Overview & new concepts in Companies Act 2013 Sushrut Chitale

1. Overview & new concepts in Companies Act 2013 Sushrut Chitale

2. Overview

3. Why are we all here?

4. Companies Act 2013 – timeline

5. Key statistics…

6. Interesting facts… Companies Act 1956 Companies Act 2013 • 96 sections in 1 Chapter (Chapter XX – Winding up) – this is 20% of all sections in Companies Act 2013 • 6 Chapters contain less than 5 sections each XIII Parts (XXVI Chapters) 658 sections XV Schedules XXIX Chapters 470 sections VII Schedules

7. Interesting numbers…

8. Current status of Companies Act 2013 • 98 sections notified w.e.f 12 September 2013 • 1 section (CSR) & Schedule VII notified w.e.f. 27 February 2014 • 196 sections & remaining schedules notified w.e.f. 26 March 2014 • 22 Rules in respect of various sections notified w.e.f. 1 April 2014 • 11 General Circulars, 7 Notifications, & 3 Orders issued after commencement of various provisions of the Companies Act 2013

9. New concepts

10. One person company (OPC) • Private company – with only 1 member • Memorandum of OPC to include nomination of person who will become member in case of subscriber’s death or incapacity • Such nomination can be changed at any point of time • The words “One Person Company” to be mentioned in brackets below name of company • There can be more than 1 director in case of OPC • Financial statements to be filed within 180 days of end of FY Concessions to OPCs • Minimum 2 Board meetings in a calendar year (with gap of minimum 90 days between 2 meetings). However, in case of only 1 Director, no Board meeting required – only resolutions to be recorded • OPC need not prepare cash flow statement / need not hold AGM • Auditor rotation not applicable

11. One person company (OPC)… Limitations • Only natural person, being citizen of India & resident can incorporate / be a nominee in an OPC • One person can not incorporate / be nominee in more than 1 OPC • Minor can not be member / nominee / hold beneficial interest • OPC can not be an investment company • Where paid up capital of OPC exceeds Rs. 50 lakhs or average annual turnover (last 3 years) exceeds Rs. 2 crores, it shall convert itself in to a private / public company within 6 months

12. Small company • Small company – company, other than public company, whose • Paid up share capital is ≤ Rs. 50 lakhs; or • Turnover ≤ Rs. 2 crores • Holding Co / subsidiary company, section 8 company, company registered under a Special Act not to be treated as small companies Concessions to Small companies • Small company not required to prepare cash flow statement • Small company to conduct at least 2 Board meetings in a calendar year (with gap of 90 days between 2 meetings) • Auditor rotation not applicable for small companies

13. Dormant company • Who can attain status of a dormant company? – Companies; • Formed for a future project, or to hold and asset / intellectual property and has no significant accounting transactions • Not carrying out any significant business or operation, or has not made any significant accounting transaction, or has not filed financial statements / annual returns for 2 years • Special resolution in AGM / confirmation from at least 3/4th shareholders (by value) required to apply for being dormant company • Certain additional conditions prescribed for company to be eligible to make application to be dormant company

14. Dormant company… Concessions to dormant companies • Dormant company not required to prepare cash flow statement • Dormant company to conduct at least 2 Board meetings in a calendar year (with gap of 90 days between 2 meetings) • Rotation of auditors not applicable Limitations • ROC to initiate process of striking off name of company in case it remains dormant for consecutive 5 years • Return to be filed within 30 days of end of financial year of financial position duly audited by CA

15. Key definitions • Financial statement – [sec 2 (40)] – • Defined to include balance sheet, • profit & loss account / income & expenditure account, • cash flow statement, • statement of changes in equity, if applicable, • explanatory notes • Financial statement for small / dormant company / OPC not to include cash flow statement • Financial year – [ sec 2 (41)] – • Defined as period ending on 31st March every year; • Where company is incorporated after 1st Jan in a year, financial year will be till 31st March of the next year • Companies given 2 years to align financial year to April – March

16. Key definitions • In case a company is a holding / subsidiary company of a company incorporated outside India, and such company is required to consolidate its accounts outside India, a different financial year can be followed subject to approval by the Tribunal • Subsidiary company [Sec 2 (87)] means a company in which the holding company • Controls composition (>50%) of the Board • Exercises or controls more than 50% of total share capital either by itself or together with one or more subsidiaries • Total share capital = paid up equity capital + convertible preference share capital

17. Key definitions • Scenarios determining whether a company is a subsidiary or not: • Scenario 1 : A Ltd holds 60% of equity share capital & 50% of convertible preference share capital, with balance held by B Ltd • Scenario 2 : A Ltd holds 51% of equity share capital. B Ltd holds 49% of equity capital and 100% of convertible preference capital

18. Class action – implication for auditors • What is Class action? – A lawsuit filed or defended by an individual or small group acting on behalf of a large group • Who can sue? – Shareholders (at least 100 shareholders) or depositors (at least 100 depositors) or an association representing such affected persons • What can they claim from auditors? – damages / compensation / any other suitable action • Compensation for what? – improper / misleading statement of particulars made in audit report or for any fraudulent, unlawful or wrongful act or conduct • Who is liable to pay? – In case of audit firm, the firm itself as well as each partner who was involved in making improper / misleading statements or who acted fraudulently • What about frivolous applications? – Tribunal can reject application & direct applicant to pay Rs. 1 lakhs to other party

19. CSR • Every company with NW > Rs. 500 crores, or turnover > Rs. 1000 crores, or net profit > Rs. 5 crores during any financial year to constitute a CSR committee • CSR committee to have minimum 3 directors (out of which 1 director to be independent) • Company to spend at least 2% of average net profits of previous 3 years on CSR activities • These CSR activities to include activities mentioned in Schedule VII – Emphasis is to spend in & around place of operation of the business. • CSR also applicable to foreign companies operating in India if they are covered by the eligibility norms • Requirements in respect of CSR are encouraged. No penal provisions stated if provisions are not complied with.

20. SFIO • Serious Frauds Investigation Office to be formed for investigating company law cases • Cases to be reported for investigation to SFIO by Central Government in following situations; • Receipt of ROC inspection report • Special resolution passed by company that its affairs need to be investigated • Cases in public interest • Request from Department of the Central / State Government • Once SFIO commences investigation, all other investigations stop • SFIO can arrest any person if they have reason to believe that certain types of offence are committed by him. • Bail application in such cases to be approved by Court only if it is satisfied that accused is not guilty of offence

21. Mediation & Conciliation panel • Central Government to maintain panel of experts to be called as Mediation & Conciliation panel – this panel to consist of experts • Matter pending before Central Government / Tribunal / Appellate Tribunal can be referred to the experts in the panel • The panel to dispose of matter within 3 months from date of reference and forward recommendations to the Central Government / Tribunal / Appellate Tribunal, as the case may be.

22. Other key changes • Accounts & Auditors • Consolidation required even for unlisted companies • Revision to financial statements granted recognition (yet to be notified) • Auditor rotation after 10 years (retrospective application) • Restriction on services provided • Auditing standards made compulsory • Mandatory internal audit for listed companies & some other companies

23. Other key changes • Directors • 1 woman director in listed companies • Independent directors even in unlisted public companies • Stricter definition of independent directors • Small shareholder directors • Maximum tenure of 10 years (prospective application) • No ESOPs to independent directors • Fees limit extended to Rs. 100,000 • Significant increase in coverage in Board’s report • Internal financial control systems & operating effectiveness thereof • Compliance with all applicable Laws

24. Other key changes • Related party transactions • Definition of deposits widened to include more transactions • Restrictions on loans to directors • Special importance given to minority shareholders in approving related party transactions • Interest rate capped in terms of giving loans to related parties

25. Other key changes • Other administration aspects • Key managerial personnel – CEO/ MD, CS, WTD, CDO • Definition of Fraud & its coverage • No Mandatory requirement to transfer to reserves before declaration of dividend • Secretarial audit mandatory in listed companies • CIN to be printed on all stationery • Registered office to be verified • Commencement of business applicable even to private companies • Changes in top 10 shareholders (>2%) to be filed with ROC within 15 days • Variation in objects clause in case of funds raised through IPO

26. Other key changes • Other administration aspects • Electronic communication with shareholders recognised • E-voting mandatory for listed companies • Registered valuer (yet to be notified) • Video conferencing allowed for Board meetings • Redeemable preference shares allowed beyond 20 years in case of infrastructure companies • Whistleblower mechanism for listed companies

27. THANK YOU! Sushrut Chitale Mukund M Chitale & Co. 204/205, Agrawal Shyamkamal – A, Vile Parle East, Mumbai – 400057, Mobile: 91 98211 12904 Email: sushrut@mmchitale.com Website: www.mmchitale.com