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Companies Act 2013 Strictly Private and Confidential Draft May 2014.

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Presentation on theme: "Companies Act 2013 Strictly Private and Confidential Draft May 2014."— Presentation transcript:

1 Companies Act 2013 Strictly Private and Confidential Draft May 2014

2 Substantively in force – w.e.f. April 1, 2014
Beyond “Company Law” Procedural to “Substantive” Man to Man Marking Ambiguities Sections - 470 Chapter wise Rules

3 One Person Company “One Person Company” means a company which has only one person as a member (who shall be a natural person who is an Indian citizen and resident in India). Max. paid up share capital = 50 lacs; Max. Turnover = 2 crores (if exceeded, convert into private or public co.) [Rules] Advantages to OPC: All advantages as applicable to private co. The provision relating to holding of AGM/ EGM / Notice & Quorum of meetings and related provisions there in is not applicable for a OPC. 1 board meeting in each half of calendar year (min. gap b/w 2 meetings, not less than 90 days) If OPC has only one director, it is exempted from holding Board meetings. Financial statements to be signed by 1 director only; No disclosure in board report required except for explanations or comments on the qualification , reservation or adverse remarks or disclaimer made by auditor in their report.

4 Small Company ‘‘small company’’ means a company, other than a public company,— (i) paid-up share capital of which does not exceed Rs. 50 lakhs or such higher amount as may be prescribed which shall not be more than Rs. 5 crore; or (ii) turnover of which as per its last profit and loss account does not exceed Rs. 2 crore or such higher amount as may be prescribed which shall not be more than Rs. 20 crore: Provided that nothing in this clause shall apply to— (A) a holding company or a subsidiary company; (B) a company registered under section 8; or (C) a company or body corporate governed by any special Act. Small Company = similar to Private Co. - Annual return to be signed by the director. - 1 board meeting in each half of calendar year (min. gap b/w 2 meetings, not less than 90 days).

5 Board Composition 1

6 Board composition Minimum = 2/3 directors; Maximum = 15 directors (limit can be increased beyond 15 after passing special resolution) 1 resident director i.e. resident in India ≥ 182 days in a calendar year Specified companies – woman director Additional directors Alternate directors Nominee directors Independent directors (in listed and specified class of public companies) Max. no. of directorships (including alternate directorships) = 20 Shareholders by special resolution can restrict the no. of directorships.

7 Board composition- Snapshot
Status of the Company > 1 Director resident in India for 182 days* > 1 Woman Director* Independent Director* Audit Committee Nomination and Remuneration Committee Applicability Number Listed Co. 1/3rd or 50% Unlisted Public Co. - Share Capital > # Rs.100 Cr Rs. 10cr Minimum 2**# Turnover >  # Rs. 300 cr Rs. 100cr Loan/Debentures/ Deposits> Rs. 50cr Private Co.(listed/unlisted) NA ** if, on account of composition of audit committee, a higher number of Independent directors are required, such higher number will become applicable. # Rules

8 Resignation/Disqualification of directors
Directors to furnish detailed reasons of resignation in writing – to be submitted to RoC within 30 days Office of the director gets vacated if he absents himself from all the meeting of BoD held during a period of twelve months with or without leave of absence Grounds of disqualification – Unsound mind or undischarged insolvent or adjudicated as an insolvent; convicted by court of an offence; disqualified by an order passed by a court or tribunal; if convicted for offence dealing with RPT any time during last 5 years. No person to be appointed as director if a director of co. which has failed to file financial statements or annual return for any continuous 3 FYs; or Has failed to repay deposits or interest thereon or redeem any debentures on due date or paid interest thereon or divided for a continuous period of one year or year. FOR NEW APPOINTEMENTS – FRESH DISCLOSURE u/s 164(2)

9 Board Proceedings 2

10 Board Proceedings New provisions What it means
Review board calendar to meet prescribed requirements Need to have electronic infrastructure to enable this. Electronic infrastructure to have adequate security measures to protect confidentiality and Recording facility. Check the quorum before every meeting depending on the number of interested directors. Gap between two consecutive meetings not to exceed 120 days Minimum 7 days’ notice, shorter notice with consent Matters not to be dealt in VC/ audio- visual meeting: Approval of annual financial statements; Approval of board’s report; Approval of prospectus; Approval of matter w.r.t. amalgamation, merger, demerger, acquisition and takeover. Quorum = 1/3rd of Board or 2, whichever higher (Quorum discounted to 2 not interested directors, in case, interested directors ≥ 2/3rd )

11 Matters to be passed in Board’s meeting – ACT
Following powers to by the board of directors only by means of resolution passed at meeting of the board: to make calls on shareholders in respect of money unpaid on their shares; to authorise buy-back of securities under section 68; to issue securities, including debentures, whether in or outside India; to borrow monies; to invest the funds of the company; to grant loans or give guarantee or provide security in respect of loans; to approve financial statement and the Board’s report; to diversify the business of the company; to approve amalgamation, merger or reconstruction; to take over a company or acquire a controlling or substantial stake in another company.

12 Matters to be passed in Board’s meeting - RULES
In addition, the rules prescribe following additional powers to be exercised by the board at its meeting : to make political contributions; to appoint or remove key managerial personnel (KMP); to take note of appointment(s) or removal(s) of one level below the Key Management Personnel; to appoint internal auditors and secretarial auditor; to take note of the disclosure of director’s interest and shareholding; to buy, sell investments held by the company (other than trade investments), constituting five percent or more of the paid up share capital and free reserves of the investee company; to invite or accept or renew public deposits and related matters; to review or change the terms and conditions of public deposit; to approve quarterly, half yearly and annual financial statements or financial results as the case may be.

13 Board Meeting.. Some matters of immediate attention
Propose Loans and Borrowings – 180(1)(c) borrowing (1) (a) creation of charge/disposal ALL COMPANIES : Resolutions - S Related Party Transactions – Board Approval (except arms length+ ordinary course) Recommend for SR by Shareholder approvals Paid Up capital Rs 10 Cr or more – for all RPTs For other Companies : If as per limits prescribed under Rule 15(3) of Chapter XII- SR Amendment of Articles – to review if JVs Deposits (S. 73(2)) new definition of deposits – ordinary resolution+ deposit insurance + repayment Authorisation for signing of documents and maintaining registers – under 2013 Act

14 Independent Directors

15 Independent Directors…criteria
Listed Public Company – 1/3rd of total no. of directors Unlisted Public Company – Share Capital Rs 10 Cr/more; Turnover Rs 100 Cr or more, Loans/Deb/Deposits over Rs 50Cr- At least 2 directors as independent Criteria of Independence: (includes himself or through any of his relative) Person of integrity, relevant expertise and experience in the opinion of Board Not a promoter neither related to promoters or directors of the company or its H/S/A. Appropriate skills, experience and knowledge in one or more fields. Not a KMP/employee of the company or its H/S/A in immediately preceding 3 financial years Not an employee or proprietor or partner in any firm of auditors/CS firms/cost auditors of the company or its H/S/A in immediately preceding 3 Fys Not holding along with relatives 2% or more of total voting power of the company Conditions on pecuniary relationship in last 2 years or current FY {S.149(6)} ID- No pecuniary relationship at all - H/S/A or their promoters or directors Relatives of IDs – Not over 2% of Company’s turnover or Rs. 50 lakh, whichever is lower Lawyers/Consultants- Not over 10% of their turnover

16 Independent Directors…some compliances
Declaration of independence to be given - at first meeting of BoD where he/she participates as director and thereafter at first meeting of Board in every financial year or where there is any change of circumstance that may affect his status as ID. Appointment approved by shareholder’s/formalised through letter of appointment explanatory statement to indicate justification for appointment as ID Tenure: maximum of two consecutive terms of upto 5 years each (past period not to be counted); cooling period of 3 yrs with no association with the company for further appointment Not to retire by rotation Remuneration: Not entitled to ESOPs Only sitting fees + reimbursement of meeting expenses+ Profit related commission

17 Independent Directors….evaluation
Mandatory Performance Evaluation to form basis of re-appointment. Conditions for liability of Independent Directors under the Act for acts of omission or commission which occur with his knowledge attributable through Board process; AND with his consent/connivance or where he does not act diligently.

18 Duties of directors – All including IDs
Acts in the best interest of company, employees, shareholders, community and for the protection of environment Takes reasonable care, skill and diligence and exercises independent judgment Avoids situations of direct / indirect interest that conflicts / may conflict with the interest of the Company Shall not achieve or attempt to achieve any undue gain or advantage Not to assign his office Fine Rs. 1 lakh - Rs. 5 lakh

19 Code of Conduct for Independent Directors (Sch. IV)
Both Company and Independent Directors to abide by Code Code prescribes Role , Functions and Duties to ensure active and responsible contribution Concerns about running the Company/proposed action to be addressed; if unresolved minute. Ensure an adequate and functional vigil mechanism Report concerns about unethical behaviour, fraud, violation of policies Ensure Related party transactions are approved after adequate deliberations/in Co. best interest One meeting only of Independent Directors to : review performance of Non- Independent Directors and Board as a whole, review performance of Chairperson, Assess quality, quantity, timeliness of information flow between Management and Board Performance of each Independent Director to be reviewed by entire Board (excluding that Director)

20 KMPs/Whole-time KMPs 4

21 Key Managerial Personnel
Impact New definition KMP (and relatives) regarded as related party Relative of KMP cannot be the auditor Policy on remuneration of KMP to be in board report Covered under the definition of ‘Officer who is in default’ Restrictions on forward dealing of securities Every listed company; and public company having a paid up capital of Rs. 1o crore or more to have whole time KMP Concept of KMP includes: CEO/ MD/ Manager; Company Secretary; WTD; CFO; and As may be prescribed.

22 Managerial Remuneration

23 Remuneration to Managerial Personnel- Directors/Mgr
Remuneration payable - to be determined either by articles, or by resolution or by special resolution if articles so provide, subject to the provisions of 2013 Act. Overall Managerial Remuneration in a FY (applicable to Public Companies) – not to exceed 11% of net profits of company in that FY (i.e., remuneration payable to directors, MD, WTD and Manager, including services rendered by them in any other capacity excluding professional nature); % can exceed with the approval of CG, subject to provision of Sch. V. Except with the approval of CG, Remuneration not to exceed (applicable to Public Companies) : to any one MD or WTD or Manager - 5% of net profits and if more than 1 such director, then 10% of net profits to all such directors taken together. to directors other than MD/ WTD - 1% of net profits of the company if there is any MD/ WTD/ Manager. In all other cases, capped at 3% of net profit. Net profits to be computed in accordance with Section 198. The above remuneration limit excludes sitting fees payable to directors. MD or WTD of a company receiving commission from the company, can also receive remuneration from holding or subsidiary company, subject to disclosure in board report’s. Premium paid on D & O’s insurance for MD/WTD/Manager/CEO/CFO/CS– not to part of remuneration, but if “ the person is proved to be guilty” then premium paid treated as remuneration.?? Listed companies to disclose ratio of remuneration of each director to median employee remuneration.

24 Remuneration to Directors - inadequacy/loss
No profit or inadequate profits in a FY (all companies including Private, Public, small ? (197(3)) - remuneration to be paid in accordance with Part II of Sch V only, otherwise prior approval of CG required. Rule 7(2)/Ch XII of Rules – (except Listed/Subsidiary of Listed Co . , may without CG approval, pay remuneration beyond limits on complying with 5 conditions – Board Approval, No default in payment of debts/debentures/Pref .Shares/Interest/dividend thereon for 30 days in preceding FY, Shareholder resolution by SR –max 3 years, Justification in notice, B/S and A/R duly filed. Sch V requires increased level of disclosures required such as detailing the performance criteria along with fixed and performance linked component, stock option details, service contracts etc., . Contravention with the above provisions - punishable with fine which shall not be less than INR 1 lakh but which may extend to INR 5 lakh.

25 Board Committees 6

26 Board Committees- Audit/NRC/Stakeholders + CSR
Particulars Audit Committee Nomination and Remuneration Committee Stakeholders Relationship Committee Applicable to Listed Companies + Public company with paid up capital ≥ Rs.10 crores or turnover ≥ Rs. 100 crores or out-standings > Rs.50 crores > 1000 shareholders / debenture holders / deposit holders/any other security holders at any time during the financial year Composition & Chairperson Minimum 3 with majority of Independent Directors. Chairperson: Independent director 3 or more NEDs out of which not less than 50% should be Independent Directors Chairperson: Independent Director Chair person: NED Other members: to be decided by Board Criteria different than sebi other c which are different than SEBI

27 Board Committees... Particulars Audit Committee
Particulars Audit Committee Nomination and Remuneration Committee Stakeholders Relationship Committee Additional Duties Extensive review Review and monitor the auditor’s independence and performance, and effectiveness of audit process Examination of financial statements and the auditors report thereon Approval of related party transactions Enlarged Role Identify persons qualified to be directors Formulate policy for determining qualifications and remuneration of directors, KMPs. Consider and resolve grievances of security holders Criteria different than sebi other c which are different than SEBI

28 Board Committees - CSR What it means
Applies to all companies, public or private: Net worth of 500 crore INR or more; Turnover of crore INR or more; Net profit of 5 crore INR or more CSR committee to have at least 1 independent director (exceptions for unlisted public/private / foreign co.) Private company to comprise of 2 directors on CSR Committee Compliance required if above criteria met in any financial year starting 1 April 2014 Exempted - if criteria not met for 3 consecutive years Endeavour to spend at least 2% of average net profits else Board to give reasons (in board report) for failure to spend What it means Assess the applicability based on defined criteria Review current CSR policies or initiatives, if any, and identify steps to align them with new regime. Identify structure for implementation and tax implication

29 Shareholder meetings 7

30 Shareholder Meetings New provisions Quorum
AGM to be convened within 9 months of closure of 1st financial year and thereafter, within 6 months of closure of financial year AGM to be called between 9 a.m. to 6 p.m. on any day other than National Holiday and to be held at the registered office or within city where RO is situated. Notice can be given in writing or by electronic mode Notice of meeting to be given to every member. Director and auditor of the company Place of EGM to be in India only. Quorum of the general meeting to be physically present. Postal ballot applicable if members > 200. Facility of Voting through electronic means to be provided, if shareholders ≥ 1000/ listed companies. Unless the articles of a public company provide for larger number, quorum of a public company shall be : 5 members personally present, if number of members is not more than 1000, 15 members personally present, if the number of members is more than but up to 5000, 30 members personally present, if the number of members exceeds 5000.

31 Shareholders Meetings - Matters
Loans and Borrowings – 180(1)(c) borrowing (1) (a) creation of charge/disposal Resolution - S Related Party Transactions - SR Paid Up capital Rs. 10 Cr or more – for all RPTs Others limits prescribed under Rule 15(3) of Chapter XII Sale/purchase/supply – exceeding 25% of annual turnover Selling /buying property – exceeding 10% of net worth Leasing of any property – exceeding 10% of net worth or 10% of turnover Availing or rendering services – exceeding 10% of net worth Appointment to any office or place of profit in Co./S/Assoc- monthly remuneration over Rs. 2.5 lacs Remuneration for Underwriting subscriptions for securities – over 1% of net worth Amendment of Articles – to review if JVs Deposits (S. 73(2)) new definition of deposits – ordinary resolution.

32 Board and Auditor’s Reports

33 Board’s report – New Matters
Directors Statement on : LISTED COMPANIES : Internal financial controls are adequate and operating effectively (“internal financial controls” means policies for ensuring orderly and efficient conduct of its business, safeguarding assets, prevention and detection of frauds and errors, accuracy and completeness of accounting records, and the timely preparation of reliable financial information.) ALL COMPANIES : Devised proper systems to ensure compliance with all applicable laws + such systems are adequate and operating effectively ALL COMPANIES : Development and implementation of a risk management policy/identification of risk LISTED + PUBLIC INR 25 Cr or more in previous year : Manner of annual evaluation of performance of Board+ Committees+ Directors WHERE CSR APPLIES : Details of CSR initiatives ALL COMPANIES : All Related parties’ contracts along with justification thereof ALL COMPANIES : Explain qualifications, reservations or adverse remarks or disclaimers made in Auditor’s Report + Secretarial audit report

34 Auditor’s Report – New Matters
Observations on financial transactions or matters which have any adverse effect on Company’s functioning Any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith Whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls Auditor to report to the Central Government within such time and manner as may be prescribed, if he has any reason to believe that any offence involving fraud is being committed or has been committed against the company by its officers or employees

35 Compliance with “ALL” Applicable Laws… All companies
LISTED/PUBLIC Co Rs 10 crore or more (NOT PRIVATE (UNLISTED) /SMALL) Company Secretary - statutory duties To report to Board about compliance with Companies Act AND Other applicable laws To ensure compliance with secretarial standards (Detailed minutes) The duties of CS not to affect duties/functions of Board, Chairperson or MD or WTD, under Companies Act or any other law.

36 Corporate Governance- Other Areas

37 Vigil Mechanism/Whistle Blower
Applicable on : LISTED COMPANIES + Co accepted deposits from public + Co. borrowed monies from banks/PFIs over Rs 50 crores. Vigil mechanism to be established for employees and directors to report concerns To provide adequate safeguards against victimisation Provision for direct access to the chairperson of the Audit Committee Independent Directors to ensure that Vigil Mechanism is adequate and functional To be disclosed on website, if any, and in the Board’s report

38 Fraud Fraud in relation to affairs of a company includes :
any act, omission, concealment of any fact, or abuse of position, committed by any person or any other person with the connivance , with intent : to deceive, to gain undue advantage from , or to injure the interests of, the company or its shareholders or its creditors or any other person; whether or not there is any wrongful gain or wrongful loss. Imprisonment – Min. 6 months (3 yrs. if public interest) Max. 10 years and Fine – Min. - Amount involved in the fraud, Max. - 3 times of amount Auditor to report to the Central Government: if he has any reason to believe that any offence involving fraud is being committed or has been committed against the company by its officers or employees

39 Officer who is in Default
WTD, KMPs If no KMPs, Board specified directors who have consented, else the entire Board Any person, under the immediate authority of the Board or any KMP: who is charged with any responsibility including maintenance, filing or distribution of accounts or records who authorises, actively participates in, knowingly permits or knowingly fails to take active steps to prevent, any default Any person in accordance with whose advice, directions or instructions the Board is accustomed to act (except professional advisors) Every director, who is aware of a contravention by virtue of receipt by him of any proceedings of the Board or participation in such proceedings without objecting to the same, or where the contravention is with consent/connivance

40 Class Action Suits Members / depositors empowered to file class action suit. If affairs of company are being conducted prejudicial to the interests of the company / members / depositors Requisite number of members for filing a suit is as under: At least 100 depositors or 100 members or specified percentage of depositors/members by number or value (as prescribed) whichever is lower . Relief includes claim for : Damages, Compensation, or Any other suitable action

41 Thank You! This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers Private Limited, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. © 2013 PricewaterhouseCoopers Private Limited. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers Private Limited which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

42 Related Party Transactions

43 Who is a Related Party Companies Act A director or his ‘relative’
A firm in which a director or his relative is a partner A private company in which a director or manager is a member or director A public co in which a director along with relatives hold more than 2% of paid up capital Any body corporate whose Board or MD is accustomed to act per instructions of a director of the Co. Any person on whose instruction a director is accustomed to act A KMP or his relative Holding co/Subsidiary co / Associate co (JV/ significant influence – 20% shareholding or control of business decisions under agreement)/subsidiary companies of same holding company Director /KMP of the holding company or his ‘relative’ Listing Agreement Person/‘Relatives’ exercising control/significant influence over entities; such entities Group Companies Associate co/JV co of group companies

44 Transactions covered Companies Act
Sale, purchase or supply of goods or materials Selling or disposing or buying property of any kind Leasing of property of any kind Availing or rendering of services Related party appointment to any office/place of profit in Co./subsidiary/associate Appointment of any agent for purchase/sale of goods, materials, services/property Underwriting the subscription of any securities Financial transactions with related parties/directors Listing Agreement Transfer of resources, services or obligations between co and related party, regardless of whether price is charged Prior approval of the Audit Committee and Board of Directors required Special Resolution of Shareholders (within 3 months of entering) Disclosure in Board Report +justification for contract/arrangement Arms length/ordinary course of business criteria – not applicable under Listing Agreement.

45 Related Party Transactions- When to go to shareholders?
For each transaction, if paid up capital of the company is INR 10 crores or more, or, Sale/purchase/ supply of goods or materials (directly or through agents) exceeding 25% of annual turnover Selling/ disposing/ buying property (directly or through agents) exceeding 10% of the net worth Leasing of property of any kind exceeding 10% of the net worth or 10% of turnover Availing/ rendering of any services (directly or through agents) exceeding 10% of the net worth. Appointment to office/ place of profit (in company/ subsidiary/ associate co. ) at monthly remunerations exceeding INR 2.5 lakh; Remuneration for underwriting subscription/ derivatives exceeding 1% of net worth. Approval of central government not required Exemption in case of transactions in the ordinary course of business if done on an arms’ length basis . NOT in CASE OF LISTING AGREEMENT

46 Restriction on non-cash transactions involving directors (S. 192)
Unless prior approval is accorded in general meeting (of co. or holding co.), a company not to enter into an arrangement by which – its director or of its H/S/A co. or person connected with such director – 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 persons so connected.

47 Corporate Social Responsibility

48 Corporate Social Responsibility - Matters
Contd.. Corporate Social Responsibility - Matters Can set up its own Sec. 8 company, trust or society or work with other such entities (to have a 3-year track record) Surplus out of CSR activity not to be part of business profits Direct/ indirect contribution to a political party under Sec. 182 not to be considered CSR activity Excludes activities undertaken in pursuance of the normal course of business of a company Excludes activities benefitting only the employees and their families Establish CSR Committee Establish governance mechanism Earmark CSR corpus Develop and approve CSR policy Set-up for implementation Implement projects Monitor progress Report and disclose performance

49 CSR areas – Schedule VII (1)
Development oriented measures Eradicating hunger, poverty and malnutrition Promoting preventive healthcare Promoting sanitation and making available safe drinking water Livelihood enhancement projects Promotion and development of traditional arts and handicrafts Rural development projects Environment oriented measures Ensuring environmental sustainability Ecological balance Protection of flora and fauna Animal welfare Agro forestry Conservation of natural resources Maintaining quality of soil, air and water Promoting art, culture, sports Protection of natural heritage, art and culture including restoration of buildings and sites of historical importance and works of art Setting up public libraries Training to promote rural sports, nationally recognized sports, Paralympics sports and Olympic sports

50 CSR areas – Schedule VII (2)
Beneficiary oriented measures Promoting education, including special education especially among children, women, elderly and the differently abled Promoting employment enhancing vocational skills especially among children, women, elderly and the differently abled Beneficiary specific measures Promoting gender equality and empowering women Setting up homes and hostels for women and orphans Setting up old age homes, day care centres for senior citizens Measures for reducing inequalities faced by socially /economically backward groups Measures for benefit of armed forces veterans, war widows, etc. Contribution to Funds Contribution to the PM’s relief fund or any other fund setup by the central government for socio-economic development and relief and welfare of SC, ST, other backward class, minorities and women Contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government

51 Agenda Board Composition Board Proceedings Independent Directors
Key managerial Personnel Managerial Remuneration Board Committees Shareholder Meetings Board & Auditor’s report Corporate Governance

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