Monday, 14 April 2014

Immediate Changes (Companies Act, 2013)

Brief description
Stationery requirements
The Company’s (i) letterhead {business letters}, (ii) billheads, (iii) letter papers, (iv) notices; and (v) other official publications to capture these additional requirements:
1. Company’s former name(s) (since the last two years) to be reflected in the above listed documents for the next two years (since April 1, 2014),
2. Corporate Identity Number,
3. Telephone number,
4. Fax number (if any),
5. Email address, and

6. Website addresses (if any).
The documents listed below which are to be prepared with regard to the meetings of the Directors and the Shareholders also need to capture the above mentioned requirements as they are to be issued on the Company’s letterhead:
1. Board meeting notice,
2. Board meeting extract,
3. Shareholders meeting notice, and
4. Shareholders meeting extract.
The Company’s promissory notes, bills of exchange and such other documents need to bear its name.
Requirement of a woman director to be appointed
The following class of companies need to have mandatory representation of at least one woman on their Board:
1. Every listed company.
2. Every public company having a paid up share capital of 100 crore (approx. US$ 163 million) or more or turnover of 300 crore.(approx.US$ 491 million)
All companies have been provided a compliance period of 1 year to appoint such a woman Director.
A resident Director to be appointed
All companies are required to appoint at least one director who has been resident in India for a minimum period of 182 days in the previous calendar year (the provision does not insist that such person should be an Indian citizen).
All directors to procure their respective digital signature certificate.
Each director is required to procure a digital signature certificate. In case of a proposed director, the said person needs to procure a digital signature certificate prior to applying for his DIN. The DIN application prescribes for the proposed director to digitally sign his/her application by using his/her digital signature certificate.
Cessation from the Board
1. A Director who does not attend any meetings of the Board in a year (with or without leave of absence) will automatically lose office.
2. Recognizing that Board positions are held by employees, for the first time, the New Act provides that an employee will cease to hold Board position upon separation of employment with the Company as well as any affiliate Company such as the holding or subsidiary or any associate Company.
3. A Director can resign upon giving notice in writing with reasons to the board.
4. In the event of a Director’s resignation, two separate filings are to be made with the RoC. A director resigning from a Company needs to file an e-form with the ROC along with detailed reasons for his/her resignation. The company also has to file an e-form with the RoC to intimate the resignation of the Director.
5. Further, the details of the resignation should be mentioned in the board’s report which is to be placed by the Board before the ensuing shareholders meeting.
Senior management requirements
The New Act requires prescribed class of companies to have Key Management Personnel (“KMP”) such as Managing Director (“MD”) or Chief Executive Officer, Chief Financial Officer and Company Secretary (“CS”). The KMP will generally be considered as ‘officers in default’ for any non-compliances by the Company. The KMP have to be in the age group of 21 to 70 years.
MD provisions
The MD’s appointment by the Board should be ratified at the ensuing shareholders meeting and also by the authorities if his/her appointment is in variance with the prescribed thresholds. In case of any fraud in the Company and if the MD or his/her predecessors have received excess payments as per its restated accounts, the Company can recover the same from such persons.
Board meeting and related requirements
1. First board meeting should be held within 30 days of the incorporation.
2. A Company needs to hold a minimum of four Board meetings in each year and not more than 120 days should have expired between two Board meetings. Seven days clear notice should be given for each Board meeting, which can be waived for shorter notice by all the directors.
3. Each director needs to attend at least one board meeting every year.
Powers of the Board
As per the Old Act, certain powers of the Board were to be exercised only at a physical meeting of the Board (as opposed to passing resolution by circulation/unanimous written consent). The New Act has expanded such powers to be exercised only at a physical Board meeting to include additional matters such as
1. issue of shares,
2. approval of financial statements,
3. diversification of the business of the Company, takeover of other companies, etc.
4. to approve amalgamation, merger or reconstruction
Additionally, the restriction on the Board to exercise certain powers without the prior approval of the shareholders has now been extended even to private limited companies.
Proxy rules
One person cannot represent as proxy for more than 50 members.
Venue of the EGM
The venue of the EGM needs to be a place within India.
Financial year
The new Act has defined the financial year and has made it uniform i.e. April to March. The new Act does not permit extension of financial year. Companies which are holding/subsidiary of a foreign entity and require consolidation outside India, would have to apply to the National Company Law Tribunal (“NCLT”) to allow a different financial year.
Financial statement
1. Consolidated financial statement to be prepared for all companies that have one or more subsidiaries and laid before AGM.
2. A separate statement containing salient features of the financial statements of its subsidiaries to be attached along with financial statement.
Mandatory auditor rotation
Mandatory auditor rotation requirement is for listed and prescribed classes of companies. The rules in this regard are to be prescribed.
Audit committee and Nomination and remuneration committee
The new Act has introduced appointment of a audit committee (which will oversee the appointment of auditors) and a nomination and remuneration committee (which will oversee the appointment of Directors). These committees are required to be constituted by the following companies:
1. every listed company and a public company having a paid up capital of Rs.10 crore or more (approx. US$ 16 million).
2. every listed company and a public company having a turnover of Rs.100 crore or more (approx. US$ 163 million).
3. every listed company and public company having loans, borrowings, debentures or denominations and deposits exceeding Rs. 50 crores (approx.US$ 8 million).
The audit committee shall consist of 3 or more Directors with independent Directors forming a majority.
The nomination and remuneration committee shall consist of 3 or more non executive Directors having 1 ½ of Independent Directors.
Auditor requirements an ‘internal auditor’.
1. Statutory auditors are to be appointed for a period of five years and their appointment has to be ratified at the AGM held every year. In listed companies and other prescribed class of companies, unconnected auditors should be appointed every five years and no auditor can hold office for more than two terms of five years each. The statutory auditor is restricted from rendering other services to the Company such as --- the internal auditor, book keeper, provide investment banking/advisory services, etc. The New Act requires that certain prescribed class of companies should mandatorily have internal auditors.
2. Auditors can audit maximum of 20 companies and out of which not more than 10 can be public companies.
Auditors report requirements
1. Any qualifications, reservations or adverse remarks relating to the maintenance of accounts and other matters.
2. Whether the Company has adequate internal financial controls system in place and the operating effective of such controls.
Directors report requirements
1. Extracts of Annual Report
2. Number of meetings of the board
3. Declarations by independent directors
4. Explanations or comments by the board on every qualification, reservation or adverse remark made by the Company Secretary in his Secretarial Audit Report.
5. Particulars of loans, guarantees or investments
6. Particulars of contracts or arrangements with related party
7. Material changes and commitments affecting the financial position of the Company which have occurred between the end of financial year of the Company to which financial statement relates to.
8. Statement indicating development and implementation of a risk management policy for the Company.
9. Details about Corporate Social Responsibility initiatives.
Number of directorships
A person cannot become director in more than 20 companies of which not more than 10 can be public companies.
Related party transactions
As a relaxation step, the need to obtain prior approval of the regulatory authorities for certain related party transactions has been done away with. It will now suffice to obtain either the Board or the shareholders approval depending on the nature of the related party transaction. This will help large corporations having multiple subsidiaries in India with common directors who enter into related party transactions in India.
The below activities have been added to the related party transactions-
1. Selling or otherwise disposing of or buying, property of any kind.
2. Leasing of property of any kind.
3. Appointment of any agents for purchase or sale of goods, materials, services or property.
4. Appointment of any related party to any office or place of profit of the Company or its subsidiary.
5. Contract for underwriting the subscription of securities or derivatives.
Stakeholders relationship committee
The new Act has introduced new provisions in relation to protecting the stakeholders by requiring the appointment of a Stake Holders Relationship Committee. This committee would be mandatory for a company which has more than 1000 shareholders or debenture holders and other security holders. This committee would consider and resolve the grievances of stakeholders.
Amendments to the Company’s MoA and AoA.
Every alteration made in the memorandum or articles of the Company shall be noted in every copy of the memorandum or articles.
Auditor’s rights
The auditor is required to mandatorily attend shareholders meetings of the Company, unless exempted by the Company. Any qualifications in the audit report have to be mandatorily read out at the shareholders meeting.
The auditor is further authorized to attend all the general meeting and express his/her opinion about proceeding concerning their functions.
Acknowledgement of notices
The Company needs to receive and acknowledge all communications and notices addressed to it.
Pro rata issuance of shares
For any increase of subscribed share capital, an offer is to be made on pro rata basis to all existing shareholders including any employee stock option (“ESOP”) holders by sending letters of offer unless varied by a previous resolution of the shareholders in respect of the ESOP holders. The ESOP holders should however be holding options/shares in the Indian Company and not in any parent or affiliate foreign Company to be eligible to receive this offer.
Corporate Social Responsibility (“CSR”) requirements
2% of the average net profits of the last three financial years are to be mandatorily spent on CSR activities by an Indian Company if it satisfies any of the following:
1. It has a net worth of INR 5,000,000,000 (~USD 83 million) or more; or
2. It has a turnover of INR 10,000,000,000 (~USD 166 million) or more; or
3. It has a net profit of INR 50,000,000 (~USD 830,000) or more.
Companies which meet any of the above thresholds should constitute a CSR committee of the Board. Such committee should consist of three or more directors including an ‘independent director’. A private limited Company which has a minimum prescribed two directors can be constituted by just the two directors and need not have an ‘independent director’ on its committee. Further, the CSR Policy of the Company should be posted on the website (if any) maintained by such Company.
Additional disclosures in annual return
The annual return to be filed every year with the ROC after the Annual General Meeting (“AGM”) should have additional disclosures on the Board and shareholders meetings held in that year along with attendance details of the participants, the remuneration paid to directors and key managerial personnel, etc. Additionally, the annual return should be signed by the CS of the Company or in his/her absence, by a CS in private practice.
Increased powers to regulatory authorities
Under the Old Act, the ROC could undertake investigation of a Company on scrutiny of the regulatory filings made by the Company. However, under the New Act the authorities have been given the power to act on the basis of ‘any information’ received by them. Further, wide ranging powers including the powers granted to civil courts such as to call for records, administer oath and compel deposition of witnesses, etc., have been given to the authorities.
Legal recognition to various authorities
The New Act recognises the establishment of a specialised investigation agency viz., the Serious Frauds Investigation Office (“SFIO”).The New Act also establishes specialised courts to try Company law disputes viz., the National Company Law Tribunal and the Appellate Tribunal. For the first time, a Mediation and Conciliation Panel has been established under the New Act to mediate disputes pending before these specialised tribunals.
Legal recognition to other forms of companies
Similarly, for the first time, the New Act recognises certain additional categories of companies such as ‘One Person Company’ (similar to ‘proprietary firm’ but these can be formed only by an Indian citizen and resident), ‘Small Company’ (which has paid in share capital and turnover less than the prescribed thresholds and are hence exempted from certain compliances under the New Act) and ‘Dormant Company’ (which can be formed for a future project, to hold assets/intellectual property, etc., subject to undertaking certain basic compliances).
Provisions on fraud prevention and consequences
a. Fraud and auditor’s obligations
b. Punishment for fraud
1. If the statutory auditor detects any fraud in the Company, he is to mandatorily report the same directly to the authorities. If any loss has occurred due misleading or incorrect statements in the audit reports, the auditor has to pay damages to the other concerned stakeholders and statutory bodies. If the auditor has acted in a fraudulent manner or colluded with Company’s management, then the partners concerned and the audit firm will have joint and several responsibility.
2. The New Act imposes very strict punishment on persons involved in perpetrating a fraud in a Company. The prescribed punishment is (i) imprisonment for a term not less than six months which may extend to ten years along with (ii) fine being not less than the amount involved in the fraud and which may extend to three times the amount involved. The New Act however clarifies that non-executive directors will not be liable if he/she had acted diligently, if the acts or omissions were done without his/her knowledge, etc.
Key changes in secretarial practices
1. A compulsory secretarial audit will be required for listed and other prescribed class of companies;
2. Statutory registers, minutes of meetings, books of account, etc., may be maintained in electronic form;
3. Share certificates to be returned within 1 month of registering a transfer of shares;
4. Notice calling a shareholders meeting to contain details of all business to be transacted at the said meeting along with disclosure of interest by the directors/KMP (and their relatives) including any holdings in excess of 2% by such persons in other companies with whom the Company has business and being subject matter of the shareholders meeting;
5. Register of directors to include details of each director’s shareholding in the Company or any affiliate companies;
6. Notice of Board meeting for appointment of an MD requires disclosures on the proposed remuneration to be paid along with other terms and conditions relating to the appointment;
7. Register of members to show resident and non-resident shareholders separately;
8. Documents filed at time of original incorporation of the Company have to be maintained till dissolution of the Company;
9. A Company cannot undertake or commence business till the minimum subscribed share capital has been infused by the subscribers and the registered office address of the Company has been verified with the ROC;
10. First statutory auditor to be compulsorily appointed within 30 days by the Board or within 90 days by the shareholders.
We will incorporate the changes as and when the requirements arise. 

No comments: