loans and Investments • Limits on Investment /Loan /Guarantee /Security Given(186) • Interest rate note lower than yield on Govt. Security • Applicable even to private limited company • Applicable even for loan given to employees • Requires approval of board – to be filed with ROC • Register to be maintained

40. Loans and Investments • Special Resolution and Board resolution to be filed with ROC • Exemption: • Loan given or guarantee or security provided by holding company to wholly owned subsidiary or joint venture company • Investment in shares by holding company to its wholly owned subsidiary company. • This section shall not apply to NBFC

41. Summary Check that all loans carry interest Check that none of the loan is in violation of section 185 Check that Shareholding / Directorship is organized to cope up with se. 185 Check if your company is becoming NBFC?

42. Fixed Assets

43. Assets • All ‘investments’ in assets should be made in company’s name • Motor Car? • Agricultural Land? • Depreciation to be changed on useful life from next financial year

44. Disposal of Assets • Any disposal/ lease / sell of undertaking OR substantial undertaking of the Company requires Special Resolution • Undertaking includes – property / investment / business undertaking • Undertaking = undertaking in which investment of the company exceeds 20% of its net worth OR • Undertaking which generates 20% of total income of the Company as per last financial year • This section does not apply to company, where selling and leasing property is an Ordinary Course of Business

45. What if special resolution is not obtained?

46. Disposal of Assets • Buyer will not be impacted if he proves that he acted in good faith • If buyer is aware about this non compliance, title will be faulty • It is subject to litigation • If you are acquiring property from the Company, get this special resolution passed and filed with ROC

47. Summary Check if all assets are in the name of the Company. Check if there is any sale of undertaking by your client.

48. Related Party Transactions

49. Approach TOWARDS Related Party Transaction • Scope is widened • Transactions to be at arms length And in Ordinary Course • If not in ordinary Course OR if not at arms length –requires approval of board and may be Special Resolution of Shareholders • Interest Directors not to participate at board meetings • Related Party shareholders not to vote at General Meeting • Transactions with Wholly Owned Subsidiary Exempted

50. Remuneration to Directors