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Impact of the Companies Act, 2013 on Private Companies Webcast Corporate Laws & Corporate Governance committee of I

Impact of the Companies Act, 2013 on Private Companies Webcast Corporate Laws & Corporate Governance committee of ICAI Wednesday, April 23rd, 2014 . Agenda for Today’s Meeting. 1. Agenda for Today’s Meeting Cont’d. 1. Passage of Companies Bill. Dec 2012. Aug 2010. 2014. Oct 2008.

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Impact of the Companies Act, 2013 on Private Companies Webcast Corporate Laws & Corporate Governance committee of I

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  1. Impact of the Companies Act, 2013 on Private Companies • Webcast • Corporate Laws & Corporate Governance committee of ICAI • Wednesday, April 23rd, 2014 Companies Act, 2013

  2. Agenda for Today’s Meeting 1 Companies Act, 2013

  3. Agenda for Today’s Meeting Cont’d.. 1 Companies Act, 2013

  4. Passage of Companies Bill Dec 2012 Aug 2010 2014 Oct 2008 Aug 2012 SCF report submitted to Lok Sabha SCF report submitted to Lok Sabha in August Co.’s Bill, 2008 introduced Oct 2012 2013 Sec 135 (CSR) notified Feb27,2014 w,e,f April 1, 2014 Bill passed by Lok Sabha Aug 2009 Dec 2011 Revised Bill introduced in Lok Sabha- Bill referred back to SCF Bill passed by Rajya Sabha, Presidential assent on August 29, 2013 & 98 Sections Notified w.e.f September 12, 2013 26th March, 2014 183 Sections notified effective from 1st April, 2014 Cabinet approves amendments to the Bill Co.’s Bill, 2009 reintroduced Companies Act, 2013

  5. Structure The Companies Act, 1956 The Companies Act, 2013 18 Chapters 658 Sections 15 Schedules 67 Definitions 29 Chapters 470 Sections 7 Schedules 95 Definitions In approx. 75% of the Sections the words “to be specified” or “as may be prescribed” has been used – depicting extensive “delegated legislation”. The rules have been made available for public debate Companies Act, 2013

  6. Notification and Circulars issued Companies Act, 2013

  7. Rules Notified under The Act Companies Act, 2013

  8. Rules Notified under The Act Companies Act, 2013

  9. Structure…continued Companies Act, 2013

  10. Structure…continuedjor Highlights Companies Act, 2013

  11. Structure…continuedjor Highlights Companies Act, 2013

  12. Structure…continuedajor Highlights Companies Act, 2013

  13. IMPACT ON PRIVATE LIMITED COMPANIES Companies Act, 2013

  14. Further issue of Share Capital by Right issue Exemptions etc… Withdrawn Additional changes: • if not right issue then: • to any person if authorised by Special Resolution; • at a price to be determined by registered valuer & • subject to other conditions as may be prescribed Companies Act, 2013

  15. Exemptions etc… Withdrawn • In case the existing shareholders do not accept the offer, directors should dispose such shares in a manner “non disadvantageous”to the shareholders and company. Earlier it was to be disposed of in manner “most beneficial to the company” • Under the existing provisions Sec. 81 (1A) (b)-if the approval was given by simple majority, CG could have allowed the issue if it was shown to be most beneficial to the Company. Such option is removed in the new act Companies Act, 2013

  16. Restrictions on Kinds of Capital that can be issued Exemptions etc… Withdrawn…. Cont’d • Length of Notice of GM, explanatory statement, Quorum, Chairman, Proxies, Voting, poll. Companies Act, 2013

  17. Interested director not to participate or vote in Board's proceedings Exemptions etc… Withdrawn…. Cont’d (Section 188 Related Party) • Appointment & tenure of Managing Director Companies Act, 2013

  18. Exemptions etc… Withdrawn…. Cont’d • Other conditions: • Age limit of 21 to 70 • If age> 70 approval by S.R in G.M no further approval of the C.G shall be necessary for such appointment • MD and Manager both cannot be appointed in same company • Term of MD for 5 years • Appointment of Director Companies Act, 2013

  19. Consent to act as director to be filed with the ROC Exemptions etc… Withdrawn…. Cont’d • Deposit from members Companies Act, 2013

  20. Exemptions etc… Withdrawn • Commencement of business Sec 11(1)- Co. having a S/C not to commence any business or exercise any borrowing powers unless- • Declaration filed with the ROC that every subscriber to the MOA has paid the value of the shares agreed to be taken by him • Co. has filed with ROC verification of its Registered office Sec 11(3)- If declaration is not filed within 180 days of incorporation and ROC has reasonable cause to believe that the co. is not carrying on any business or operations, he may, initiate action for the removal of the name of the company from the Register of Co.'s. Companies Act, 2013

  21. Passing of Resolution by Postal Ballot Exemptions etc… Withdrawn Following items of business shall be transacted only by means of voting through a postal ballot- • Object Clause Alteration • Articles of Association Alteration • Change in Registered Office • Change in utilisation of funds raised by company • Issue of shares with differential voting rights • Variation in the rights attached to shares or debentures • Buy back of shares • Election of small shareholder’s director • Sale of undertaking Companies Act, 2013

  22. Restriction on Non-cash transaction involving directors (S. 192) The new Act introduce the new requirement, that without prior approval of the company in general meeting, a company will not 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 If the director or connected person is a director of its holding company, approval under this sub-section shall also be required to be obtained by passing a resolution in general meeting of the holding company Companies Act, 2013

  23. Private Placement ( Section 42) • Offer / invitation in a financial year not exceeding 50 person or as may be prescribed(excluding QIB, employee under ESOP), else it is offer to public • Payment through cheque or DD or other banking channels but not by cash • Allotment in 60 days from the receipt-else repay the money in 15 days. If repaid after 60+15 (75 days) – interest of 12% from 60th day • Moneys received on application keep in a separate bank a/c in scheduled bank, not to be used for other than allotment or repayment • Offer in person by name and records thereof • No advertisement or the use of any media/ marketing or distribution channels or agency • Penalty for non compliance: Higher of amount involved in offer or Rs 2 crores • Refund of all the money in 30 days Companies Act, 2013

  24. Other Major Provisions Companies Act, 2013

  25. BOARDSAND DIRECTORS Companies Act, 2013

  26. Major new definitions Promoter [Section 2(69)] - the definition of promoter has been introduced to also include a person—(Notified on 12th September, 2013)(a) who has been named as such in a prospectus is identified by the company in the annual return(b) who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or(c) in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act:Provided that nothing in sub-section (c)shall apply to a person who is acting in a professional capacity; Companies Act, 2013

  27. Board of Directors Companies Act, 2013

  28. Powers of BoD Companies Act, 2013

  29. Powers of BoD Companies Act, 2013

  30. Report of Board of Directors Additional Items required to be given in report of board of Directors: • The extract of the annual return • Particulars of loans, guarantees or investments in subsidiaries as provided in sec. 186 • Particulars of contracts or arrangements with related parties with rationale for arms length pricing as stated in sec. 188 • A statement indicating development and implementation of risk management policy for the company which in the opinion of the Board may threaten the existence of the company • Additional items specified in Rule 8 of Companies (Accounts) Rules, 2014 Additional Items required to be given in director responsibility statement: • Details about policy developed and implementation of CSR policy • Such other matters as provided in the Rules notified by the Government • Directors had devised proper system to ensure compliance with the provision of all applicable laws and that such systems were adequate and operating effectively Companies Act, 2013

  31. Related Party Transactions Companies Act, 2013

  32. Definitions – KMP [Section 2(51)] Key Managerial Personnel [Section 2(51)] (Notified on 12th September, 2013) - in relation to a company, means As per AS – 18: KMP means those persons who have the authority and responsibility for planning, directing and controlling the activities of the reporting enterprise Companies Act, 2013

  33. Related Party Transactions • What does the Companies Act, 1956 say ? [Section 297 (1)] • Central government approval required for entering into specific contracts, where paid-up capital of the company is not less than Rs.1 crore; for other Companies – the Board approval where interested Directors are not to participate • Following transactions are covered: • Sale, purchase or supply of any goods, material or services • Underwriting the subscription of any shares or debentures • Sale/purchase of goods/services for cash at prevailing market prices not exceeding Rs 5K – are exempted • No specific disclosure required in the Board Report Companies Act, 2013

  34. Related Party Transaction (notified) • Sec 2(76) -Related party with reference to a company, means: (i) a director or his relative; (ii) a key managerial personnel or his relative; (iii) a firm, in which a director, manager or his relative is a partner; (iv) a private co. in which a director or manager is a member or director; (v) a public co. in which a director or manager is a director or holds along with his relatives, more than 2% of its paid-up S/C; (vi) any body corporate whose BoD, M.D or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager; (vii) any person on whose advice, directions or instructions a director or manager is accustomed to act: Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions given in a professional capacity; (viii) any company which is— (A) a holding, subsidiary or an associate company of such company; or (B) a subsidiary of a holding company to which it is also a subsidiary; (ix) such other person as may be prescribed Companies Act, 2013

  35. Related Party Transactions ….cont’d • Provisions of Sec 188 of New Act • Prior approval by SR at GM required if paid-up capital of Co is Rs.10 Cr or more OR the transaction with RP does not exceed such sum, as may be prescribed (The word “not” is mis-placed in Section). The limits for clauses (a) to (e) as per rules are prescribed as 25% of annual Turnover or 10% of Net worth of Co as per last audited FS • Interested member not to vote on SR – (issue for some Co’s) • Disclosure in board report required along with appropriate justification for RPT • Section exempts: Any transaction entered by company in its ordinary course of business other than transactions which are not an arm’s length basis Companies Act, 2013

  36. Related Party Transaction Companies Act, 2013

  37. Related Party Transactions …cont’d • Following transactions are covered u/s 188 • sale, purchase or supply of any goods or materials; • selling or otherwise disposing of, or buying, property of any kind; • leasing of property of any kind; • availing or rendering of any services; • appointment of any agent for purchase or sale of goods, materials, services or property; • such related party's appointment to any office or place of profit in the company, its subsidiary company or associate company; and (Rs 2.5 Lakh per month or more) • underwriting the subscription of any securities or derivatives thereof, of the company (remuneration notmore than 1% of networth) Companies Act, 2013

  38. “Related Parties”- Defined Term Companies Act, 2013

  39. “Related Parties”- Defined Term Companies Act, 2013

  40. Change in Definition - (Relative) Section 2(77) Rule Companies Act, 2013

  41. RPT: Disclosure Requirements • What has changed? • Boards’ report to capture RP arrangement – this was not required as per the old act • Boards’ report shall also capture the justification of undertaking such RPT • Sec 186 disclosure around loans, investments etc now through the ‘FS’ – earlier through ‘register’ (Sec372 A) Companies Act, 2013

  42. Loan to Directors Companies Act, 2013

  43. Loan etc to Directors Etc… (Notified on 12th September 2013) Exemptions etc… Withdrawn…. • Section 295 exempted Pvt Limited Companies; new Act does not • Under the existing act, prohibited loans/guarantees can be made with the approval of CG, Under the new act no provision for giving loan even with CG permission • Loans from holding company to subsidiary not exempted by Section. However Rule has given exemption. Companies Act, 2013

  44. Exemptions etc… Withdrawn…. Cont’d • Exemptions given under Rule 10(1) – Chapter XII • Loan by Holding Co. to Wholly Owned Subsidiary (WOS)or guarantee or security provided by a holding company in respect of any loan made toitsWOSis exempted • Rule 10 (2) Any guarantee given or security provided by a holding company in respect of loan made by any bank or FI to itssubsidiary company is exempted • Provided loans made under 10 (1) & (2) are utilised by subsidiary for its principle business activities. • Only exceptions in Sec 185: • loan given to MD or WTD if such loan is in accordance with the terms of services extended to all employees or is approved by shareholders by SR • Loans etc. given in ordinary course of its business (conditions apply) Companies Act, 2013

  45. Exemptions etc… Withdrawn…. Cont’d Consequences of non-compliance: • Fine to Company - Rs 5 Lakh to Rs 25 Lakh • Fine to Director or other person - Rs 5 Lakh to Rs 25 Lakh or Imprisonment upto Six months or Both Unlike in Sec. 295, the exemption from imprisonment, if loan is repaid fully, is not there in Sec. 185 Companies Act, 2013

  46. Exemptions etc… Withdrawn…. Cont’d Under sec. 185 “person in whom Director is interested” means: (the list is same as in Section 295 of 1956 Act) • Any Director of lending Co or of Holding Co • Any partner or relative of any such Director • Any firm in which any such Director or relative is partner • Any PVT Co of which any such Director is Director or Member • Any Body Corporate of which 25% or more of total voting power is exercised/controlled by any such Director(s) • Any Body Corporate the BoD or MD whereof is accustomed to act in accordance with directions/instructions of BoD or of any Director(s) of lending Company Companies Act, 2013

  47. S. 185 – Discussion in Select Committee Pg 67; Companies Act, 2013

  48. Restrictions on Inter- Company Loan and Investments Companies Act, 2013

  49. Intercompany Investments and Loans Exemptions etc… Withdrawn…. Cont’d • Changes: • Exemption in case of loan by Holding Co to WOS also withdrawn in section • Now under Rule 11 of Chapter XII • Loan or guarantee given or security provided by Holding Co. to Wholly Owned Subsidiary Co. or JV or acquisition of securities of Wholly Owned Subsidiary (WOS)--Prior S.R. Not Required • Under the existing act, no loan shall be given at a ROI lower than the prevailing bank rate being the standard rate made public under section 49 of the Reserve Bank of India Act, 1934 • As per the new provision of the Act, no loan shall be given at a ROI lower than the prevailing yield of 1 year, 3 year, 5 year, or 10 year G-Sec cloest to the tenor of the loan Companies Act, 2013

  50. Exemptions etc… Withdrawn…. Cont’d • Additional disclosure in financial statements- full particulars of the loans given, investment made or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilized by the recipient of the loan or guarantee or security • 186(1) Restriction on layers of, Investment subsidiaries to two layers except for subsidiaries outside India or if required by law • 186 (2)- No company shall directly or indirectly — (No change) • (a) give any loan to any person or other body corporate; • (b) give any guarantee or provide security in connection with a loan to any other body corporate or person; and • (c) acquire by way of subscription, purchase or otherwise, the securities of any other body corporate, exceeding 60% of its paid-up S/C, free reserves and S.P account or 100% of its free reserves and S.P account, whichever is more • If exceeds the limits then prior approval by S.R in G.M shall be necessary Companies Act, 2013

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