Few Points on New Companies Act, 2013.

Ø  100 Sections notified in September 2013.

Ø  183 sections notified on March 25, 2014.  All effective from April 1, 2014.

Ø  With effect from April 1, 2014, every company, private limited or public limited, which either has a net worth of Rs 500 crore or a turnover of Rs 1,000 crore or net profit of Rs 5 crore, needs to spend at least 2% of its average net profit for the immediately preceding three financial years on corporate social responsibility activities. The CSR activities should not be undertaken in the normal course of business and must be with respect to any of the activities mentioned in Schedule VII of the 2013 Act. Contribution to any political party is not considered to be a CSR activity and only activities in India would be considered for computing CSR expenditure

Ø  One-person company: New Companies Act has introduced a concept of one-person company. A single promoter now need not worry having another partner to incorporate a company. As per the earlier Act, it was also required to have a minimum of two directors. In case of any dispute between the directors, it would create a dead lock. One-person company comes as a rescue in such a situation.

Ø  Dormant company: Earlier it used be a pain running and maintaining a company than incorporating one. But after incorporation, liquidation was not easy. The 2013 Act states that a company can be classified as dormant when it is formed for a future project or to hold an asset or intellectual property and has no significant accounting transaction. Also any inactive company can also apply as dormant company. So any company which does not have any financial transaction can apply for dormant company status and need not go through the hassles of maintaining, complying with various legal requirements. Later, when they see some traction occurring they can renew the company into an active company by following the required formalities.

Ø  Object of the company: As per the new legislature, a private limited company can have charitable purpose as a primary object, which was not allowed under the earlier legislature. This will be a great boon for social entrepreneurs who could not enjoy corporate benefits earlier. However, license can be revoked contravenes any of the requirements of the section but also where the affairs of the company are conducted fraudulently or in a manner violative of the objects of the company or prejudicial to public interest. The new Act thus provides for more stringent provisions for companies incorporated with charitable objects.

Ø  A company can’t give loan to another company: As per the New Companies Act, any company is prohibited to lend to another company where the directors and shareholders are common. For example, Company A has good revenue and is making a profit. Founders of Company A start another company, Company B. Now Company B cannot borrow from Company A, as both companies have common shareholders. Penal provision of non-compliance is extremely high, so companies have a hard look at this.

Ø  Penal provisions for non-compliance: In the New Companies Act, penal provisions have been increased significantly. For regular non compliance like not filing return etc can lead to criminal prosecution. So startup companies should ensure they comply with regulations to avoid future problems.

Moreover, every director will be prohibited to become director for a period of five years in any other company if the default company fails to

·         File returns for consecutive three years

·         Fail to pay dividend

For example: Company A fails to file returns for three years. Its directors X, Y, and Z cannot be appointed as directors of any other company for the next five years. Moreover, they cannot even exit the company from the position of director till the returns are filed. This is very critical for fund managers, because if any of their portfolio companies don’t comply then their reputation will be at stake.

Ø  Mandatory Rotation of Auditors and CA can sign only 20 audit report.

Ø  Non-profit companies (which were commonly called Section 25 companies under the Companies Act, 1956) will now be called Section 8 companies;

Ø  Issue of GDR by passing a special resolution;

Ø  Private placement of shares (which would mean shares offered to not exceeding 200 persons in each financial year excluding the QIBs and ESOPs issued to employees);

Ø  Kinds of share capital – i.e. two kinds of share capital – equity shares and preference share. Equity share capital is further subdivided into with voting rights and with differential rights as to dividend, voting or otherwise

Ø  Voting rights on shares – now no distinction has been made between cumulative and non-cumulative preference shares when it comes to giving preference shareholders voting rights on all matters of the company if the dividend is unpaid for 2 years or more;

Ø  Prohibition on issue of shares at discount, however, sweat equity shares are permitted;

Ø  Flexibility in financial year.

Ø  Section 2(85)-Small Company Small Company means a company (other than a public company) whose paid –up capital does not exceed Rs 5 million (or such other higher amount as may be prescribed, not exceeding Rs 50 million) or whose turnover does not exceed Rs 20 million ( or such other higher amount as may be prescribed, not exceeding Rs 200 million) as per last profit and loss account. Small Company cannot be a holding or a subsidiary company.   The 2013 Act provides exemptions to Small Companies primarily from certain requirements relating to board meeting, presentation of cash flow statement and certain merger process.

Ø  Voting through electronic means. 

Ø  Section 138- Internal audit  : Section 138 mandates internal audit for prescribed class of companies (*rules have prescribed the applicability of this section to listed company; unlisted public company with a paid up capital of Rs 500 million or more, or turnover of Rs 2000 million or more, or outstanding bank/financial institution borrowings of Rs 1000 million or more, or outstanding deposits of Rs 250 million or more at any time during the last financial year; and every unlisted public company with a turnover at any time during the last financial year ; and private company with a turnover of Rs 2000 million or more, or outstanding bank/financial institution borrowings of Rs 1000 million or more, or outstanding deposits of Rs 250 million or more at any time during the last financial year)   

Ø  Section 144- Auditor not to render certain services  : Section 144 prohibits auditors of a company to render non-audit services to an audit client (or its holding company or its subsidiary company). Prohibited non-audit services include accounting and book keeping services, internal audit, design and implementation of any financial information system; actuarial services; investment advisory services; investment banking services; rendering of outsourced financial services and management services. Other restricted service may be further prescribed. There is a transition period of one year from 01 April 2014 to comply with this requirement.   

Ø  Section 188- Related party transactions Section 188 requires that related party transactions exceeding prescribed amount (*rules have prescribed the threshold either as an absolute amount or amount determined as a percentage of turnover /net worth per last audited financial statements, threshold varies depending on the nature of related party transactions) or all such transactions entered by prescribed class of companies (*rules have prescribed the applicability of requirement to company having a paid up capital of Rs 100 million or more) which are not in the ordinary course of business or not at arm’s length basis should be approved by the special resolution. Related party shareholders are not permitted to exercise their voting rights in such special resolution.  It also requires every related party transaction should be referred to in the Board’s report along with the justification for entering into such transactions. 

Ø  Schedule II- useful lives to compute depreciation Schedule II prescribes useful life and residual value of an asset. Certain class of companies (as may be prescribed) and companies that comply with accounting standards prescribed under section 133 of the 2013 Act should disclose the justification if the useful life and residual value of an asset are different from those prescribed under Schedule II.. Impact of change in useful life and residual life should be recognised over the revised remaining useful of the asset. 

Ø  Women director for prescribed companies. Maximum number of director can be 15.

  

Ø  No Change in Schedule VI.