The document provides an overview of the key changes and implications of the Companies Act 2013. Some of the major changes introduced include allowing one person companies, increasing the limit of members in a private company to 200, mandating corporate social responsibility spending, and increasing governance norms around boards and auditors. The document also summarizes the changes affecting private companies in areas like annual returns, board meetings, financial statements, and auditor appointments. Companies will need to take immediate action to amend their constitutional documents and ensure compliance with the new requirements.
2. Introduction
The long - awaited Companies Act, 2013 got its assent
in theLok Sabhaon 18th
December, 2012 and in theRajya
Sabha on 8th
August, 2013. After having obtained the
assent of the President of India on 29th
August, 2013, it
has now become the much awaited Companies Act, 2013
(2013 Act).
The Companies Act, 2013 is divided into 29 Chapters,
contains470 sectionsand 7 Schedules.
3. Historical Background
• Government constitutes an Expert Committee on Company Law
under the Chairmanship of Dr. J. J. Irani on 2nd
December, 2004 to
adviceon new CompaniesBill.
• The Committee submitted its report to the Government on 31st
May, 2005.
• Companies Bill, 2008 was introduced on 23rd
October, 2008 in the
Lok Sabha to replace existing Companies Act, 1956. Companies
Bill, 2008 lapsed becauseof dissolution of the14th
Lok Sabha.
• Ministry of Corporate Affairs introduces the Companies Bill,
2009 in the Lok Sabha on August 3, 2009 and Bill was referred to
the Standing Committee on Finance (SCF) of the parliament for
examination in September 09, 2009.
4. Historical Background
• Report of the SCF on Companies Bill introduced in the Lok
Sabhaon 31st
August, 2010.
• In view of the amendments made by the recommendations of
SCF and suggestions of Stakeholders the Companies Bill,
2009 waswithdrawn by theCentral Government.
• A fresh Companies Bill, 2011 was introduced in the
Parliament on Wednesday, 14th
December, 2011.
• The Companies Bill, 2011 was again referred to the Standing
Committeeon Financeon 5th
January, 2012.
5. Historical Background
• Based on the SCF’s recommendations, the Bill was amended
and introduced astheCompaniesBill 2012.
• The Lok Sabha on 18th December, 2012 approved the
Companies Bill 2012; but the same could not be placed in that
session in theRajyaSabha.
• The Rajya Sabha passed the bill on 8th August, 2013 and
received the assent of the President of India on 29th August,
2013.
• As on date 283 sections and Rules for 19 chapters have been
notified and a few circulars have been issued clarifying the
applicability of these.
• 187 sectionsof CompaniesAct, 2013 isyet to benotified.
6. Aims &Objectives
The objective behind the enactment of Companies Act, 2013 is
to provide for lesser Government approvals and enhanced self-
regulationscoupled with emphasison corporatedemocracy.
The Companies Act, 2013 is expected to facilitate business-
friendly corporate regulation, improve corporate governance
norms, enhance accountability on the part of corporate houses
and auditors, enhanced levels of transparency and protect
interestsof investors, particularly small investors.
7. Key Highlights
One Person Company (OPC) is a new vehicle for
individuals for carrying on business as Corporate entity with
limited liability.
The new concept will be beneficial as entrepreneurs will be
able to singly set up a corporate entity, restrict the liability of
business and reduce compliances. Further, it will now be
easier for a foreign companies to set up wholly owned
subsidiariesin India[Section 2(62) and Section 3(1) (c)]
8. Small Company: The Companies Act, 2013 introduces this
new concept of a small company, which means a company
other than a public company having paid up share capital not
exceeding INR 50,00,000 (or such higher amount as may be
prescribed which shall not be more than INR 5,00,00,000) or
turnover of which as per its last profit and loss account does
not exceed INR 2,00,00,000 (or such higher amount asmay be
prescribed which shall not bemorethan INR 20,00,00,000).
However, this section of small company will not be applicable
to (a) holding or subsidiary company; (b) company registered
under Section 8 of 2013 Act (i.e. companies form with the
charitable object); or (c) company or a body corporate formed
under thespecial act. [Section 2(85)]
9. Dormant Company: The Companies Act, 2013 now allows a
company to be formed and classified as a dormant company for
holding assets or intellectual property subject to the company not
having any significant accounting transaction. Further, an
inactive company can also make an application to the Registrar
in such manner as may be prescribed for obtaining the status of a
dormant company. [Section 455].
Associate Company: The Companies Act, 2013 defines the
Associate Company to mean a company which has ‘Significant
Influence’ over the other company and which is not a subsidiary
company but includes a joint venture company. Further it has
been explained that ‘Significant Influence’ shall mean control of
at least 20% of total share capital or control of the business
decision under an agreement. [Section 2(6)]
10. Private Limited Company: The Companies Act, 2013 has now
increased the total limit of number of members / shareholders in
privatecompany from 50 to 200. [Section 2(68)(ii)]
Investments Companies: The Companies Act, 2013 provides
that any company (unless otherwise prescribed) shall not make
investment through more than two layers of investment
companies. However, this section has not been made applicable to
a company acquiring any other company incorporated outside
India, if such other companies has investment subsidiaries beyond
two layers as per the law of such country. This Section may
considerably restrict the flexibility of Indian companies in
structuring their transactions. [Section 186]
11. Key Managerial Personal (KMP): According to section 203 of
the Companies Act, 2013, Key Managerial Personnel comprises
of:
a) Managing Director or Chief Executive Officer or Manager or in
their absence, aWholeTimeDirector
b) Company Secretary, and
c) Chief Financial Officer
As per Rule 8 of the Companies (Appointment & Remuneration
of Managerial Personnel) Rules, 2014, every listed company and
every other public company having a paid up share capital of Rs.
10 crores or more shall have whole time Key Managerial
Personnel.
12. Class Action Suits: The Companies Act, 2013 introduces the
western concept of class action suits which allows requisite
number of members, depositors or any class of them file a suit
against the company, its directors, auditors and/or other experts or
consultants or advisors, if they believe that affairs of the company
are conducted in a manner prejudice to the company or its
membersor depositors. [Section 245]
Registered Valuer: Valuation in respect of any property, stocks,
shares, debentures, securities, goodwill or any other assets or net
worth of a company or its liabilities required under any provision
of the Act shall be carried out by only a registered valuer. Valuers
to be appointed by the Audit Committee or in its absence by the
Board.
13. Corporate Social Responsibility (CSR): 2% of average
net profits of last 3 years to be mandatorily
spent on CSR by companieshaving:
- net worth of Rs. 500 Croresor more; or
- turnover of Rs.1,000 Croresor more; or
- net profit of Rs. 5 Croresmillion or more
Consolidated Financial Statement: The Companies Act, 2013
mandates preparation of consolidated financial statements for all
companies that have one or more subsidiaries. These would be in
addition to the separate financial statements and are required to be
prepared in the same form and manner as the separate financial
statements. Subsidiary would include associate companies and
joint ventures.
14. MajorChanges Affecting Private Companies
SECTION PARTICULAR
S
REMARKS
2(6) Associate
Company
Associate company will be considered as Related Party
and will have implications under financial statements
and related party contracts.
2(41) Financial Year Financial Year can only be of April to March. A
Company/Body Corporate, which is a holding company
or subsidiary incorporated outside India and is required
to follow a different financial year for consolidation of
its accounts outside India, may have different financial
year subject to the approval of National Company Law
Tribunal.
A Transition period of 2 Year has been prescribed for
Company existing on the commencement of the Act to
align their financial yearsto April – March.
15. MajorChanges Affecting Private Companies
SECTION PARTICULAR
S
REMARKS
2(68) Private
Company
Number of members has been increased from 50 to 200
and restriction to invite public to subscribe shares or
debentures has been extended to include all types of
securities.
Earlier Company can only accept deposit from
members, therefore restriction as to acceptance of
deposit from person other than member, directors and
their relativeshasbeen dispensed with.
19 Subsidiary
Company not
to hold shares
in Holding
Company
A subsidiary company can’t hold shares in its holding
company, either by itself or through its nominees.
A holding company can’t allot or transfer its shares to
any of its subsidiary companies.
16. MajorChanges Affecting Private Companies
SECTION PARTICULARS REMARKS
21 Authentication of
Documents,
proceedingsand
contracts
Any document or proceeding requiring authentication
by a company or contracts made by or on behalf of a
company may be signed by any KMP or an officer of
Company, duly authorised by Board.
42 Private
Placement
A private company may do private placement through
privateplacement offer letter;
• Number of persons can’t exceed 50 in a financial
year;
•Money can be brought only through cheque or
demand draft or other banking channels but not by
cash
17. MajorChanges Affecting Private Companies
SECTION PARTICULARS REMARKS
48 Variation of
Shareholder’s
Right
Rights of a particular class of shares may be varied
through special resolution
62 Further issue of
ShareCapital
A company can increase itssubscribed capital through
thefollowing:
•rightsissue;
•to employees under a scheme of employees’ stock
option, subject to special resolution passed by
company
•to any other person, if authorised by special
resolution, if the price of such shares is determined by
thevaluation report of aregistered valuer
18. MajorChanges Affecting Private Companies
SECTION PARTICULAR
S
REMARKS
92 Annual Return Every to prepare Annual Return in prescribed format with more
disclosures and such return shall be signed by a Director an the
Company Secretary, or where there isno Company Secretary, by
aCompany Secretary in Practice.
Every Listed Company and other Company having Paid up
Share Capital of Rs. 10 Crore or more or Turnover of Rs. 50
Crore or more will obtain a Certificate from a Practicing
Company Secretary, stating thefact that Annual Return discloses
the facts correctly and adequately and that the Company has
complied with all provisionsof Act.
101 Notice of
Meeting
21 clear daysnoticehasto begiven for every general meeting.
Noticeof general meeting also hasto besent to every director
Every general meeting can be done with shorter notice with 95%
shareholdersapproval
19. MajorChanges Affecting Private Companies
SECTION PARTICULAR
S
REMARKS
102 Statement to
be annexed
with Notice
Every company is required to give explanatory statement
for every special business, whereby interest of director and
the manager, key managerial personnel and their relatives
hasto begiven
110 Postal Ballot For private companies having members more than 50,
following prescribed matters shall be passed through postal
ballot:
Alteration in objectsclauseof Memorandum
Alteration of Articles for conversion of private company
into public or viceversa
Change in place of registered office outside the local limits
of any city, town or village
Issueof shareswith differential rights
Variation in therightsattached to any classof securities
Buyback of shares
Appointment of small shareholder director
Sale of the whole or substantially the whole of an
undertaking of acompany
20. MajorChanges Affecting Private Companies
SECTION PARTICULAR
S
REMARKS
117 Resolution and
Agreements to
befiled.
Certain new board resolutions as follows, will have to be
registered by concerned ROC:
• For making calls
•Authorizing buyback
•Borrowing money
•Investing fundsof Company
•Giving loans, guaranteeor security
•For approving financialsstatementsand DirectorsReport.
118 Minutes of
Proceedings of
Meetings
Secretarial Standard issued by the Institute of Company
Secretaries of India in relation to Board and General
Meeting should befollowed.
128 Books of
Accounts
Booksof Accountsmay bekept in Electronic Forms
21. MajorChanges Affecting Private Companies
SECTION PARTICULARS REMARKS
129 Consolidated
Financial
Statement
A company having subsidiary/ies or associate company,
shall prepare a consolidated financial statement, in
addition to its financial statements and shall lay the same
for approval in AGM.
135 Corporate
Social
Responsibilities
Prescribed companies have to form CSR Committee and
haveto undertakeactivitiesasper ScheduleVII.
139 Appointment of
Auditors
Maximum term of office as auditor for an individual is
oneterm of fiveconsecutiveyearsand for an audit firm, is
two termsof fiveconsecutiveyearseach.
Cooling off period of 5 yearshasbeen specified for both
Member have the option to rotate the audit team and can
also appoint multipleauditors
22. MajorChanges Affecting Private Companies
SECTION PARTICULARS REMARKS
144 Auditors not to
render certain
services
An auditor can’t provide the following services to
company, itsholding or subsidiary company:
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
149(3) Resident
Director
Every Company shall have at least one director who has
stayed in India for a total period of not less than one
hundred and eighty – two days in the previous calendar
year.
23. MajorChanges Affecting Private Companies
SECTION PARTICULARS REMARKS
185 Loan to
Directors
No Company shall give any loan, provide any security or
guarantee in connection with a loan to a Director or any
other person in whom he is interested, except as provided
below.
Company can give loan to MD/WTD without approval of
shareholders where the loan is given as part of the
condition of services extended by the Company to all its
employees or where loan is approved by way of passing
thespecial resolution.
No Central Govt. approval is required. Only Special
Resolution will berequired.
The exemption given to loan granted, guarantee or
security provided by any Holding Company to its
Subsidiary or the exemptions granted to Private Limited
Company hasbeen dispensed with.
24. MajorChanges Affecting Private Companies
SECTION PARTICULARS REMARKS
186 Loans and
Investment
The Companies Act, 2013 states that companies can make
investments only through two layers of investment
companies subject to exceptions which includes company
incorporated outsideIndia.
Giving any loan or guarantee or providing any security or
the acquisition by company exceeds 60% of paid up share
capital, free reserves and share premium account or 100%
of free reserves and share premium account, whichever is
more, requires prior approval of the company by special
resolution.
Now, loans and investment by holding company to/in its
wholly owned subsidiary isnot exempted.
25. MajorChanges Affecting Private Companies
SECTION PARTICULARS REMARKS
138 Internal Audit The Companies Act, 2013 now moves a step forward and
mandates the appointment of an internal auditor who shall
either be a chartered accountant or a cost accountant, or
such other professional as may be decided by the Board to
conduct internal audit.
Every privatecompany having-
a)turnover of two hundred crore rupees or more during the
preceding financial year; or
a)outstanding loans or borrowings from banks or public
financial institutions exceeding one hundred crore rupees or
more at any point of time during the preceding financial
year:
Shall berequired to appoint an Internal Audit.
26. MajorChanges Affecting Private Companies
SECTION PARTICULARS REMARKS
203 Company
Secretary
Company Secretaries are regulated professionals and they
render services critical for the companies. A Company
needs a Company Secretary to strengthen its governance
and compliances.
Every private limited company having paid up share capital
of Rs. 50 Million or more shall be mandatory required to
haveaWholeTimeCompany Secretary all thetime.
204 Secretarial Audit Secretarial Audit of Private Companies are voluntary. But
all companies should voluntary adopt the annual
practice of Secretarial Audit due to multiplicity and
complexity of laws, Secretarial Audit facilities to
ensure compliance and avoid risk associated with non-
compliance.
27. Immediate Action Points
Alteration of Memorandum and
Articlesof Association
Existing Companies should amend their MOA and
AOA to incorporate the provisions of the new
CompaniesAct;
Option to include entrenchment provisions, if any, in
the Articles of Association for strict compliance. (An
entrenchment clause is a provision which makes
further amendments to AOA more difficult. such
provision enables a company to follow a more
restrictiveprocedurethan passing aspecial resolution
for altering aspecific clauseof AOA.
Entrenchment clause may prevent unilateral
amendments to the AOA which may be a joint
venturecompany.)
Resident Director At least one of the directors who is resident in India
shall beappointed on theBoard of every company.
28. Immediate Action Points
Printing of New Stationery items Disclosureof thefollowing on theletterhead / billsor
other official communications such as name
(including previous name for upto 2 years),
registered address, Corporate Identity Number(CIN),
Telephone No., Fax No., website address email
address, if any;
(In case the letterheads already printed, please affix a
rubber stamp to comply with additional disclosures.)
Disclosure of Interest by
Directors
Every director shall disclose his concern or interest
in any company or companies or body corporate
(including shareholding interest), firms or other
association of individuals, by giving a notice in
writing in Form MBP 1 and the Board taking note of
the same shall be filed in eForm MGT – 14 along
with DIR – 8 to the concerned Registrar of
Companies.
29. Immediate Action Points
Related Party Transactions Companies need to evaluate the related party
transactions and have to take necessary approval
prescribed under theAct.
Requirement of obtaining Central Government
approval has been withdrawn but more compliances
has been introduced in the Act as well through the
Rules.
Preparation of Statutory
Registers
The Companies has to maintain all the statutory
registers as per the new prescribed format under the
new Act and Rules.
Obligation to IntimateDIN Every person or Company should mention the DIN
in all forms, information or particulars which relates
to the director or containing any reference of any
director whilefurnishing thesame.
30. Immediate Action Points
Board Meeting New act allowsparticipation of Directorsin Board Meeting through video
conferencing and through other audio visual means by complying the
prescribed procedures;
At-least 7 daysnoticeto begiven for Board meeting;
Noticeof Board meeting may begiven by electronic mode;
Not more than 120 days shall be intervene between 2 consecutive board
Meetings;
Participation through video conferencing shall becounted for quorum;
The Rules provided certain matters which cannot be dealt with in a
meeting through video conferencing or other audio visual means.
At least one meeting in a period of 12 months has to be physically
attended by every director.
Director will Vacate the office if he is absent from all Meetings of the
Board during 12 months with or without leave of absence (Attending one
BM in aperiod of 12 monthsismust).
31. Penalties forNon – Compliances
Companies Act, 2013 has increased monetary
penaltiesand imprisonment.
The civil and criminal liabilities are not just on
directorsbut includes“Officersin Default”.
There is heightened corporate governance
requirements even for startups and unlisted
companies, even though there is no public
money invested.
32. Penalties forNon – Compliances
While sections which require monetary penalties
can be compounded before the statutory
authorities, sections which details imprisonment
can not be compounded.
Entrepreneurs should also note that such
penalties are not limited by the ‘limited liability’
concept. We urge the entrepreneurs to give
importance to corporate governance.