1. COMPANIES ACT 2013 – Impact on Private Limited Companies - By CS Makarand Joshi - makarandjoshi@mmjc.in

2. Change in approach of Companies Act 2013  Shift from Shareholders Protection to stakeholders protection  Corporate Governance /Investor Protection is Mantra  Lot of Disclosures  Strict penalties and prosecution  Liabilities of Directors / Professionals increased  Cost of Limited Liability increased  Coverage of the Act increased

3. Change in Approach  Pushing towards more policy based functioning  Pushing towards more capitalized companies  Pushing towards financially independent companies  Pushing towards inclusive working  Compliance is paramount  Pushing towards LLP?

4. Coverage of Session  Commencement of Business  Allotment of Shares / Securities  Borrowings / Deposit  Fixed Assets  Managerial Remuneration  CSR  Listing compliance for Private Company?  Miscallaneous

6. Commencement of Business  Commencement of business certificate is not required for any company  Private & Public company can commence if – 1. Confirmation w.r.t. receipt of share subscription money has been filed with ROC in 180 days 2. Verification of registered office is filed with ROC within 30 days  In absence of aforesaid, company can be struck off

7. What is commencement of Business?  Company can not enter into any contract  Company can not borrow  Company can not hire employees  Promoters need to be cautioned that unless, they open bank account and pay for shares subscribed, company can not start busienss

9. Share Capital AllotmentShareholdersRights IssueBonus IssueOutsidersPublic offer Private Placement Sweat EquityESOPOthers

10. Share Capital  All Shares to be offered on rights basis; ELSE  It is Private Placement  Private Placement requires - Special Resolution + valuation report  Private Placement offer document!!!  Separate Bank account required in private placement  Funds can not be used till allotment is completed  Any mis statement in Offer document can be alleged as ‘Fraud’

14. Who can approve borrowing?  Board of Directors can approve borrowing  Board can delegate this power to committee or to MD  If borrowing exceeds paid up capital + free reserves, it requires prior special resolution  All the resolutions [shareholders / directors] to be filed with ROC

15. Charge – secured loan  Means an interest or lien created on – 1. Property or 2. Asset of a company or 3. Any of its undertaking as a security and includes mortgage  Now requires charge registration for lien on FD or pledge of shares  Charge on vehicle is also required to be registered.

16. What if not complied?  If charge is not registered – secured lender is at part with unsecured lender  Penatly = 100,000 – 500,000 + imprisonment of 6 months  If borrowing made without special resolution, borrowing may be considered as ultra vires

18. Repayment of Deposits  Deposits as on 1 April 2014 to be repaid till 31 March 2015  Deposit under Old act or Under New Act?  Penalty for non repayment = 1cr >10 cr + officer liable for imprisonment >7 years and fine 25 lacs>2cr

19. What is ‘deposit’ under acceptance of deposit rules?  The major highlights of this definition are –  This is an inclusive definition. It says ‘deposit’ includes any receipt of money by way of deposit or loan or any other form, by a company, but does not include.....  There are 14 exclusions from the definition of deposit  Here any other manner has to be read in the context of receipt either as deposit or loan.  Any amount received against issue of commercial paper or any other instrument issued under guidance of RBI

20. What are 14 exclusions? 1. Any amount received from government or from any other source whose repayment is guaranteed by central government 2. Any amount received from foreign source, so long as it is in compliance with Foreign Exchange Management Act 3. Any loan or facility received from Bank 4. Any loan or financial assistance received from public financial institutions 5. Any amount received against issue of commercial paper or any other instrument issued under guidance of RBI

21. What are 14 exclusions? 6. Any amount received from any other company 7. Any application money received under this act, against issue of any securities [so long as the allotment is done in 60 days of receipt of money] 8. Any amount received from Director of the Company [however the amount received should not be out of borrowed funds] 9. Any amount received against issue of secured bond or debentures OR Any amount received against issue of compulsory convertible bond or debentures [bond should be convertible into shares within a period of 5 years]

22. What are 14 exclusions? 10. Any security deposit received from employee of the company [not exceeding 12 months salary]. This deposit should be non interest bearing. 11. Any non interest bearing amount received or held in trust [by the company] 12. Any amount received in the course of and for the purpose of business of the company –  as an advance for the supply of goods or provisions of services accounted for in the manner, provided that such advance is appropriated against supply of goods or services within a period of 365 days from acceptance of deposit

23. What are 14 exclusions?  as advance accounted for in any manner, received in connection with consideration for property  as security deposit for performance of contract for supply of goods or services  as advance under long term projects for supply of capital goods 13. any amount brought by promoters in pursuance of stipulation imposed by the lending institution 14. any amount accepted by a Nidhi Company in accordance with section 406 of the Companies Act 2013.

25. Acceptance of Deposit  Private Company can take deposit only upto 25% of paid up capital + free reserves, if – 1. Credit rating is obtained 2. deposit insurance is obtained 3. Special Resolution is passed  Only Public companies with min. networth of Rs.100 Cr or turnover of Rs.500 can accept Public Deposit [other than shareholders]  Limits may be relaxed to 100% of paid up capital for private companies!!

27. Assets  All ‘investments’ in assets should be made in company’s name 1. Motor Car? 2. Agricultural Land?  Depreciation to be changed on useful life from next financial year

28. Disposal of Assets  Any disposal/ lease / sell of undertaking OR substantial undertaking of the Company requires Special Resolution  Undertaking includes – property / investment / business undertaking  Undertaking = undertaking in which investment of the company exceeds 20% of its net worth OR  Undertaking which generates 20% of total income of the Company as per last financial year  This section does not apply to company, where selling and leasing property is an Ordinary Course of Business

29. What if special resolution is not obtained?

30. Disposal of Assets  Buyer will not be impacted if he proves that he acted in good faith  If buyer is aware about this non compliance, title will be faulty  It is subject to litigation  If you are acquiring property from the Company, get this special resolution passed and filed with ROC

31. What is Investment?  Laying of money in such a manner that it would produce some revenue  It may include following – 1. Shares, 2. Debentures 3. Property [which is not purchased for business] 4. Fixed Deposit is investment? – Yes, it can be said as Investment for the purpose of section 179

32. Corporate Social Responsibility

33. Who is covered under CSR?  Every company having:  Net worth of Rs. 500 crore or more, or  Turnover of Rs. 1000 crore of more, or  Net profit of Rs. 5 crore or more during 3 previous financial year  Foreign company havg branch office or project office are also included

34. How much to be spend?  At least 2 % of the average net profits of the company made during the three immediately preceding financial years  Profit to be calculated as prescribed under section 198 of the Act

35. What if not spend?  The reason for same shall be mentioned in Board report  Section 450?  Duties of Director

36. Monitoring and Reporting of CSR Spending  MONITORING- CSR Committee to formulate and recommend CSR Policy, recommend amount to be spent and monitor the CSR policy  REPORTING:  In Board report as per prescribed format  In case of foreign company, the balance sheet to contain as annexure

38. Remuneration  Board and Shareholder approval essential  Require compliance of schedule V  No remuneration restriction on private company, if – no default in payment of debts  Disclosure is required in the annual report  Interested Directors should not vote [section 166]  Related Shareholders can vote [Se. 188 does not cover these transactions]

40. Liabilities  Every working Director/ KMP is officer in default  Director made accountable is officer in default  If there is no working Director, all Directors will be officer in default  Non executive / independent Directors are liable for acts / omissions occurred with his knowledge attributable through broad process

41. Actions Required for Pvt. Co.

42. Actionable for Private company  Printing of CIN, website, mail id, phone, fax, registered office on letterhead and official publication  Induction of new directors  Appointment of CS (?)/ MD / WTD  Appointment of Internal Auditor  Policy for related party transaction  Articles of Association needs revision  Borrowing in excess of paid up capital + reserves require special resolution to be filed with ROC  Repayment of deposit in 1 year

43. Actionable for Private company  Every borrowing / loan / investment requires prior board resolution and interest to be charged  Private Company can not give loan/ guarantee / security to another entity in which Director is interested  Minutes/ Registers / Share Certificates to be maintained  Statutory Registers to be maintained in new format [since incorporation]  ROC filing to be maintained up to date without any delay  Every Director to mention his DIN / Address etc in correspondence  Constitute CSR Policy and Spend 2% of avg. profits

44. THANK YOU. Lets help industry to be better governed