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New Companies Act

New Companies Act. Salient Features of importance to the Industry and Opportunities / Critical Risks to the Chartered Accountants. Salient features. Salient Features…. New Concepts Business Structures Board and Management Business Friendly Accounts Audit and Auditors Dispute Resolution

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New Companies Act

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  1. New Companies Act Salient Features of importance to the Industry and Opportunities / Critical Risks to the Chartered Accountants

  2. Salient features

  3. Salient Features… • New Concepts • Business Structures • Board and Management • Business Friendly • Accounts • Audit and Auditors • Dispute Resolution • CSR • Cross Border Mergers • Others

  4. New Concepts • One person Company • Concept of Small Company and Dormant Company • “Provisions of entrenchment” in AOA • National Financial Reporting Authority (NFRA) from NACAS • More than advisory; Charged with monitoring and enforcement • Investigate into professional or other misconduct • CSR obligations on companies • Covered company to spend 2% of its average NP for 3 years • Provision for cross border mergers • Registered Valuers • CG empowered to prescribe restrictions on layers of subsidiaries • New Act is highly rule driven

  5. Business structures

  6. Chapter I Sec. 2 (62), 2 (85), 455 Structuring Advisory • New formats of business • One Person Company (OPC) • Dormant Companies • Small Company • Option to use these formats for business • Especially, potential to convert proprietorship into OPC • Number of members enhanced from 50 to 200 for private limited companies • Effect on control and management • Potential to advice on structuring revolving around terms an conditions to be placed on members

  7. Chapter I Sec. 2 (62), 2 (85), 455 New Structures • ICAI could take up measures to develop • Simplified format for financials • Accounting Standards for small companies • Simplified format of Audit report including CARO requirements • ICAI could also help provide support in terms of prescribing process for registration, monitoring etc., of these type of companies • Especially, considering the experience India has had with a huge lot of vanishing companies!

  8. Chapter XII Sec. 186 (1) Restriction on layer of subsidiaries • Step down subsidiaries restricted to two layers going forward • Scope for advisory to groups which have significant number of subsidiaries across multiple layers

  9. Directors and Management • A person can be a director in 20 companies (incl. 10 public companies) • Duties and liabilities of directors has been prescribed • Max. Directors – 15 (more through special resolution) • At least one woman director mandatory for certain class of companies • Every company to have at least one director who has stayed in India for over 182 days in the PY • Independent Directors prescribed for class of companies • Also tenure (10 years) and liability codified • Nominee director cannot be an independent director • Stringent requirements for independence • Statutory recognition to audit committee, remuneration committee and stakeholders relationship committee as well as CEO, CFO and CS as KMP

  10. Directors and Management • Shares cannot be issued at a discount • Use of securities premium • Inter corporate loans will include loans to and investment into “any person” • Minimum interest on ICD to be G Sec rates • More disclosures on related party transactions

  11. Business Friendly - Process • Speedy incorporation process • Private limited members limit enhanced to 200 • Simpler and single forum approval for M&A • Simple and short process for holding and WOS or small companies • Concept of deemed approval in some cases • Squeeze out provisions – purchase of minority shareholding when 90% holding reached • Simplified process for voluntary removal of name from register

  12. Business Friendly - E-enable • Voting through electronic means by members at meeting • Board meetings can be held by video conferencing / electronic means • Such participation will count for quorum too • Maintenance and allowing inspection of documents by companies in electronics form

  13. Business Friendly – Deleted • Certificate of Incorporation is the conclusive evidence • Provisions relating to certificate of commencement of business • Statement in lieu of prospectus • Statutory meeting and statutory report • Share warrants • Public trustee • Payment of interest out of capital • Transfer to general reserve for declaration of dividend • Special audit • Share qualification • Restrictions on appointment and remuneration of sole selling / sole-purchasing agents • Employee’s Security and PF amounts • Receivers and Managers

  14. Accounts • Consolidated Financials made mandatory • Company’s financial year made standard – 1st April to 31st March (except for exceptional cases) • No need to attach full annual reports of subsidiaries • Provision for revision of accounts • On being ordered by the authority • Voluntary revision • Internal audit by members of professional body being made mandatory • Mandatory secretarial audit for bigger companies including listed companies

  15. Audit and auditors

  16. Chapter IX Sec. 132 NFRA • New oversight body for the accounting and auditing profession • Functions hitherto with NACAS will also move over to NFRA • NFRA will deal with • Prescribing Standards based on ICAI’s standard setting – Accounting as well as Auditing • Monitor compliance with the accounting and auditing standards • For prescribed class of companies / auditors deal with disciplinary mechanism

  17. Chapter X Sec. 139 (2) Audit Rotation • Rotation of auditors after 5 / 10 years for CA / firm • Rotation of team and partner if the members so resolve • 5 year tenure for auditors appointed in AGM • Automatic reappointment in AGM where no auditor is appointed / reappointed • Scope to move into Statutory Audits for more firms • Opportunity to specialise in specific industries by firms to become the automatic choice for such rotation

  18. Chapter X and XVI Sec. 245, 143 Onerous Responsibility… • 245 (1) (g) (ii) and 245 (2) – Class Action suits a major area of concern for CA professionals • 143 (3) (i) – to be limited to internal financial controls that would materially impact the financial statements (like ICOFAR under SoX)

  19. Chapter X Sec. 143 Audit Execution and Reporting • 143 (3) (a) – Details of • How audit to be performed to be left to Auditing Standards • Discretion on reporting issues to Auditor’s judgement

  20. Chapter X Sec. 143 Fraud and Auditor’s Responsibility • 143 (12) and 143 (15) – To be limited to fraud, if identified in the course of the audit • Audit is only seeking reasonable assurance • Primary responsibility to protect from fraud and error lies with Management and TCWG • Audit procedures • May be effective to identify material errors • But not to identify all frauds

  21. Chapter X Sec. 141 Auditor’s Eligibility and Disqualifications • 141 (1) - Firms / LLP with majority partners being Chartered Accountants can be auditors • Could lead to non professionals and foreign entities taking advantage • Only multi disciplinary firms under CA Act to be permitted • 141 (3) (d) – Relatives to be redefined as “financially dependent relatives” • 141 (3) (e) – Arms length transactions in the ordinary course of business to be permitted • 141 (3) (e) - “Business relationship” should exclude permitted professional services

  22. Audit and Auditor • Tribunal can direct change of auditors if it is satisfied that the auditors have colluded in a fraud… • LLPs may be appointed as auditors • Auditing Standards to be made mandatory

  23. Chapter X Sec. 144 Prohibited Services • Differentiate “public interest entities” and others • Can provide for safeguards where applicable (like ICAI code of conduct) • Clarity needed on its application on services rendered outside India • Services prohibited to be specifically defined for their meaning • Over stringent norms could lead to services slipping away from CA professionals to other professionals

  24. Dispute Resolution • Class Action Suits • Disgorgement provisions in such cases • Resigning directors to also notify ROC with detailed reasons • Investigation into the affairs by SFIO • Vigil mechanism (whistle blowing…) • Mediation and Conciliation Panel • Prohibition of insider trading • Personal and unlimited liability on directors, promoters, experts etc., in case of fraudulent purpose • Special court to deal with offences under the Act

  25. CSR • Companies requiring to constitute a CSR committee • Networth of Rs.500 crore or more • Turnover of Rs.1,000 crore or more • Net profit of Rs.5 crore or more in any financial year • CSR committee to have • Three or more directors • At least one is to be an independent director • CSR committee will • Formulate CSR policy and recommend to board • Recommend the amount of expenditure to be incurred • Monitor CSR policy from time to time • Schedule VII lists out the activities which can be considered • Company to give preference to local areas / areas around which it operates

  26. Chapter XV Sec. 234 Cross Border Mergers • Critical look required into the following aspects: • India shareholder’s interest • Implications of FEMA and other such regulations • Indian worker interest • Dual listing • Implication to Indian tax revenue scenario

  27. Others • Revival and Rehabilitation Provisions for Sick Companies • Sickness to be determined not based on negative networth but based on ability to repay debts • Stringent control over Not for profit companies • Companies which can raise public deposits restricted • Dividend claim not extinguished after 7 years

  28. Others • Relaxation that association / partnerships could have up to 100 persons • No ceiling on partners / members in case of associations of persons / partnerships for professionals regulated by special acts

  29. Chapter I Sec. 2 (6), 2 (27), 2 (76), 2 (87) AS vs. Companies Act • The definitions in Bill different from Accounting Standard • Control • Associate • Subsidiary • Related Party • Recommend • For preparation of CFS, definition as per AS will prevail and • For regulatory purposes definition as per Act will apply

  30. New opportunities

  31. Chapter XVII Sec. 247 Valuation – Registered Valuers • Introduction of registered valuer • CA in practice could take benefit of this requirement • Also, to look into more areas where such registered valuer services could be made mandatory

  32. Chapter XIV Sec. 211 Serious Fraud Investigation Office • ICAI could work with SFIO • Opportunities to work on forensic investigations • Development of early warning systems for being implemented for online monitoring and tracking • SFIO being viewed as a large employment provider for CA professionals

  33. Chapter I Sec. 2 (41) Uniform Financial Year • Help companies with the transition • Identify feasibility of a different financial year where scope exists and the company would find it beneficial

  34. Chapter IX Sec. 129 (3) Consolidated Financial Statement • Requirement to file consolidated financial statements extended to more companies • Opportunity to advice groups into a relook at their structures and implications • Automatic requirement for more professional services in view of this

  35. Chapter XI Sec. 149 (4) Independent Directors • More opportunities for independent directors • Need to create a database and panel as a professional development initiative • Focused training sessions to make CA’s as the choice for independent directors

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