Background
The Companies Bill, 2011 (the Bill / 2011 Act) was introduced in the Parliament on 14 December 2011. The Bill when enacted would replace the Companies Act, 1956 (1956 Act). On introduction of the Companies Bill, 2009 in Parliament, CG had received several suggestions for amendments in the said Bill. The Parliamentary Standing Committee on Finance also made numerous recommendations in its Report. CG accepted in general the recommendations of the Standing Committee and also considered the suggestions received by it from various stakeholders. Accordingly, CG has withdrawn the Companies Bill, 2009 and introduced the Bill.
The Bill will come into force after it passes through the legislative scrutiny of the Parliament and from the date/(s) to be notified by CG.
Executive Summary
Maximum number of members in a private company increased from 50 to 200
Subscription money to be brought before commencement of business or borrowing by a newly formed company
For infrastructural projects, preference shares can be issued for a period exceeding 20 years
Provisions relating to further issue of capital to be applicable to all companies
Time gap between 2 buy-backs shall be minimum 1 year
QIBs not eligible to invest in securities of a company on private placement basis
Consolidation of financial statements made mandatory
2% of average profits of last 3 years to be spent on CSR
Mandatory transfer of profits to reserves for dividend declaration done away with
Rotation of Auditor
Secretarial audit by CS made compulsory in certain cases
One of the directors of a company shall be a person who has stayed in India for 182 days or more
Restriction on multilayer investment subsidiaries
Requirement of obtaining CG approval for relating party transactions done away with
Approval of CG required for certain managerial remuneration
Indian company can be merged with foreign company
Fast track merger for small companies and holding-WOS introduced
Inability to pay debts will be considered as criteria for determining a sick company
Valuation under 2011 Act to be done by registered valuer
Salient Features
The Bill lays down the basic framework of company law and leaves procedures to be determined by the Rules to be prescribed. Rules will be framed and amended by CG from time to time. This mechanism is for ensuring quick response to business needs without going through an elaborate procedure that an amendment to the Act would entail. The prescribed Rules are yet to be announced. In this document we have used the expression "prescribed" or "as prescribed" or "as may be prescribed" to mean that CG will prescribe the Rules for implementing the substantive provisions of the Bill. In the subsequent pages, salient features of the Bill are provided.
Incorporation of companies
No association or partnership consisting of more than prescribed number of persons (not more than 100) shall be formed for the purpose of carrying on any business that has for its object the acquisition of gain by the association or partnership or by the individual members thereof, unless it is registered as a company or is formed under any other law for the time being in force. This rule is not applicable to an HUF carrying on any business and association or partnership formed by professionals who are governed by special acts.
Before commencement of any business or exercising any borrowing power, newly formed company to file with ROC a prescribed declaration to the effect that
‒ every subscriber has paid-in the value of shares subscribed to MOA; and
‒ paid-up share capital of the company is not less than the minimum prescribed.
Share capital and debentures
Authorized, subscribed and paid-up capital of a company to be mentioned in all notices, advertisement or other official publication or any business letter, billhead or letter paper.
Preference shares can be issued for a period exceeding 20 years for "infrastructural projects" (as defined).
Issue of further redeemable preference shares in lieu of arrears of dividend or failure to redeem existing preference shares as per the terms of issue to also require approval of NCLT.
Securities of any member in a public company shall be freely transferable. However, any contract or arrangement between two or more persons in respect of transfer of securities shall be enforceable as a contract.
Pricing of a Preferential Issue of shares by a company to be determined by a RV. Conditions may be prescribed in rules for preferential issue by companies.
Provisions relating to further issue of capital to be applicable to all types of companies.
Conditions specified for issue of Bonus shares which are applicable to all companies. CG to also provide detailed Rules.
Bonus shares cannot be issued in lieu of dividend.
No offer for buy-back shall be made within a period of 1 year from the date of preceding buy-back.
Companies which have issued debentures are required to create a DRR account out of profits of the company available for dividend.
Prospectus and allotment of securities
Public company permitted to issue securities through:
‒ public offer; or
‒ private placement; or
‒ issue of rights issue or bonus issue
subject to compliances with the Rules and SEBI Act and rules and regulations made thereunder.
A Private company may issue securities only through private placement complying with the Rules to be prescribed.
QIBs shall not be eligible to invest in securities of a company issued on private placement basis.
A person who has been convicted for personation for acquisition etc. of securities shall also be liable for suffering disgorgement of gains, seizure and disposal of such securities and such amount received through disgorgement or disposal of securities shall be transferred to IEPF.
Acceptance of deposits
Companies prohibited from inviting, accepting or renewing deposits from public except following:
‒ Banking company;
‒ NBFC;
‒ such other company as CG may specify; and
‒ Public companies having such net worth or turnover and subject to prescribed Rules.
Company other than those covered above can accept deposit only from its members by passing a resolution in general meeting and subject to Rules and conditions including the following:
‒ Credit rating;
‒ Deposit insurance;
‒ Depositing in scheduled bank 15% of amount of its deposits maturing during the current and next financial year, etc.
Any deposit accepted before the commencement of 2011 Act or any interest due thereon to be repaid within 1 year from the commencement of 2011 Act or from the date on which such payments are due, whichever is earlier.
Accounts of companies & BOD’s report
Financial Year of a company to end on the 31st day of March every year – exemptions may be availed in specified cases with approval of NCLT.
A company can re-open its books of accounts or re-cast its financial statements on the ground that the relevant
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earlier accounts were prepared in a fraudulent manner or the affairs of the company were mismanaged during the relevant period casting a doubt on the reliability of the financial statements with the order of a Court or NCLT.
BOD may prepare revised financial statement or a revised board report in respect of any of the 3 preceding financial years after obtaining approval of NCLT, if it believes that the financial statements or the BOD report do not comply with the relevant provisions.
NFRA to be constituted by CG – to be headquartered at New Delhi – to provide for matters relating to accounting and auditing standards applicable to companies.
The functions of NFRA shall include:
‒ Monitor and enforce compliance with accounting and auditing standards;
‒ Oversee the quality of service of the professions and suggest measures required for improvement in quality of services and such other related matters as may be prescribed;
‒ Perform other prescribed functions.
Powers of NFRA shall include:
‒ Investigate into the matters of professional or other misconduct committed by member or firm of CA, CWA or CS in practice or any other profession as may be prescribed.
‒ Powers as are vested in a civil court under the Code of Civil Procedure, 1908 while trying a suit.
‒ Where professional or other misconduct is proved, NFRA have the power to make order for imposing monetary penalty or debarring the member or the firm from engaging himself or itself from practice as member of the institute for a minimum period of 6 months or for such higher period not exceeding 10 years.
CG may direct keeping books of accounts of a company to be maintained for a period more than 8 years where any investigation has been ordered.
Director‘s Report to include amongst others, extract of the Annual Return, development and implementation of a risk management policy and CSR, related party contracts, certain loan / guarantees / investments and in case of listed and prescribed public companies – annual evaluation of the performance of the BOD.
Company having subsidiaries is mandatorily required to additionally prepare an audited consolidated financial statement of all the subsidiaries. Subsidiary for this purpose includes "joint venture" and "associate company".
Corporate Social Responsibility
Provisions applicable to every company having
‒ net worth of ` 5 billion or more; or
‒ turnover of ` 10 billion or more; or
‒ net profit of ` 50 million or more
during any financial year.
Such companies to constitute CSR committee of its BOD consisting of minimum 3 directors including 1 ID.
CSR committee shall formulate and recommend to the BOD, CSR Policy on the lines specified.
BOD of such companies shall make every endeavour to ensure that the company spends, in every financial year, minimum 2% of the average net profits of the company made during the 3 immediately preceding financial years, in pursuance of its CSR Policy. If the company fails to spend such amount, BOD shall specify the reasons for not spending the amount in the BOD report.
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Dividend
Dividend to be paid out of
‒ profits of the company for the year after providing for depreciation; or
‒ profits of the previous years arrived at after providing for depreciation and remaining undistributed; or
‒ both of the above
Mandatory transfer of profits to reserves before declaration of dividend done away with. Companies may voluntarily transfer a portion of its profits to reserves.
Interim dividend may be declared only out of surplus in Profit & Loss Account and out of profits of the financial year in which dividend is sought to be declared. In case company has incurred loss upto the preceding quarter of the current financial year then interim dividend shall not be declared at a rate higher than the average dividends declared by the company during the immediately preceding 3 financial years.
Failure to comply with provisions relating to acceptance and repayment of deposits will prevent the company to declare any dividend during the period of non-compliance.
Where the unpaid / unclaimed dividend has been transferred to IEPF, the corresponding shares on which such dividend was unpaid / unclaimed shall also be transferred by the Company to IEPF.
Amounts that can be credited to IEPF widened to include
‒ amount received on disgorgement;
‒ redemption amount of preference shares remaining unpaid / unclaimed for 7 years or more;
‒ sale proceeds of fractional shares arising out of issuance of bonus shares, merger and amalgamation for 7 years or more.
Audit and auditors
Appointment of Auditor in unlisted companies Appointment Period of appointment
At first AGM
to hold office till conclusion of 6th AGM
Subsequent
to hold office till conclusion of 6th meeting
Procedure and manner of selection of auditor to be prescribed by Rules.
Appointment of Auditor in listed and specified class of companies Appointment Period of appointment
Individual
1 term of 5 consecutive years
Audit Firm
2 terms of 5 consecutive years
Cooling off period of 5 years before next appointment
Common conditions for appointment of auditor in listed and specified class of companies:
Incoming audit firm should not have any common partners who were the partners of the outgoing audit firm i.e. the audit firm whose tenure expired in the immediately preceding financial year by virtue of mandatory rotation requirement.
CG shall prescribe the manner in which the companies shall rotate their auditors.
Transition period of 3 years provided to the companies to comply with the mandatory rotation of auditor
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requirement.
Provisions relating to auditors applicable to all companies
Company may resolve:
‒ If Audit firm is appointed, the audit partner and his team shall rotate every year.
‒ Audit shall be conducted by more than 1 auditor (i.e. joint auditor).
Qualification of firm as auditors:
‒ Majority of partners practicing in India are qualified for appointment;
‒ If LLP is appointed as auditor, only partners who are CA shall be authorized to sign.
Additional grounds for disqualifications for appointment as auditor provided.
Auditor cannot provide following services "directly or indirectly" to the company or its holding company or subsidiary company or associate company, namely:—
‒ 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;
‒ management services; and
‒ services prescribed under the Rules.
"Directly or Indirectly" shall include rendering of services by the auditor,—
‒ Where auditor is an individual - Either himself or through his relative or any other person connected or associated with such individual or through any other entity, whatsoever, in which such individual has significant influence or control, or whose name or trade mark or brand is used by such individual
‒ Where auditor is a firm – Either itself or through any of its partners or through its parent, subsidiary or associate entity or through any other entity, whatsoever, in which the firm or any partner of the firm has significant influence or control, or whose name or trade mark or brand is used by the firm or any of its partners.
Limits on number of audits to be prescribed through the Rules.
Functions of company secretary and secretarial audit
Functions of CS shall include —
‒ report to BOD about compliance with the provisions of 2011 Act, the rules made thereunder and other laws applicable to the company;
‒ ensure compliance with the applicable secretarial standards as may be approved by CG; and
‒ discharge such other prescribed duties.
Secretarial audit by CS in practice made compulsory for listed and prescribed class of companies.
Management and administration
AGM shall be called during the business hours i.e. between 9.00 AM and 6.00 PM on any day other than a National Holiday.
OPC not required to hold AGM.
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A member may exercise his vote at a meeting by electronic means as prescribed. Notice of general meeting can be given by electronic mode as prescribed.
Conditions for demanding a Poll at a general meeting on any resolution made uniform for all companies having share capital.
Listed company to file with ROC a report in respect of change in number of shares held by promoters or top 10 shareholders within 15 days of the said change.
CG may declare by notification such items of business which must be transacted by means of postal ballot. All items other than ordinary business and any business in respect of which directors or auditors have a right to be heard at any meeting, may be transacted by means of postal ballot. The manner of postal ballot will be as prescribed.
Quorum for general meeting - Presence of members in person only will be counted.
‒ Quorum for a private company shall be 2 members personally present.
‒ Quorum for a public company shall be as under: Total number of members in the Public company as of date of the meeting Quorum (Members personally present)
Upto 1,000 members
5
Between 1,000 to 5,000 members
15
More than 5,000 members
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Annual Return to contain details as on close of the financial year (currently it is as on the date of AGM).
Annual Return to contain additional information relating to remuneration of directors and KMP, details of meetings of members, BOD and its various committee, etc.
Explanatory statement to be annexed to the notice of general meeting to also provide such other information and facts that may enable members to understand the meaning, scope and implications of the items of business and to take decision thereon.
Appointment and qualifications of directors
One of the directors in a company shall be a person who has stayed in India for 182 days or more in the previous calendar year.
OPC to have minimum 1 director.
Prescribed class of companies to have at least 1 woman director.
Duties of directors have been defined.
Director to vacate office if he remains absent from all the meetings of the BOD held during 12 months whether with or without seeking leave of absence of the BOD.
IDs
Listed companies to have at least 1/3rd of its total number of directors as IDs (as defined – further, the Rules may prescribe additional qualifications to be an ID). CG may prescribe minimum number of IDs in case of any class of public companies. This requirement is to be complied within 1 year:
‒ By existing listed companies from the commencement of 2011 Act; and
‒ By the prescribed class of public companies from the date Rules are notified.
Alternate director of an ID can be appointed if such an alternate director is also an ID.
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ID is not liable to retire by rotation.
ID shall be appointed for a term upto 5 consecutive years and are eligible for re-appointment subject to compliance with conditions including performance evaluation by the entire BOD and approval by members through special resolution.
Once the 2 consecutive terms are completed, the ID shall be eligible for appointment after a cooling period of 3 years, provided he is not associated with the company during this 3 years period in any capacity, either directly or indirectly.
An ID may be selected from data bank maintained by notified institute or association having expertise in creation and maintenance of such data bank.
IDs not entitled to any remuneration other than sitting fee, re-imbursement of expenses for participation in meetings, profit related commission as approved by the members of the company.
ID and NED (not being promoter or KMP), shall be held liable, only for such acts by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently.
Director elected by small shareholders
A listed company may have 1 director elected by a small shareholders i.e. shareholders holding shares of nominal value of not more than ` 20,000 or such other sum as may be prescribed.
Manner, terms and conditions of appointment of such director will be prescribed.
Additional grounds for disqualification of director
A person who has been convicted of offence dealing with related party transactions at any time during the preceding 5 years.
Directorship in private companies too under ambit of disqualification on ground of non-filing of financial statements or annual return for any continuous 3 years or failure to repay deposits accepted by it or redeem debentures on due date or pay interest due thereon or pay any dividend declared and such failure continues for 1 year or more.
Maximum number of directorship
A person cannot be a director, including alternate director, in more than 20 companies including not more than 10 public companies.
‒ For determination of public companies for this purpose, directorship in private companies that are either holding or subsidiary company of a public company shall be regarded as a public company.
Shareholders may specify lesser number of companies in which a director of the company may act as director.
Transition period to comply with the limit on directorship - 1 year from the commencement of 2011 Act.
Resignation of directors
Resignation of director to take effect from the date on which notice of resignation is received by the company, or the date, if any, specified by director in the notice, whichever is later.
Resigning director to also file his resignation letter with the ROC within 30 days, in prescribed manner, giving detailed reasons for resignation.
Where all directors of a company resigns or vacate office, the promoter or in his absence, the CG to appoint the
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required number of directors till new directors are appointed in a general meeting.
Meetings of BOD
First meeting of the BOD of a company must be held within 30 days of its incorporation. Minimum 4 meetings of BOD to be held every year with the gap between the 2 consecutive meetings not exceeding 120 days. CG may by notification provide different requirement or modify the requirement for specific class or description of companies.
In case of OPC, small companies and dormant companies 1 board meeting to be in each half of the calendar year and gap between 2 meetings is not more than 90 days.
Participation in the board meeting through prescribed video conferencing or other audio visual means (VC) recognized. CG may provide a list of businesses where meeting by means of VC will not be recognized.
At least 7 days‘ notice for board meeting shall be given. A board meeting may be called at a shorter notice to transact urgent business, if at least 1 ID is present at such meeting. Decision taken at such meeting in absence of an ID is final only on ratification thereof by at least 1 ID.
Committees of BOD
Audit committee
Mandatory for listed companies and other prescribed classes of companies.
Composition – Minimum 3 directors with majority comprising of IDs.
Chairperson and majority of directors shall be persons with ability to read and understand the financial statement.
Transitional period for compliance – 1 year from the commencement of 2011 Act.
Listed companies and prescribed companies to have vigil mechanism for directors and employees to report genuine concern in prescribed manner.
Nomination and Remuneration committee
Mandatory in case of listed companies and other prescribed classes of companies.
Composition – 3 or more NED of which at least ½ shall be IDs.
This committee shall amongst other:
‒ Identify persons who are qualified to be directors and who can be appointed in senior management;
‒ Recommend to BOD, policy relating to remuneration to directors, KMP and other employees keeping in mind appropriate performance bench mark; striking a balance between fixed and incentive pay etc.;
‒ be responsible for evaluation of every director of BOD.
Stakeholders Relationship Committee
SRC mandatory where total number of shareholders, deposit holders, debenture holders and other security holder exceeds 1,000 at any time during a financial year.
Composition – Chairperson shall be NED and such other number of directors as determined by the BOD.
This committee to consider and resolve grievances of the security holders of the company.
Restrictions on powers of BOD
Restriction on power of BOD to exercise specified powers with general meeting approval extended to private companies. In all cases approval of shareholders by a special resolution made necessary.
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In case of sale, lease or otherwise disposal of one or more undertaking or the whole or substantially the whole of undertaking, quantitative tests provided for determination of ‗undertaking‘ and ‗substantially the whole of the undertaking‘.
Loan to Directors
Company shall not directly or indirectly make any loan including book debt or give any guarantee or provide any security to its director or to any other persons in whom the director is interested. This provision is not applicable to
‒ Loan to MD / WTD
as a part of contract of services extended to all its employees; or
Pursuant to scheme approved by members by special resolution
‒ A company which in the ordinary course of its business provides loan, guarantee or security for due repayment of any loan and charges interest thereon being not less than bank rate declared by RBI.
Provisions made applicable to private companies and need to obtain CG approval for such loans removed.
Restriction on multilayer investment subsidiaries
A company unless otherwise prescribed can make investment through not more than 2 layers of investment companies. Exception to this rule is:
‒ acquisition of a foreign company which has investment subsidiary beyond 2 layers as per the applicable foreign law; and
‒ a subsidiary company making investment to comply with any applicable law.
Inter-corporate loan, guarantee, security and investment
Loans, guarantee and security made to any person will be covered under the ambit of this provision.
Exemption provided for
‒ Loan, guarantee or security made by:
banking company or insurance company or housing finance company in-ordinary course of their business;
company engaged in the business of financing of companies or of providing infrastructural facilities.
‒ Investment and lending by NBFC whose principal business is acquisition of securities.
‒ Acquisition by companies having principal business of acquisition of securities.
‒ Acquisition of shares pursuant to further issue of capital.
Prescribed class of companies being company registered with SEBI under section 12 of SEBI Act cannot take inter-corporate loan or deposit exceeding the prescribed limit.
Related party transactions
Requirement of obtaining CG approval done away with.
Related party transactions amongst others to include:
‒ Buying, selling etc. property of any kind;
‒ Leasing of any kind of property;
‒ Related party‘s appointment to any office or place of profit in the company, its subsidiary company or associate company.
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Related party transactions by a company having prescribed paid-up capital or value of transaction exceeding prescribed limits will require prior approval of members by special resolution. The related party who is a member of such a company cannot vote in such special resolution.
The provisions would not apply to transactions entered into in the ordinary course of business, unless they are not on an arms‘ length basis.
BOD report to disclose related party transactions along with the justification.
Appointment and remuneration of Managerial Personnel
Prescribed class of companies to have whole-time KMP.
‒ A whole-time KMP shall not hold office in more than 1 company at the same time.
‒ CFO made responsible and liable for penalty and / or prosecution for compliance with various provisions such as – maintenance of books of accounts, preparation & filing of annual accounts, disclosure of financial information in offer document, risk management, internal control etc.,
In case of companies with no profits or inadequate profits, managerial remuneration can be paid as per Schedule of remuneration (Schedule V – similar to existing Schedule XIII to 1956 Act). If the conditions of such Schedule are not complied with, payment of managerial remuneration will require approval of CG.
Insurance premium paid by company for indemnifying specified KMPs against the liabilities for negligence, breach of duty etc. of such specified KMPs shall not be treated as part of remuneration of such KMPs.
MD or WTD of the company who is in receipt of any commission from the company shall not be disqualified from receiving any remuneration / commission from its holding company or subsidiary company subject to necessary disclosures in the BOD report.
Prior approval of shareholders required in general meeting for a company to enter into an arrangement by which -
‒ a director of the company or its holding, subsidiary or associate company or a person connected with him acquires or is to acquire assets for consideration other than cash, from the company; or
‒ the company acquires or is to acquire assets for consideration other than cash, from such director or person so connected.
Director or KMP of a company shall not buy in the company, its holding, subsidiary or associate company -
‒ a right to call for delivery or a right to make delivery at a specified price and within a specified time, of a specified number of relevant shares or a specified amount of relevant debentures; or
‒ a right, as he may elect, to call for delivery or to make delivery at a specified price and within a specified time, of a specified number of relevant shares or a specified amount of relevant debentures.
Prohibition on insider trading of securities
No person including any director or KMP of a company shall enter into insider trading (as defined) except to any communication required in the ordinary course of business or profession or employment or under any law.
Compromises, arrangements and amalgamations
Fast track provisions made to facilitate merger between 2 or more small companies or between holding company and its WOS or such other class of companies as may be prescribed. Fast track merger would require approval of ROC, OL, members holding at least 90% of total no. of shares and majority of creditors representing 9/10th in value.
Foreign company can be merged with Indian company or vice versa with prior approval of RBI and the
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consideration can be paid in the form of cash and / or depository receipts. This would apply to foreign companies in jurisdictions as notified by CG.
Acquirer and / or PAC or person or group of persons who holds 90% or more of the issued equity capital of the company by virtue of amalgamation, share exchange, conversion of securities or for any other reasons, can notify the company of his intention to purchase the remaining equity shares of the company from minority shareholders. In such cases the valuation shall be done by RV. The minority shareholders of the company may also offer to sell their equity shares to the majority shareholders at a price determined in accordance with the prescribed Rules.
Compromise or arrangement would require approval by a majority representing 3/4th in value of the creditors and members. Creditors meeting may be dispensed with if at least 90% in value thereof, agree and confirm, by way of an affidavit, to the scheme of compromise or arrangement.
Accounting treatment in the scheme of compromise and arrangement need to be compliant with the accounting standards and auditor‘s certificate to that effect needs to be filed with NCLT.
Valuation report to be given to shareholders / creditors along with notice convening meeting for a compromise or arrangement.
Notice of compromise or arrangement to be given to CG, Income tax, RBI, SEBI, Stock exchanges, ROC, OL, CCI, if necessary, and other sectoral regulators / authorities, to enable them to make representations.
Postal ballot for approval of compromise / arrangement with creditors allowed.
Holding of shares in its own name or in the name of trust whether through subsidiary or associate companies by the transferee company as a result of the compromise or arrangement, not allowed and any such shares shall be cancelled / extinguished.
Objection to the compromise or arrangement can be made only by persons holding not less than 10% of the shareholding or having outstanding debt of not less than 5% of total outstanding debt as per the latest audited balance sheet.
A scheme of compromise and arrangement may include ―takeover offer‖ in a prescribed manner. In case of listed companies such takeover offer shall be as per the guidelines issued by SEBI.
No compromise or arrangement shall include buy-back of securities unless it is in accordance for buy-back provisions.
In case of compromise / arrangement between a listed transferor company and an unlisted transferee company, NCLT may provide that the transferee company shall remain unlisted company until it becomes listed and those shareholders of the transferor company who opts to exit be given an exit at a price which should not be less than the price under SEBI Regulations.
The scheme of compromise or arrangement shall clearly indicate an appointed date from which it shall be effective and the scheme shall be deemed to be effective from such date and not at a date subsequent to the appointed date
Revival and rehabilitation of sick companies
Provisions of revival and rehabilitation of sick companies to apply to all companies and not only to "industrial company" as defined under SICA.
Inability of a company to pay debts will be considered as criteria for determining a sick company.
‒ If a company fails to pay debts due to its secured creditor representing 50% or more of outstanding amount of debt within 30 days of demand, any secured creditor may file an application to NCLT to declare such company as a sick company.
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‒ The company may also file an application to NCLT to declare it as a sick company on above ground.
RIF shall be formed for the purposes of rehabilitation, revival and liquidation of sick companies. A company that has contributed any amount to RIF can utilize the funds contributed by it for making payment to workmen, protecting assets and meeting incidental costs during sickness / winding-up proceedings.
Registered Valuers
Where any valuation is required to be made in respect of any property, stocks, shares, debentures, securities, goodwill or other assets or of net-worth or liabilities under 2011 Act, such valuation shall be done by a person registered as a valuer.
Registered valuer shall be appointed by the audit committee or in its absence by the BOD.
Prevention of oppression and mismanagement
Class action suits enabled - One or more members or class thereof or one or more creditors / class thereof can apply to NCLT for orders to prevent the affairs of the company being conducted in a manner prejudicial to interests of the company.
To prevent possible misuse, Class action applications can be made by prescribed number of members / creditors. Banking companies to be out of the purview of Class action.
Dormant company
A company not having any significant accounting transaction, and which is formed under the 2011 Act for a future project or to hold an asset or an intellectual property or an inactive company may obtain status of a dormant company by applying to the ROC.
A company which has not filed financial statements or annual returns for 2 financial years consecutively will be classified as Dormant Company by the ROC.
A company which not been carrying on any business or operation, or has not made any significant accounting transaction during the last 2 financial years, or has not filed financial statements and annual returns during the last 2 financial years is classified as Inactive Company.
A dormant company will have such number of directors, file such documents and pay such annual fees as may be prescribed.
Removal of names of companies from the register of companies
A company may be struck off by ROC for following reasons -
‒ subscribers to MOA have not paid the subscription money within 180 days from the date of incorporation;
‒ company has failed to commence its business within 1 year of its incorporation;
‒ company is not carrying on any business or operation for 2 immediately preceding financial year and has within such period applied for status of a dormant company.
Companies can also by passing a special resolution apply for removal of name.
Winding up of a company
Certain criteria for winding-up by NCLT deleted like minimum number of members falling below prescribed limit, non-commencement of business for 1 year etc.
Additional grounds provided for winding-up. Winding up can be ordered if NCLT is of the opinion that:
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‒ affairs of the company have been conducted in a fraudulent manner;
‒ company was formed for fraudulent and unlawful purpose;
‒ the persons concerned in the formation or management of its affairs have been guilty of fraud, misfeasance or misconduct in connection therewith.
Inspection, inquiry and investigation
KMP, auditors and practicing CS also subject to search and seizure of documents by ROC and the Inspector appointed by CG.
CG to establish SFIO for investigation of frauds relating to a company. Till the time SFIO is not established, SFIO already set up by CG in terms of directions of GOI to be used.
CG may under the specified situations including in public interest refer affairs of a company to be investigated by SFIO.
Where pursuant to an investigation or a compliant, NCLT is of the opinion that there is good reason to find relevant facts about any securities and such facts cannot be found out unless certain restrictions are imposed, NCLT may provide restrictions on securities for a period not exceeding 3 years.
Where it appears to NCLT in specified circumstances that there are reasonable grounds to believe that the removal, transfer or disposal of funds, assets, properties of the company is likely to take place in a manner that is prejudicial to the interests of the company or its shareholders or creditors or in public interest, NCLT may direct such transfer, assets, properties, etc. of the company shall not take place during a period not exceeding 3 years.
Notwithstanding anything contained in the Code of Criminal Procedure, 1973,
‒ Special Court may try in a summary way any offence under 2011 Act which is punishable with imprisonment for a term not exceeding 3 years.
‒ every offence under 2011 Act except certain offences shall be deemed to be non-cognizable within the meaning of the said Code. Offences under 2011 Act which are cognizable within the meaning of the said Code include:
Providing misleading or false information on incorporation;
Misstatement in prospectus;
Fraudulently inducing person to invest money;
Personation for acquisition of securities;
Concealment of name of creditor entitled to object reduction in capital;
Destruction of documents, etc.
National Company Law Tribunal and Appellate Tribunal
Tribunal to be known as NCLT will be constituted which will consists of Judicial and Technical members, as CG may deem necessary, to exercise and discharge the powers and functions conferred on NCLT by or under 2011 Act or any other law for the time being in force.
Principal bench of NCLT shall be at New Delhi and there may be such other benches as may be specified by CG.
NCLT to endeavor to dispose of the proceedings within 3 months from the date of commencement of the proceeding.
On the date of the constitution of NCLT
‒ All matters, proceedings or cases pending before CLB shall stand transferred to NCLT;
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‒ All proceedings under 1956 Act, including proceedings relating to arbitration, compromise, arrangements and reconstruction and winding up of companies, pending before any District Court or High Court, shall stand transferred to NCLT and NCLT may proceed to deal with such proceedings either de novo or from the stage before their transfer.
Appeals against the order of NCLT shall lie to NCLAT.
An appeal arising out of order of NCLAT on any question of law shall lie to Supreme Court.
A party to any proceeding or appeal before NCLT or NCLAT, may either appear in person or authorise one or more CA or CS or CWA or legal practitioners or any other person to present his case.
Special courts
CG may, for the purpose of providing speedy trial of offences, by notification, establish Special Courts.
When trying an offence under 2011 Act, a Special Court may also try an offence other than an offence under 2011 Act with which the accused may, under the Code of Criminal Procedure, 1973 be charged at the same trial.
Protection of minority shareholders interest
Some of the measures include the following:
The promoter and shareholders having control of a company which has unutilized money raised from public through prospectus and which proposes to change its objects are required to provide an exit to the dissenting shareholders in accordance with regulations to be specified by SEBI.
Where any benefit accrues to promoter, director, manager, KMP, or their relatives, either directly or indirectly as a result of non-disclosure or insufficient disclosure in the explanatory statement annexed to the notice of general meeting then such persons shall hold such benefit in trust for the company and shall be liable to compensate the company to the extent of the benefit received by him.
Others
The Bill provides that Producer Companies shall continue to be governed by Chapter IXA of 1956 Act until the enactment of Special Act for Producer Companies.
Remarks
The Bill has provisions which will have significant impact on the manner in which the companies are formed, managed, owned and regulated in India. The Bill has several unique features aimed at protection of minority shareholders and for corporate governance. It also introduces new concepts such as KMP, CSR, mandatory secretarial audit by listed companies, rotation of auditors, woman director, fast track mergers, amalgamation of an Indian company with a foreign company, OPC, etc. One would have to see the text of the Bill as approved by both the houses of Parliament. Also important will be to examine the Rules that would be notified by CG to operationalize the substantive provisions.
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Glossary
AGM: Annual General Meeting
AOA: Articles of Association
BOD: Board of Directors
CA: Chartered Accountant
CCI: Competition Commission of India
CEO: Chief Executive Officer
CFO: Chief Finance Officer
CG: Central Government
CRA: Credit Rating Agency
CS: Company Secretary
CSR: Corporate Social Responsibility
CWA: Cost Accountant
DRR: Debenture Redemption Reserve
EGM: Extra-Ordinary General Meeting
FY: Financial Year
GOI: Government of India
HUF: Hindu Undivided Family
ID: Independent Director
IEPF: Investor Education and Protection Fund
KMP: Key Managerial Personnel
LLP: Limited Liability Partnership
MCA: Ministry of Corporate Affairs
MD: Managing Director
MOA: Memorandum of Association
NBFC: Non-Banking Finance Companies
NCLT: National Company Law Tribunal
NCLAT: National Company Law Appellate Tribunal
NED: Non-Executive Director
NFRA: National Financial Reporting Authority
OL: Official Liquidator
OPC: One Person Company
PAC: Persons Acting in Concert
QIB: Qualified Institutional Buyer
RBI: Reserve Bank of India
RIF: Rehabilitation and Insolvency Fund
ROC: Registrar of Companies
RSE: Recognised Stock Exchange
RV: Registered Valuer
SEBI: Securities and Exchange Board of India
SFIO: Serious Fraud Investigation Office
SRC: Stakeholders Relationship Committee
WOS: Wholly Owned Subsidiary
WTD: Whole Time Director
Source: Companies Bill 2011 as introduced in Lok Sabha on 14 December 2011.
The Companies Bill, 2011 (the Bill / 2011 Act) was introduced in the Parliament on 14 December 2011. The Bill when enacted would replace the Companies Act, 1956 (1956 Act). On introduction of the Companies Bill, 2009 in Parliament, CG had received several suggestions for amendments in the said Bill. The Parliamentary Standing Committee on Finance also made numerous recommendations in its Report. CG accepted in general the recommendations of the Standing Committee and also considered the suggestions received by it from various stakeholders. Accordingly, CG has withdrawn the Companies Bill, 2009 and introduced the Bill.
The Bill will come into force after it passes through the legislative scrutiny of the Parliament and from the date/(s) to be notified by CG.
Executive Summary
Maximum number of members in a private company increased from 50 to 200
Subscription money to be brought before commencement of business or borrowing by a newly formed company
For infrastructural projects, preference shares can be issued for a period exceeding 20 years
Provisions relating to further issue of capital to be applicable to all companies
Time gap between 2 buy-backs shall be minimum 1 year
QIBs not eligible to invest in securities of a company on private placement basis
Consolidation of financial statements made mandatory
2% of average profits of last 3 years to be spent on CSR
Mandatory transfer of profits to reserves for dividend declaration done away with
Rotation of Auditor
Secretarial audit by CS made compulsory in certain cases
One of the directors of a company shall be a person who has stayed in India for 182 days or more
Restriction on multilayer investment subsidiaries
Requirement of obtaining CG approval for relating party transactions done away with
Approval of CG required for certain managerial remuneration
Indian company can be merged with foreign company
Fast track merger for small companies and holding-WOS introduced
Inability to pay debts will be considered as criteria for determining a sick company
Valuation under 2011 Act to be done by registered valuer
Salient Features
The Bill lays down the basic framework of company law and leaves procedures to be determined by the Rules to be prescribed. Rules will be framed and amended by CG from time to time. This mechanism is for ensuring quick response to business needs without going through an elaborate procedure that an amendment to the Act would entail. The prescribed Rules are yet to be announced. In this document we have used the expression "prescribed" or "as prescribed" or "as may be prescribed" to mean that CG will prescribe the Rules for implementing the substantive provisions of the Bill. In the subsequent pages, salient features of the Bill are provided.
Incorporation of companies
No association or partnership consisting of more than prescribed number of persons (not more than 100) shall be formed for the purpose of carrying on any business that has for its object the acquisition of gain by the association or partnership or by the individual members thereof, unless it is registered as a company or is formed under any other law for the time being in force. This rule is not applicable to an HUF carrying on any business and association or partnership formed by professionals who are governed by special acts.
Before commencement of any business or exercising any borrowing power, newly formed company to file with ROC a prescribed declaration to the effect that
‒ every subscriber has paid-in the value of shares subscribed to MOA; and
‒ paid-up share capital of the company is not less than the minimum prescribed.
Share capital and debentures
Authorized, subscribed and paid-up capital of a company to be mentioned in all notices, advertisement or other official publication or any business letter, billhead or letter paper.
Preference shares can be issued for a period exceeding 20 years for "infrastructural projects" (as defined).
Issue of further redeemable preference shares in lieu of arrears of dividend or failure to redeem existing preference shares as per the terms of issue to also require approval of NCLT.
Securities of any member in a public company shall be freely transferable. However, any contract or arrangement between two or more persons in respect of transfer of securities shall be enforceable as a contract.
Pricing of a Preferential Issue of shares by a company to be determined by a RV. Conditions may be prescribed in rules for preferential issue by companies.
Provisions relating to further issue of capital to be applicable to all types of companies.
Conditions specified for issue of Bonus shares which are applicable to all companies. CG to also provide detailed Rules.
Bonus shares cannot be issued in lieu of dividend.
No offer for buy-back shall be made within a period of 1 year from the date of preceding buy-back.
Companies which have issued debentures are required to create a DRR account out of profits of the company available for dividend.
Prospectus and allotment of securities
Public company permitted to issue securities through:
‒ public offer; or
‒ private placement; or
‒ issue of rights issue or bonus issue
subject to compliances with the Rules and SEBI Act and rules and regulations made thereunder.
A Private company may issue securities only through private placement complying with the Rules to be prescribed.
QIBs shall not be eligible to invest in securities of a company issued on private placement basis.
A person who has been convicted for personation for acquisition etc. of securities shall also be liable for suffering disgorgement of gains, seizure and disposal of such securities and such amount received through disgorgement or disposal of securities shall be transferred to IEPF.
Acceptance of deposits
Companies prohibited from inviting, accepting or renewing deposits from public except following:
‒ Banking company;
‒ NBFC;
‒ such other company as CG may specify; and
‒ Public companies having such net worth or turnover and subject to prescribed Rules.
Company other than those covered above can accept deposit only from its members by passing a resolution in general meeting and subject to Rules and conditions including the following:
‒ Credit rating;
‒ Deposit insurance;
‒ Depositing in scheduled bank 15% of amount of its deposits maturing during the current and next financial year, etc.
Any deposit accepted before the commencement of 2011 Act or any interest due thereon to be repaid within 1 year from the commencement of 2011 Act or from the date on which such payments are due, whichever is earlier.
Accounts of companies & BOD’s report
Financial Year of a company to end on the 31st day of March every year – exemptions may be availed in specified cases with approval of NCLT.
A company can re-open its books of accounts or re-cast its financial statements on the ground that the relevant
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earlier accounts were prepared in a fraudulent manner or the affairs of the company were mismanaged during the relevant period casting a doubt on the reliability of the financial statements with the order of a Court or NCLT.
BOD may prepare revised financial statement or a revised board report in respect of any of the 3 preceding financial years after obtaining approval of NCLT, if it believes that the financial statements or the BOD report do not comply with the relevant provisions.
NFRA to be constituted by CG – to be headquartered at New Delhi – to provide for matters relating to accounting and auditing standards applicable to companies.
The functions of NFRA shall include:
‒ Monitor and enforce compliance with accounting and auditing standards;
‒ Oversee the quality of service of the professions and suggest measures required for improvement in quality of services and such other related matters as may be prescribed;
‒ Perform other prescribed functions.
Powers of NFRA shall include:
‒ Investigate into the matters of professional or other misconduct committed by member or firm of CA, CWA or CS in practice or any other profession as may be prescribed.
‒ Powers as are vested in a civil court under the Code of Civil Procedure, 1908 while trying a suit.
‒ Where professional or other misconduct is proved, NFRA have the power to make order for imposing monetary penalty or debarring the member or the firm from engaging himself or itself from practice as member of the institute for a minimum period of 6 months or for such higher period not exceeding 10 years.
CG may direct keeping books of accounts of a company to be maintained for a period more than 8 years where any investigation has been ordered.
Director‘s Report to include amongst others, extract of the Annual Return, development and implementation of a risk management policy and CSR, related party contracts, certain loan / guarantees / investments and in case of listed and prescribed public companies – annual evaluation of the performance of the BOD.
Company having subsidiaries is mandatorily required to additionally prepare an audited consolidated financial statement of all the subsidiaries. Subsidiary for this purpose includes "joint venture" and "associate company".
Corporate Social Responsibility
Provisions applicable to every company having
‒ net worth of ` 5 billion or more; or
‒ turnover of ` 10 billion or more; or
‒ net profit of ` 50 million or more
during any financial year.
Such companies to constitute CSR committee of its BOD consisting of minimum 3 directors including 1 ID.
CSR committee shall formulate and recommend to the BOD, CSR Policy on the lines specified.
BOD of such companies shall make every endeavour to ensure that the company spends, in every financial year, minimum 2% of the average net profits of the company made during the 3 immediately preceding financial years, in pursuance of its CSR Policy. If the company fails to spend such amount, BOD shall specify the reasons for not spending the amount in the BOD report.
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Dividend
Dividend to be paid out of
‒ profits of the company for the year after providing for depreciation; or
‒ profits of the previous years arrived at after providing for depreciation and remaining undistributed; or
‒ both of the above
Mandatory transfer of profits to reserves before declaration of dividend done away with. Companies may voluntarily transfer a portion of its profits to reserves.
Interim dividend may be declared only out of surplus in Profit & Loss Account and out of profits of the financial year in which dividend is sought to be declared. In case company has incurred loss upto the preceding quarter of the current financial year then interim dividend shall not be declared at a rate higher than the average dividends declared by the company during the immediately preceding 3 financial years.
Failure to comply with provisions relating to acceptance and repayment of deposits will prevent the company to declare any dividend during the period of non-compliance.
Where the unpaid / unclaimed dividend has been transferred to IEPF, the corresponding shares on which such dividend was unpaid / unclaimed shall also be transferred by the Company to IEPF.
Amounts that can be credited to IEPF widened to include
‒ amount received on disgorgement;
‒ redemption amount of preference shares remaining unpaid / unclaimed for 7 years or more;
‒ sale proceeds of fractional shares arising out of issuance of bonus shares, merger and amalgamation for 7 years or more.
Audit and auditors
Appointment of Auditor in unlisted companies Appointment Period of appointment
At first AGM
to hold office till conclusion of 6th AGM
Subsequent
to hold office till conclusion of 6th meeting
Procedure and manner of selection of auditor to be prescribed by Rules.
Appointment of Auditor in listed and specified class of companies Appointment Period of appointment
Individual
1 term of 5 consecutive years
Audit Firm
2 terms of 5 consecutive years
Cooling off period of 5 years before next appointment
Common conditions for appointment of auditor in listed and specified class of companies:
Incoming audit firm should not have any common partners who were the partners of the outgoing audit firm i.e. the audit firm whose tenure expired in the immediately preceding financial year by virtue of mandatory rotation requirement.
CG shall prescribe the manner in which the companies shall rotate their auditors.
Transition period of 3 years provided to the companies to comply with the mandatory rotation of auditor
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requirement.
Provisions relating to auditors applicable to all companies
Company may resolve:
‒ If Audit firm is appointed, the audit partner and his team shall rotate every year.
‒ Audit shall be conducted by more than 1 auditor (i.e. joint auditor).
Qualification of firm as auditors:
‒ Majority of partners practicing in India are qualified for appointment;
‒ If LLP is appointed as auditor, only partners who are CA shall be authorized to sign.
Additional grounds for disqualifications for appointment as auditor provided.
Auditor cannot provide following services "directly or indirectly" to the company or its holding company or subsidiary company or associate company, namely:—
‒ 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;
‒ management services; and
‒ services prescribed under the Rules.
"Directly or Indirectly" shall include rendering of services by the auditor,—
‒ Where auditor is an individual - Either himself or through his relative or any other person connected or associated with such individual or through any other entity, whatsoever, in which such individual has significant influence or control, or whose name or trade mark or brand is used by such individual
‒ Where auditor is a firm – Either itself or through any of its partners or through its parent, subsidiary or associate entity or through any other entity, whatsoever, in which the firm or any partner of the firm has significant influence or control, or whose name or trade mark or brand is used by the firm or any of its partners.
Limits on number of audits to be prescribed through the Rules.
Functions of company secretary and secretarial audit
Functions of CS shall include —
‒ report to BOD about compliance with the provisions of 2011 Act, the rules made thereunder and other laws applicable to the company;
‒ ensure compliance with the applicable secretarial standards as may be approved by CG; and
‒ discharge such other prescribed duties.
Secretarial audit by CS in practice made compulsory for listed and prescribed class of companies.
Management and administration
AGM shall be called during the business hours i.e. between 9.00 AM and 6.00 PM on any day other than a National Holiday.
OPC not required to hold AGM.
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A member may exercise his vote at a meeting by electronic means as prescribed. Notice of general meeting can be given by electronic mode as prescribed.
Conditions for demanding a Poll at a general meeting on any resolution made uniform for all companies having share capital.
Listed company to file with ROC a report in respect of change in number of shares held by promoters or top 10 shareholders within 15 days of the said change.
CG may declare by notification such items of business which must be transacted by means of postal ballot. All items other than ordinary business and any business in respect of which directors or auditors have a right to be heard at any meeting, may be transacted by means of postal ballot. The manner of postal ballot will be as prescribed.
Quorum for general meeting - Presence of members in person only will be counted.
‒ Quorum for a private company shall be 2 members personally present.
‒ Quorum for a public company shall be as under: Total number of members in the Public company as of date of the meeting Quorum (Members personally present)
Upto 1,000 members
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Between 1,000 to 5,000 members
15
More than 5,000 members
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Annual Return to contain details as on close of the financial year (currently it is as on the date of AGM).
Annual Return to contain additional information relating to remuneration of directors and KMP, details of meetings of members, BOD and its various committee, etc.
Explanatory statement to be annexed to the notice of general meeting to also provide such other information and facts that may enable members to understand the meaning, scope and implications of the items of business and to take decision thereon.
Appointment and qualifications of directors
One of the directors in a company shall be a person who has stayed in India for 182 days or more in the previous calendar year.
OPC to have minimum 1 director.
Prescribed class of companies to have at least 1 woman director.
Duties of directors have been defined.
Director to vacate office if he remains absent from all the meetings of the BOD held during 12 months whether with or without seeking leave of absence of the BOD.
IDs
Listed companies to have at least 1/3rd of its total number of directors as IDs (as defined – further, the Rules may prescribe additional qualifications to be an ID). CG may prescribe minimum number of IDs in case of any class of public companies. This requirement is to be complied within 1 year:
‒ By existing listed companies from the commencement of 2011 Act; and
‒ By the prescribed class of public companies from the date Rules are notified.
Alternate director of an ID can be appointed if such an alternate director is also an ID.
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ID is not liable to retire by rotation.
ID shall be appointed for a term upto 5 consecutive years and are eligible for re-appointment subject to compliance with conditions including performance evaluation by the entire BOD and approval by members through special resolution.
Once the 2 consecutive terms are completed, the ID shall be eligible for appointment after a cooling period of 3 years, provided he is not associated with the company during this 3 years period in any capacity, either directly or indirectly.
An ID may be selected from data bank maintained by notified institute or association having expertise in creation and maintenance of such data bank.
IDs not entitled to any remuneration other than sitting fee, re-imbursement of expenses for participation in meetings, profit related commission as approved by the members of the company.
ID and NED (not being promoter or KMP), shall be held liable, only for such acts by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently.
Director elected by small shareholders
A listed company may have 1 director elected by a small shareholders i.e. shareholders holding shares of nominal value of not more than ` 20,000 or such other sum as may be prescribed.
Manner, terms and conditions of appointment of such director will be prescribed.
Additional grounds for disqualification of director
A person who has been convicted of offence dealing with related party transactions at any time during the preceding 5 years.
Directorship in private companies too under ambit of disqualification on ground of non-filing of financial statements or annual return for any continuous 3 years or failure to repay deposits accepted by it or redeem debentures on due date or pay interest due thereon or pay any dividend declared and such failure continues for 1 year or more.
Maximum number of directorship
A person cannot be a director, including alternate director, in more than 20 companies including not more than 10 public companies.
‒ For determination of public companies for this purpose, directorship in private companies that are either holding or subsidiary company of a public company shall be regarded as a public company.
Shareholders may specify lesser number of companies in which a director of the company may act as director.
Transition period to comply with the limit on directorship - 1 year from the commencement of 2011 Act.
Resignation of directors
Resignation of director to take effect from the date on which notice of resignation is received by the company, or the date, if any, specified by director in the notice, whichever is later.
Resigning director to also file his resignation letter with the ROC within 30 days, in prescribed manner, giving detailed reasons for resignation.
Where all directors of a company resigns or vacate office, the promoter or in his absence, the CG to appoint the
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required number of directors till new directors are appointed in a general meeting.
Meetings of BOD
First meeting of the BOD of a company must be held within 30 days of its incorporation. Minimum 4 meetings of BOD to be held every year with the gap between the 2 consecutive meetings not exceeding 120 days. CG may by notification provide different requirement or modify the requirement for specific class or description of companies.
In case of OPC, small companies and dormant companies 1 board meeting to be in each half of the calendar year and gap between 2 meetings is not more than 90 days.
Participation in the board meeting through prescribed video conferencing or other audio visual means (VC) recognized. CG may provide a list of businesses where meeting by means of VC will not be recognized.
At least 7 days‘ notice for board meeting shall be given. A board meeting may be called at a shorter notice to transact urgent business, if at least 1 ID is present at such meeting. Decision taken at such meeting in absence of an ID is final only on ratification thereof by at least 1 ID.
Committees of BOD
Audit committee
Mandatory for listed companies and other prescribed classes of companies.
Composition – Minimum 3 directors with majority comprising of IDs.
Chairperson and majority of directors shall be persons with ability to read and understand the financial statement.
Transitional period for compliance – 1 year from the commencement of 2011 Act.
Listed companies and prescribed companies to have vigil mechanism for directors and employees to report genuine concern in prescribed manner.
Nomination and Remuneration committee
Mandatory in case of listed companies and other prescribed classes of companies.
Composition – 3 or more NED of which at least ½ shall be IDs.
This committee shall amongst other:
‒ Identify persons who are qualified to be directors and who can be appointed in senior management;
‒ Recommend to BOD, policy relating to remuneration to directors, KMP and other employees keeping in mind appropriate performance bench mark; striking a balance between fixed and incentive pay etc.;
‒ be responsible for evaluation of every director of BOD.
Stakeholders Relationship Committee
SRC mandatory where total number of shareholders, deposit holders, debenture holders and other security holder exceeds 1,000 at any time during a financial year.
Composition – Chairperson shall be NED and such other number of directors as determined by the BOD.
This committee to consider and resolve grievances of the security holders of the company.
Restrictions on powers of BOD
Restriction on power of BOD to exercise specified powers with general meeting approval extended to private companies. In all cases approval of shareholders by a special resolution made necessary.
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In case of sale, lease or otherwise disposal of one or more undertaking or the whole or substantially the whole of undertaking, quantitative tests provided for determination of ‗undertaking‘ and ‗substantially the whole of the undertaking‘.
Loan to Directors
Company shall not directly or indirectly make any loan including book debt or give any guarantee or provide any security to its director or to any other persons in whom the director is interested. This provision is not applicable to
‒ Loan to MD / WTD
as a part of contract of services extended to all its employees; or
Pursuant to scheme approved by members by special resolution
‒ A company which in the ordinary course of its business provides loan, guarantee or security for due repayment of any loan and charges interest thereon being not less than bank rate declared by RBI.
Provisions made applicable to private companies and need to obtain CG approval for such loans removed.
Restriction on multilayer investment subsidiaries
A company unless otherwise prescribed can make investment through not more than 2 layers of investment companies. Exception to this rule is:
‒ acquisition of a foreign company which has investment subsidiary beyond 2 layers as per the applicable foreign law; and
‒ a subsidiary company making investment to comply with any applicable law.
Inter-corporate loan, guarantee, security and investment
Loans, guarantee and security made to any person will be covered under the ambit of this provision.
Exemption provided for
‒ Loan, guarantee or security made by:
banking company or insurance company or housing finance company in-ordinary course of their business;
company engaged in the business of financing of companies or of providing infrastructural facilities.
‒ Investment and lending by NBFC whose principal business is acquisition of securities.
‒ Acquisition by companies having principal business of acquisition of securities.
‒ Acquisition of shares pursuant to further issue of capital.
Prescribed class of companies being company registered with SEBI under section 12 of SEBI Act cannot take inter-corporate loan or deposit exceeding the prescribed limit.
Related party transactions
Requirement of obtaining CG approval done away with.
Related party transactions amongst others to include:
‒ Buying, selling etc. property of any kind;
‒ Leasing of any kind of property;
‒ Related party‘s appointment to any office or place of profit in the company, its subsidiary company or associate company.
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Related party transactions by a company having prescribed paid-up capital or value of transaction exceeding prescribed limits will require prior approval of members by special resolution. The related party who is a member of such a company cannot vote in such special resolution.
The provisions would not apply to transactions entered into in the ordinary course of business, unless they are not on an arms‘ length basis.
BOD report to disclose related party transactions along with the justification.
Appointment and remuneration of Managerial Personnel
Prescribed class of companies to have whole-time KMP.
‒ A whole-time KMP shall not hold office in more than 1 company at the same time.
‒ CFO made responsible and liable for penalty and / or prosecution for compliance with various provisions such as – maintenance of books of accounts, preparation & filing of annual accounts, disclosure of financial information in offer document, risk management, internal control etc.,
In case of companies with no profits or inadequate profits, managerial remuneration can be paid as per Schedule of remuneration (Schedule V – similar to existing Schedule XIII to 1956 Act). If the conditions of such Schedule are not complied with, payment of managerial remuneration will require approval of CG.
Insurance premium paid by company for indemnifying specified KMPs against the liabilities for negligence, breach of duty etc. of such specified KMPs shall not be treated as part of remuneration of such KMPs.
MD or WTD of the company who is in receipt of any commission from the company shall not be disqualified from receiving any remuneration / commission from its holding company or subsidiary company subject to necessary disclosures in the BOD report.
Prior approval of shareholders required in general meeting for a company to enter into an arrangement by which -
‒ a director of the company or its holding, subsidiary or associate company or a person connected with him acquires or is to acquire assets for consideration other than cash, from the company; or
‒ the company acquires or is to acquire assets for consideration other than cash, from such director or person so connected.
Director or KMP of a company shall not buy in the company, its holding, subsidiary or associate company -
‒ a right to call for delivery or a right to make delivery at a specified price and within a specified time, of a specified number of relevant shares or a specified amount of relevant debentures; or
‒ a right, as he may elect, to call for delivery or to make delivery at a specified price and within a specified time, of a specified number of relevant shares or a specified amount of relevant debentures.
Prohibition on insider trading of securities
No person including any director or KMP of a company shall enter into insider trading (as defined) except to any communication required in the ordinary course of business or profession or employment or under any law.
Compromises, arrangements and amalgamations
Fast track provisions made to facilitate merger between 2 or more small companies or between holding company and its WOS or such other class of companies as may be prescribed. Fast track merger would require approval of ROC, OL, members holding at least 90% of total no. of shares and majority of creditors representing 9/10th in value.
Foreign company can be merged with Indian company or vice versa with prior approval of RBI and the
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consideration can be paid in the form of cash and / or depository receipts. This would apply to foreign companies in jurisdictions as notified by CG.
Acquirer and / or PAC or person or group of persons who holds 90% or more of the issued equity capital of the company by virtue of amalgamation, share exchange, conversion of securities or for any other reasons, can notify the company of his intention to purchase the remaining equity shares of the company from minority shareholders. In such cases the valuation shall be done by RV. The minority shareholders of the company may also offer to sell their equity shares to the majority shareholders at a price determined in accordance with the prescribed Rules.
Compromise or arrangement would require approval by a majority representing 3/4th in value of the creditors and members. Creditors meeting may be dispensed with if at least 90% in value thereof, agree and confirm, by way of an affidavit, to the scheme of compromise or arrangement.
Accounting treatment in the scheme of compromise and arrangement need to be compliant with the accounting standards and auditor‘s certificate to that effect needs to be filed with NCLT.
Valuation report to be given to shareholders / creditors along with notice convening meeting for a compromise or arrangement.
Notice of compromise or arrangement to be given to CG, Income tax, RBI, SEBI, Stock exchanges, ROC, OL, CCI, if necessary, and other sectoral regulators / authorities, to enable them to make representations.
Postal ballot for approval of compromise / arrangement with creditors allowed.
Holding of shares in its own name or in the name of trust whether through subsidiary or associate companies by the transferee company as a result of the compromise or arrangement, not allowed and any such shares shall be cancelled / extinguished.
Objection to the compromise or arrangement can be made only by persons holding not less than 10% of the shareholding or having outstanding debt of not less than 5% of total outstanding debt as per the latest audited balance sheet.
A scheme of compromise and arrangement may include ―takeover offer‖ in a prescribed manner. In case of listed companies such takeover offer shall be as per the guidelines issued by SEBI.
No compromise or arrangement shall include buy-back of securities unless it is in accordance for buy-back provisions.
In case of compromise / arrangement between a listed transferor company and an unlisted transferee company, NCLT may provide that the transferee company shall remain unlisted company until it becomes listed and those shareholders of the transferor company who opts to exit be given an exit at a price which should not be less than the price under SEBI Regulations.
The scheme of compromise or arrangement shall clearly indicate an appointed date from which it shall be effective and the scheme shall be deemed to be effective from such date and not at a date subsequent to the appointed date
Revival and rehabilitation of sick companies
Provisions of revival and rehabilitation of sick companies to apply to all companies and not only to "industrial company" as defined under SICA.
Inability of a company to pay debts will be considered as criteria for determining a sick company.
‒ If a company fails to pay debts due to its secured creditor representing 50% or more of outstanding amount of debt within 30 days of demand, any secured creditor may file an application to NCLT to declare such company as a sick company.
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‒ The company may also file an application to NCLT to declare it as a sick company on above ground.
RIF shall be formed for the purposes of rehabilitation, revival and liquidation of sick companies. A company that has contributed any amount to RIF can utilize the funds contributed by it for making payment to workmen, protecting assets and meeting incidental costs during sickness / winding-up proceedings.
Registered Valuers
Where any valuation is required to be made in respect of any property, stocks, shares, debentures, securities, goodwill or other assets or of net-worth or liabilities under 2011 Act, such valuation shall be done by a person registered as a valuer.
Registered valuer shall be appointed by the audit committee or in its absence by the BOD.
Prevention of oppression and mismanagement
Class action suits enabled - One or more members or class thereof or one or more creditors / class thereof can apply to NCLT for orders to prevent the affairs of the company being conducted in a manner prejudicial to interests of the company.
To prevent possible misuse, Class action applications can be made by prescribed number of members / creditors. Banking companies to be out of the purview of Class action.
Dormant company
A company not having any significant accounting transaction, and which is formed under the 2011 Act for a future project or to hold an asset or an intellectual property or an inactive company may obtain status of a dormant company by applying to the ROC.
A company which has not filed financial statements or annual returns for 2 financial years consecutively will be classified as Dormant Company by the ROC.
A company which not been carrying on any business or operation, or has not made any significant accounting transaction during the last 2 financial years, or has not filed financial statements and annual returns during the last 2 financial years is classified as Inactive Company.
A dormant company will have such number of directors, file such documents and pay such annual fees as may be prescribed.
Removal of names of companies from the register of companies
A company may be struck off by ROC for following reasons -
‒ subscribers to MOA have not paid the subscription money within 180 days from the date of incorporation;
‒ company has failed to commence its business within 1 year of its incorporation;
‒ company is not carrying on any business or operation for 2 immediately preceding financial year and has within such period applied for status of a dormant company.
Companies can also by passing a special resolution apply for removal of name.
Winding up of a company
Certain criteria for winding-up by NCLT deleted like minimum number of members falling below prescribed limit, non-commencement of business for 1 year etc.
Additional grounds provided for winding-up. Winding up can be ordered if NCLT is of the opinion that:
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‒ affairs of the company have been conducted in a fraudulent manner;
‒ company was formed for fraudulent and unlawful purpose;
‒ the persons concerned in the formation or management of its affairs have been guilty of fraud, misfeasance or misconduct in connection therewith.
Inspection, inquiry and investigation
KMP, auditors and practicing CS also subject to search and seizure of documents by ROC and the Inspector appointed by CG.
CG to establish SFIO for investigation of frauds relating to a company. Till the time SFIO is not established, SFIO already set up by CG in terms of directions of GOI to be used.
CG may under the specified situations including in public interest refer affairs of a company to be investigated by SFIO.
Where pursuant to an investigation or a compliant, NCLT is of the opinion that there is good reason to find relevant facts about any securities and such facts cannot be found out unless certain restrictions are imposed, NCLT may provide restrictions on securities for a period not exceeding 3 years.
Where it appears to NCLT in specified circumstances that there are reasonable grounds to believe that the removal, transfer or disposal of funds, assets, properties of the company is likely to take place in a manner that is prejudicial to the interests of the company or its shareholders or creditors or in public interest, NCLT may direct such transfer, assets, properties, etc. of the company shall not take place during a period not exceeding 3 years.
Notwithstanding anything contained in the Code of Criminal Procedure, 1973,
‒ Special Court may try in a summary way any offence under 2011 Act which is punishable with imprisonment for a term not exceeding 3 years.
‒ every offence under 2011 Act except certain offences shall be deemed to be non-cognizable within the meaning of the said Code. Offences under 2011 Act which are cognizable within the meaning of the said Code include:
Providing misleading or false information on incorporation;
Misstatement in prospectus;
Fraudulently inducing person to invest money;
Personation for acquisition of securities;
Concealment of name of creditor entitled to object reduction in capital;
Destruction of documents, etc.
National Company Law Tribunal and Appellate Tribunal
Tribunal to be known as NCLT will be constituted which will consists of Judicial and Technical members, as CG may deem necessary, to exercise and discharge the powers and functions conferred on NCLT by or under 2011 Act or any other law for the time being in force.
Principal bench of NCLT shall be at New Delhi and there may be such other benches as may be specified by CG.
NCLT to endeavor to dispose of the proceedings within 3 months from the date of commencement of the proceeding.
On the date of the constitution of NCLT
‒ All matters, proceedings or cases pending before CLB shall stand transferred to NCLT;
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‒ All proceedings under 1956 Act, including proceedings relating to arbitration, compromise, arrangements and reconstruction and winding up of companies, pending before any District Court or High Court, shall stand transferred to NCLT and NCLT may proceed to deal with such proceedings either de novo or from the stage before their transfer.
Appeals against the order of NCLT shall lie to NCLAT.
An appeal arising out of order of NCLAT on any question of law shall lie to Supreme Court.
A party to any proceeding or appeal before NCLT or NCLAT, may either appear in person or authorise one or more CA or CS or CWA or legal practitioners or any other person to present his case.
Special courts
CG may, for the purpose of providing speedy trial of offences, by notification, establish Special Courts.
When trying an offence under 2011 Act, a Special Court may also try an offence other than an offence under 2011 Act with which the accused may, under the Code of Criminal Procedure, 1973 be charged at the same trial.
Protection of minority shareholders interest
Some of the measures include the following:
The promoter and shareholders having control of a company which has unutilized money raised from public through prospectus and which proposes to change its objects are required to provide an exit to the dissenting shareholders in accordance with regulations to be specified by SEBI.
Where any benefit accrues to promoter, director, manager, KMP, or their relatives, either directly or indirectly as a result of non-disclosure or insufficient disclosure in the explanatory statement annexed to the notice of general meeting then such persons shall hold such benefit in trust for the company and shall be liable to compensate the company to the extent of the benefit received by him.
Others
The Bill provides that Producer Companies shall continue to be governed by Chapter IXA of 1956 Act until the enactment of Special Act for Producer Companies.
Remarks
The Bill has provisions which will have significant impact on the manner in which the companies are formed, managed, owned and regulated in India. The Bill has several unique features aimed at protection of minority shareholders and for corporate governance. It also introduces new concepts such as KMP, CSR, mandatory secretarial audit by listed companies, rotation of auditors, woman director, fast track mergers, amalgamation of an Indian company with a foreign company, OPC, etc. One would have to see the text of the Bill as approved by both the houses of Parliament. Also important will be to examine the Rules that would be notified by CG to operationalize the substantive provisions.
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Glossary
AGM: Annual General Meeting
AOA: Articles of Association
BOD: Board of Directors
CA: Chartered Accountant
CCI: Competition Commission of India
CEO: Chief Executive Officer
CFO: Chief Finance Officer
CG: Central Government
CRA: Credit Rating Agency
CS: Company Secretary
CSR: Corporate Social Responsibility
CWA: Cost Accountant
DRR: Debenture Redemption Reserve
EGM: Extra-Ordinary General Meeting
FY: Financial Year
GOI: Government of India
HUF: Hindu Undivided Family
ID: Independent Director
IEPF: Investor Education and Protection Fund
KMP: Key Managerial Personnel
LLP: Limited Liability Partnership
MCA: Ministry of Corporate Affairs
MD: Managing Director
MOA: Memorandum of Association
NBFC: Non-Banking Finance Companies
NCLT: National Company Law Tribunal
NCLAT: National Company Law Appellate Tribunal
NED: Non-Executive Director
NFRA: National Financial Reporting Authority
OL: Official Liquidator
OPC: One Person Company
PAC: Persons Acting in Concert
QIB: Qualified Institutional Buyer
RBI: Reserve Bank of India
RIF: Rehabilitation and Insolvency Fund
ROC: Registrar of Companies
RSE: Recognised Stock Exchange
RV: Registered Valuer
SEBI: Securities and Exchange Board of India
SFIO: Serious Fraud Investigation Office
SRC: Stakeholders Relationship Committee
WOS: Wholly Owned Subsidiary
WTD: Whole Time Director
Source: Companies Bill 2011 as introduced in Lok Sabha on 14 December 2011.
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