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Glimpses under the Companies Bill, 2009

Glimpses under the Companies Bill, 2009. Presented By: Manisha Chaudhary, Advocate Partner, UKCA Law Chambers. INTRODUCTION.

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Glimpses under the Companies Bill, 2009

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  1. Glimpses under the Companies Bill, 2009 Presented By: Manisha Chaudhary, Advocate Partner, UKCA Law Chambers

  2. INTRODUCTION • The re-codification of company law began when the government posted a draft Companies Bill as a concept paper on its website and invited comments and suggestions from professionals and trade and industry organisations. This input was handed over to an expert committee established by the government and headed by Dr. JJ Irani. • The companies bill, 2009 seeks to establish a new benchmark for corporate governance in comparison to the existing framework under the Companies Act, 1956, and various amendments, thereto.

  3. FOCUS OF THE BILL The new bill aims to simplify company law by: • Revising and modifying the Act in consonance with changes in economy both national and international. • Retaining essential features of the existing frame work, while introducing new provisions which are useful and urgently required, keeping in view of good corporate governance and address the concerns of all stakeholders equitably. • Deleting certain provisions that have become reluctant and re-grouping the scattered provisions to specific subjects.

  4. De-linking the procedural aspects from the substantive law and providing greater flexibility in rule making to enable adaptation to the changing economic and technical environment. • Introducing specific provisions in the Act relating to director’s duties which have been ignored in the previous Act and its amendments. • Harmonizing company law with provisions of the Securities and Exchange Board of India governance norms.

  5. HIGHLIGHTS Following are the some of the important New Concepts which have been introduced in the Companies Bill, 2009: - • BOARD MEETING THROUGH VIDEO CONFERENCING. • REGISTERED VALUER. • KEY MANAGERIAL PERSONAL. • CONSTITUTION OF SPECIAL COURTS. • REPORT ON ANNUAL GENERAL MEETING. • ONE PERSON COMPANY. • ADJUDICATION PROCEEDINGS.

  6. Following are the some of the other important concepts of the new bill, which are improvements of the older existing provisions of the Companies Act, 1956: - • SETTING UP OF SPECIAL COURTS OUTSIDE INDIA. • KINDS OF SHARE CAPITAL. • DIRECTOR’S DUTIES. • SPECIFIC PROVISIONS REGARDING INSIDER TRADING. • RETIREMENT AND RESIGNATION OF DIRECTORS. • MANAGERIAL REMUNERATION. (Continued...)

  7. INDEPENDENT DIRECTORS. • CONTRACTS AND INTERESTED DIRECTORS. • MERGERS AND AMALGAMATIONS. • ABOLITION OF PUBLIC DEPOSITS. • ANNUAL RETURNS AND REPORTS AT AGM. • AUDITORS. • VOTING BY ELECTRONIC MEANS. • DEFUNCT COMPANIES. • INSPECTION AND INVESTIGATION. (Continued...)

  8. CLASS ACTION SUITS. • EXTINGUISHING RESTRICTIONS ON CLAIM OF INVESTORS FROM IEPF. • INSOLVENCY, REHABILITATION AND WINDING UP.

  9. NEW CONCEPTS

  10. BOARD MEETING THROUGHVIDEO CONFERENCING • Sec. 258 of Companies Act, 1956 contemplates 4 board meetings in a year – atleast once every 3 months. • Globalization and advent of information technology has removed economic and physical barriers. There is a huge demand from industry and trade organizations to hold board meetings through video conferencing. • The bill recognises these demands and Cl. 154 of the Companies Bill, 2009 provides that board meetings can be held through video conferencing or other electronic modes with careful reckoning of the directors and storing the video footage of such meetings. • The government may by notification prescribes certain subjects which cannot be dealt through video conferencing and should only be dealt in a board meeting on the lines of present Sec. 292 of the Companies Act, 1956 corresponding to the Cl. 159 of the Companies Bill, 2009. • Cl. 107 (10) provides to make it mandatory for every company to observe such secretarial standards as may be prescribed with respect to general and board meetings.

  11. REGISTERED VALUER • Cl. 218 of the Companies Bill, 2009 provides that if valuation is required in any of the provisions of the Act relating to property, stock, assets, it should be done by a Registered Valuer appointed by the Audit Committee of the Board and the valuer should be a Chartered Accountant, or Cost and Works Accountant, or a Company Secretary or such other person possessing such qualification as may be prescribed, who has to apply to the Central Government to become a registered valuer. • Cl. 56 of the Companies Bill, 2009 which is related to further issue of capital by private placement provides that the price of such issue should also be done by a Registered Valuer. • Cl. 201 of the Companies Bill, 2009 deals with compromise arrangement, amalgamations with creditors and members (Sec. 391 to Sec. 394 of the Companies Act, 1956) provides for valuation report in respect of shares, other properties and all assets, tangible and intangible, movable and immovable of the transferor company, by a Registered Valuer.

  12. KEY MANAGERIAL PERSONNEL • For the first time in the Companies Bill, 2009, a new concept of Key Managerial Personnel has been introduced. The Managing Director, CEOs, Managers, Whole-time Director(s), Company Secretaries and CFOs have been brought under the purview of this definition. • Cl. 178 seeks to provide that every company which is covered under this clause or description, shall have whole time key managerial personnel, who should be appointed by means of a board resolution fixing the terms of appointment including the remuneration and such person shall not hold any office in more than one company at the same time but can be a director of any company with the permission of the company and any vacancies in key managerial personnel can be filled up by the board within six months. • The Key Managerial Personnel have also been drawn under the clause of ‘officer-in-default” in about 24 clauses excluding winding up provisions.

  13. CONSTITUTION OF SPECIAL COURTS • It is a new concept relating to establishment of special courts for speedy trial of offences punishable for non-compliance of law as envisaged in Cl. 396 and 397 of the Companies Bill, 2009. • The Special Courts will be established in consultation with the Chief Justice of High Court. Who have shall have jurisdiction with another Judge, who should be at least holding an office of session judge or additional session judge and who can only impose punishment by way of imprisonment pursuant to Sec. 28 of the Code of Civil Procedure. • There are many offences major and minor which comes within the jurisdiction of the special court. Minor offences like failure to file a resolution or agreement or failure to provide information about DIN may be considered to be removed from this clause and they can come under adjudication proceedings. This means the special court concentrates only on serious offences.

  14. REPORT ON AGM • Cl. 109 of the Companies Bill, 2009 provides for reporting of Annual General Meeting in the case of listed companies. • The reporting should include the confirmation to the effect that it has been convened, held and conducted as per provisions of the Act and Rules. • A company has to file with the Registrar of Companies a report referred to in Sub-Sec. 1 within 30 days from the conclusion of AGM with a fee. • In case of failure to report, the company shall be punishable with a fine, not less than 1 lac Rupees which may extend to 5 lac Rupees. • The penalty can also be imposed on the officer-in-default, which shall be not less than 25,000 Rupees and may extend up to 1 lac Rupees.

  15. ONE PERSON COMPANY • Cl. 3 of the Companies Bill, 2009 provides a new concept relating to formation of One Person Company (OPC). It is a new form of business organization which has only one person as a member. • It provides that one person company can be incorporated for any lawful purposes and it enjoys limited liability. • The Memorandum of Association (MoA) of such company should indicate the name of the person who shall in the event of the subscribers disability, death or otherwise becomes the member of the company and such change should be informed to the Registrar of Companies and it will be considered as an alteration to the MoA. • A OPC need not hold Annual General meeting as provided in Cl. 85 of the Companies Bill, 2009 but all other provisions, relating to maintaining of books of accounts, audit etc. will apply. This is to bring out transparency in their operation and it offers some measure of protecting the creditors of the OPC.

  16. ADJUDICATION PROCEEDINGS • The Bill provides a new concept of adjudication of penalties in respect of non-compliance of procedural laws by fixing minimum and maximum penalties for each offence and also increases the penalties for repeated defaults. • The penalties range from 5000 Rupees to 50,000 Rupees and for some it is between 1 to 10 lac Rupees. In the case of failure to repay the matured deposit or interest within the agreed period or under any extension, the company is punishable with a fine of not less than 1 crore Rupees and to the extent of 10 crore Rupees. In addition to this the officer-in-default will be fined not less that 25 lac Rupees which can extend up to 2 crore Rupees. (Cl. 67) • The Penalties will be determined by the Adjudicating Officers, who will not be below the rank of Registrar of Companies and who shall have powers to impose penalties by following the principles of natural justice. The Central Govt will publish the status of the offices in the Gazette Appeal provisions have been included. • There are 32 clauses of the bill which refers to officer-in-default for the penalties.

  17. IMPROVED PROVISIONS

  18. SETTING UP OF SPECIAL COURTSOUTSIDE INDIA • Register of members is one of the statutory registers prescribed by the Companies Act, 1956 which establishes an evidence of ownership of a share held by a member. • Cl. 53 of the Companies Bill, 2009 provides for rectification of register of members. Also a person aggrieved or the company may appeal to the tribunal (at present Company Law Board) for rectification of register of members. • The new concept is to establish a special court outside India for the benefit of the foreign members or debenture holders to have this right.

  19. KINDS OF SHARE CAPITAL • Cl. 37 of the Companies Bill, 2009 corresponding to Ss. 85 and 86 of the Companies Act, 1956 seeks to provide that there shall be only two kinds of share capital – Equity and Preference. • Preferential Share capital carries a preferential right with respect to the payment of dividend and also repayment of the capital at the time of winding up. • In respect of equity capital that clause clarifies that it has no limits for participation either with respect to dividend or with respect to capital in the distribution of the profits or otherwise. • The result of this is doing away with the deferential voting rights as to dividend, voting or otherwise, at present recognized by Sec. 86 of the Companies Act. 1956. The companies which have issued shares with preferential rights have to take effective steps to cancel such shares.

  20. DIRECTOR’S DUTIES • Cl. 117 of the Companies Bill, 2009 provides for the manner in which regulation of arrangement between a company and its directors in respect of acquisition of assets for consideration other than cash are to be done. Such arrangement require prior approval in a general meeting and if the Director or concerned person is a Director of its holding company approval is required in the general meeting of the holding company also. • Cl. 147 of the Companies Bill, 2009 defines duties of directors as following: • To act in accordance with the Articles of Association. • Act in good faith in order to promote objects in the company. • Keeping in view of the benefits to its members. • Perform duties with due and reasonable care, skill and diligence. • Not to place in a concrete situation directly or indirectly in the interest of the company. • Not to gain any undue advantages for himself and relatives, partners, or associates, not to assign his office and contravention of any of the duties is punishable with fine. • The codification of duties of directors as mentioned above, has been brought out in the bill and any deviation will attract penal consequences.

  21. INSIDER TRADING • Cl. 171 of the Companies Bill, 2009 provides for the manner in which certain transactions or contracts are entered between a person company and its own member. • It provides that the OPC, limited by shares or by guarantee, enters into a contract with a sole member of the company who is a director, unless the contract is in writing ensure that the terms of the Contract or offer are contained in a Memorandum or are recorded in the minutes of the Board Meeting held after entering into contract and such contract shall be intimated to Registrar. • Cl. 172 of the Companies Bill, 2009 prohibits whole-time director and key managerial personal (KMP) from buying certain kinds of mutual contracts in relation to securities of the company. If it is acquired by the Whole-time director or KMP it has to be surrendered and the company shall not register the same in the name of the whole-time director or the KMP in the Register of Members and if it is in de-mat, it shall inform the depositor not to record such application. • Cl. 173 of the Companies Bill, 2009 provides to prohibit Directors or KMP to deal in securities of the company or counsel, procure, communicate, directly or indirectly, about any unpublished price sensitive information to any person.

  22. RETIREMENT AND RESIGNATION OF DIRECTORS • Retirement • Cl. 133 of the Companies Bill, 2009, more or less reckons to Section 254 to 256 and 264 of the Companies Act, 1956 as it intends to provide the manner in which the Directors including the First Directors shall be appointed by the Company. • The clause provides that 1/3rd of the total number of Directors of a Public Company shall retire and out of the remaining, 1/3rd shall retire by rotation at every AGM in accordance with the rules as may be prescribed. • Resignation • Cl. 149 of the Companies Bill, 2009 provides that the Director may resign from his office by giving a notice in writing to the Company and the Board shall take note of the same and intimate the Registrar as prescribed and shall place the resignation before the general meeting held immediately. The Resigned Director may also forward a copy of the Resignation to the ROC in the manner as may be prescribed. Resignation shall take effect on the date on which it is received or any other date specified, which ever is later.

  23. MANAGERIAL REMUNERATION • Cl. 174 of the Companies Bill, 2009 deals with appointment of Managerial personal. • No company shall appoint or re-appoint any person for a term exceeding five years at a time: Provided that no re-appointment shall be made earlier than one year before the expiry of his term. • No company shall appoint any firm, body corporate or other association as its manager. • No company shall appoint or continue the employment of any person as its key managerial personnel who — (a) is below the age of 21 years or has attained the age of 70 years: Provided that appointment of a person who has attained the age of 70 years may be made by passing a special resolution; (b) is an un discharged insolvent or has at any time been adjudged an insolvent; (c) has at any time suspended payment to his creditors or makes, or has at any time made, a composition with them; or (d) has at any time been convicted by a court of an offence involving moral turpitude. (Continued...)

  24. A managing director, whole-time director or manager shall be appointed by the Board of Directors at a meeting with the consent of all the directors present, which shall be subject to approval by a special resolution at the next general meeting of the company: Provided that a notice convening Board or general meeting for considering such appointment shall include the terms and conditions of such appointment, remuneration payable and such other matters including interest, if any, of a director or directors in such appointments, if any. • Subject to the provisions of this Act, where an appointment of a managing director, whole-time director or manager is not approved by the company at a general meeting, any act done by him before such approval shall not be deemed to be invalid. • Cl. 175 of the Companies Bill, 2009 provides for the manner in which the remuneration to managerial personal can be paid either by – monthly remuneration or on some % of net profit basis. The gist of these clauses is that the Government intends to do away the approval required from it as in existence under Schedule 13 where the remuneration cannot exceed the limits prescribed.

  25. INDEPENDENT DIRECTORS • Cl. 132 of the Companies Bill, 2009 provides that every listed company having such paid up capital, as may be prescribed, should have 1/3rd of its directors as independent directors. Central Government may prescribes the minimum no. of directors in the case of other public companies. • These directors are non-executive directors of integrity and should have expertise and he or his relatives should not have any pecuniary relationship with the company. • Nominee directors are excluded from the definition of independent directors. • Existing companies should have to comply with the requirement of independent director within one year from the commencement of the new Act. • The bill for the first time has defined and recognized the role of independent directors irrespective of the board chairman being executive or non-executive.

  26. CONTRACTS & INTERESTEDDIRECTORS • Cl. 166 of the Companies Bill, 2009 seeks to provide the manner in which contracts or arrangements by a company with related parties shall be made and disclosed. • it provides to do away with a requirement of obtaining approval of the Central Government for a Company entering into contracts for – sale, purchase, supply of goods, materials; selling or otherwise disposing of or buying property of any kind; availing or rendering any services; appointment of agents – for purchase or sale of goods, materials, services or property; appointment to any office or place of profit in the company or its subsidiary and for underwriting the subscription of any securities of the Company. • The new clause requires the prior approval of the Company by a special resolution where the companies’ paid-up capital is not less than such amount or transactions not exceeding such sums, as may be prescribed. • All contracts referred in this clause have to be reported in the Board’s report. There are penal provisions for contravention which includes that the director(s) who are involved in the contravention have to indemnify the company against any loss incurred.

  27. MERGERS & AMALGAMATIONS • Cl. 201 to 205 of the Companies Bill, 2009 corresponding to Ss. 391 to 394 of the Companies Act, 1956 deals with mergers and amalgamations which will include compromises and arrangements with creditors and members, takeover offers, scheme of debt restructuring, valuation of shares and other properties of the company, merger by absorption or by formation of a new company, amalgamation by mutual consent of the companies in the jurisdiction of such countries as may be notified by the government. • This provision helps to provide for amalgamation of foreign companies with Indian companies and payment for such acquisition in cash or partly in IDRs. • The scheme requires the sanction of the tribunal, except for mergers and amalgamations by absorption or formation of new company which shall be by mutual consent of the companies. The effect of this clause is that the powers of approving amalgamations have been shifted to the NCLT from the High Courts. • Cl. 208 of the Companies Bill, 2009 corresponding to Sec. 398 of the Companies Act, 1956 empowers the government to amalgamate any company in public interest.

  28. ABOLITION OFPUBLIC DEPOSITS • It is proposed in the Companies Bill, 2009 that companies will no longer be permitted to accept deposits from public as under Sec. 58A of the Companies Act, 1956. • Cl. 66 of the Companies Bill, 2009 provides that a company may subject to passing of a resolution in a general meeting and subject to complying with such rules as may be prescribed in consultation with RBI can accept deposits from its members on such terms and conditions, provided, including the provision of security. • This means even the deposit from the members will have to be secured. This is a total departure from the present provision whereby the companies could have accepted the deposit from public and members as the companies felt that it is cheaper finance as compared to bank finance. • Contravention of this will result in heavy penalties which shall not be less than 1 crore Rupees and may extend to 10 crore Rupees, and fine and imprisonment of every officer-in-default. (continued...)

  29. The new concept in the bill provides a safeguard to the deposit holders due to creation of a security for the deposits. • If the deposit holders fail to get back their deposits can always enforce the security. • This restriction will not apply to the banking companies and non banking financial companies and to such other companies as the Central Government may prescribe.

  30. ANNUAL RETURNS & REPORTS ON AGM • Cl. 82 of the Companies Bill, 2009 provides for widening the scope of annual return. • It includes in addition to the existing disclosures; disclosures relating to corporate governance practices in the company as well as certification of compliances and disclosures. • The annual return of every company is required to be signed by a director and a company secretary or where there is no company secretary, by a company secretary in whole-time practice. • It means that the annual return of the every company, whether private or public, listed or unlisted (except one person and small companies) is required to be signed by either company secretary in employment or the company secretary in practice. (Continued...)

  31. In case of listed companies and companies having the prescribed paid up capital, the annual return is also to be signed by a company secretary in whole-time practice certifying that the annual return states the facts correctly and adequately and the company has complied with all the provisions of the Act. • This is a new addition as all these days, the company secretaries in practice were simply certifying the annual return without any attachment of a certificate in the prescribed form. • Cl. 82(2) of the Companies Bill, 2009 provides that an extract of an annual return shall form part of the board’s report.

  32. AUDITORS • Cl. 123 to 131 of the Companies Bill, 2009 deal with Audit and Auditors. • The Important provisions are as under: • Cl. 125 provides that the remuneration of the auditors of the company shall be fixed in the general meeting or in such manner as determined therein. • Cl. 127 is a new provision and it provides that the Auditor can do such other services as approved by the Board or Audit Committee. This clause provides that the following services cannot be done by the auditors – Accounting and book keeping services, internal Audit, design and implementation of any financial services, Actuarial services, investment advisory services, investment banking services, rendering of outsourced financial services and Management services. • A new companies bill intends to bring stronger audit standards to provide a stronger regulatory platform which is to be notified as a part of the bill. It means recognition of both accounting and auditing standards. The role, rights and duties of the auditors as to maintain integrity and independence of the audit process. Consolidation of financial statements of subsidiaries with those of holding companies it proposed to be mandatory.

  33. VOTING BYELECTRONIC MEANS • Cl. 97 of the Companies Bill, 2009 provides a member may exercise his vote at a meeting by electronic means in the manner as may be prescribed.

  34. DEFUNCT COMPANIES • Cl. 224 of the Companies Bill, 2009 in addition to the existing provision of Section 560 of the Companies Act, 1956 provides that a company by a special resolution or with the consent of 75% members in terms of share capital may file an application for striking of the name. • However if the company is regulated under any special law approval of that regulatory body is also required. • Cl. 227 of the Companies Bill, 2009 provides for penalties in case of fraudulent applications for removal of the name with the intention to deceive the creditors or to defraud any person or to avoid any liabilities of the company.

  35. INSPECTION & INVESTIGATION • Cl. 184 of the Companies Bill, 2009 provides that no suit or proceedings shall lie in any court are tribunal or any action initiated by Central Government for making an investigation or for the appointment of the Inspector and no stay can be granted by any court on any ground until the conclusion of the investigation and the submission of the report by the Inspector. • Cl. 199 of the Companies Bill, 2009 extends the power of inspection or investigation to Foreign Companies.

  36. CLASS ACTION SUITS • Shareholder’s association and group of shareholders are enabled to take legal action in the case of any fraudulent action on the part of the company and to take part in investors protection activities and class action suits.

  37. EXTINGUISHING RESTRICTIONS ON CLAIM OF INVESTORS FROM IEPF • The new bill provides that claim of an investor over a dividend or a security, not lent for more than seven years, not being extinguished, can be claimed by the investors from IEPF (Investor Education and Protection Fund). This has to be administered by a statutory authority as provided for in Cl. 216 of the Companies Bill, 2009.

  38. INSOLVENCY, REHABILITATION& WINDING UP • Revised framework for regulation of mergers and amalgamations, insolvency, rehabilitation, liquidation and winding up of companies are in the offing in the new companies bill. • This should provide great scope for professionals like company secretaries and chartered accountants to act as liquidators, administrators and also provide an opportunity for them to represent the various stake holders before the Tribunal. • The following clauses of the new bill, replace all the provisions of the Sick Industrial Companies (Special Provisions) Act, 1996: • Chapter XIX, Clause 229: – Determination of Sickness • Clauses 230 – 240: – Procedure and Schemes • Chapter XX, Clauses 246 – 278: – Concept of Company Liquidator (Cl. 250 to 260), Powers of Company Liquidator (Cl. 265)

  39. CONCLUSION

  40. The notable features of the Bill is the Government’s intention to allow the Corporate sector to work independently with less restrictions and doing away with the requirements of Government approvals, but equally having the whip in their hand to regulate the affairs of the company especially on the erring directors. The Bill has brought out for the first time new concepts including the recognition of the professionals as the key managerial personnel and also the risks they face in the event of them not functioning properly within the regulatory framework of law.

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