Specific Issues under Companies Act, 2013 By: CA Kamal Garg [B. Com (H), FCA, DISA (ICAI), LLB]

Borrowing Powers of the Company under Companies Act, 2013 Part I Borrowing Powers of the Company under Companies Act, 2013

Borrowing Powers of Company [Section 180(1)(c)] If: Borrowings [Present (+) Proposed] > [Paid-up Share Capital (+) Free Reserves]; Then: SR Approval required (words used in Section are “exercise the powers only with the consent by SR”) Companies Covered: Public as well as Private; Borrowings Exclusion: Temporary Loans obtained from Companies Bankers in ordinary course of Business

Case Study Particulars Case I (Rs. In Cr.) Case 2 Case 3 Case 4 Equity Share Capital 100 Pref. Share Capital 50 Free Reserves 20 Total 170 Present Borrowings 120 Proposed Borrowings 30 40 60 150 160 180 Resolutions BOD BOD (+) SR

Particulars Case I (Rs. In Cr.) Case 2 Case 3 Case 4 Paid up Capital 150 Free Reserves 20 Total 170 Working Capital loan (repayable on demand - Existing) from GE Capital Ltd. 50 CC from PNB (repayable on demand - Existing) 120 6 Months loan for Plant & Mach. from PNB (Proposed) 30 40 60 24 Months loan for Plant & Mach. from PNB (Proposed) 10 210 230 250 270 Eligible Borrowings 90 110 130 Resolutions BOD

Debt Due from Directors under Companies Act, 2013 Part II Debt Due from Directors under Companies Act, 2013

Debt due from Director [Section 180(1)(d)] SR Approval required to: Remit; or Give time for the repayment of any debt due from a director

Contribution to charitable funds, etc. under Companies Act, 2013 Part III Contribution to charitable funds, etc. under Companies Act, 2013

Contribution to charitable funds, etc. [Section 181] If: contribution to charitable & other funds > 5% [Past 3 years’ average profits]; Then: Prior SR Approval required Companies Covered: Public as well as Private; Exclusion: NIL; Unlike 1956 Act, now donations to charitable and other funds directly relating to the business of the company or the welfare of its employees are not excluded; CSR Contributions: Covered by this Section, hence SR (Prior) Approval Required [Section 181 read with Section 135]

Loans to Directors, etc. under Companies Act, 2013 Part IV Loans to Directors, etc. under Companies Act, 2013

Loans to Directors, etc. [Section 185] Save as otherwise provided in this Act, Prohibition to advance any loan: a company shall not directly or indirectly advance any loan, including any loan represented by a book debt, to— (i) any of its directors; or (ii) any other person in whom such director is interested Prohibition to provide any guarantee or security: a company shall not directly or indirectly: (i) give any guarantee; or (ii) provide any security in connection with any loan taken by him or such other person.

Loans to Directors, etc. [Section 185] Provisions not to apply in the following cases:— (i) giving of any loan to a managing or whole-time director- (a) as part of the conditions of service extended by the company to all its employees; or (b) pursuant to any scheme approved by the members by a SR (ii) a company which in the ordinary course of its business provides loans or gives guarantee or securities for the due repayment of any loan and interest on such loans is charged at a rate not less than the bank rate declared by the RBI

Loans to Directors, etc. [Section 185] Any other person in whom director is interested – meaning thereof: any director of the lending company, or of a company which is its holding company or any partner or relative of any such director; or any firm in which any such director or relative is a partner; or any private company of which any such director is a director or member; or any body corporate at a general meeting of which not less than 25% of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or any body corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.

Case Studies – whether covered by Sec. 185 ABC Limited proposes to give a loan to Mr. Rajneesh who is a director of its subsidiary company, PQR Limited. ABC Limited proposes to give a loan to M/s XYZ & Associates, a partnership firm in which Mr. Rajneesh (who is a director of its subsidiary company PQR Limited) is a partner. Mr. Rajneesh is a director of ABC Limited and also DEF Limited. ABC Limited proposes to give a loan to DEF Limited. Mr. Rajneesh is a director of ABC Limited and also a member of DEF Limited. ABC Limited proposes to give a loan to DEF Limited. Mr. Rajneesh is a director of ABC Pvt. Limited and also a member of DEF Limited. ABC Pvt. Limited proposes to give a loan to DEF Limited. Mr. Rajneesh is a member of ABC Limited and also a member of DEF Pvt. Limited. ABC Limited proposes to give a loan to DEF Pvt. Limited. Mr. Rajneesh is a member of ABC Limited and also a director of DEF Pvt. Limited. ABC Limited proposes to give a loan to DEF Pvt. Limited.

Loans to Directors, etc. [Section 185] Exemption to subsidiary companies – conditions thereof: As per Rule 10 of the Companies (Meetings of Board and Its Powers) Rules, 2014: Wholly owned Subsidiary: Section not to be complied for: Any loan made by a holding company to its wholly owned subsidiary company; or Any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company Subsidiary: Section not to be complied for: Any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company Cardinal Condition for Exemptions: Such loans are utilised by the subsidiary company for its principle business activities.

Loans to Directors, etc. [Section 185] Section 295 (1956 Act) vs. Section 185 (2013 Act): Section 185 applicable even on private companies. Under section 295, loans made to or security provided or guarantee given required previous approval of CG in that behalf. Under section 185, there is total prohibition on such transactions; Banking companies were exempt from the ambit of section 295. Exemption is now available from section 185 to company which in ordinary course of business providing loans etc. and interest is charged at a rate not less than RBI's bank rate; Under section 295 imprisonment could be avoided by fully repaying the loan. Section 185 does not contain such a provision.

Loans and Investments by Company under Companies Act, 2013 Part IV Loans and Investments by Company under Companies Act, 2013

Loans And Investments By Company [Section 186] Investment through two layers of companies only [Section 186(1)]: A company shall, unless otherwise prescribed, make investment through not more than two layers of investment companies. Exception: However, this provision shall not affect— (i) a company from acquiring any other company incorporated in a country outside India if such other company has investment subsidiaries beyond two layers as per the laws of such country; (ii) a subsidiary company from having any investment subsidiary for the purposes of meeting the requirements of any law or under any rule or regulation framed under any law for the time being in force.

H Ltd. S1 Ltd. S2 Ltd. S3 Ltd. Investment Company Investment Company Chart - 1

S3 Ltd. – Spinning Business H Ltd. Soda Ash Business S1 Ltd. – Textiles Business S2 Ltd.- Salt Business S4 Ltd. – Herbal Business S3 Ltd. – Spinning Business S5 Ltd. – Cotton Process S6 Ltd. – Raw Salt Producer Chart - 2

Loans And Investments By Company [Section 186] Limit for making inter-corporate loan, guarantee, providing security or investment [Section 186(2)]: A company can not, directly or indirectly- (a) give loan to any person or other body corporate. (b) give any guarantee or provide security in connection with a loan to any body corporate or person; or (c) acquire by way of subscription, purchase or otherwise, the securities of any other body corporate. Exceeding: 60% of [Paid Up Share Capital (+) Free Reserves (+) Securities Premium Account]; or 100% of [Free Reserves (+) Securities Premium Account], whichever is more

Loans And Investments By Company [Section 186] If: Amounts Involved (supra) > Specified Limit Then: Prior SR Approval is required [Section 186(3)] Disclosure in F.S.: Particulars & purposes of such loans, investments etc. required to be disclosed [Section 186(4)]; BOD Approval always required: All the directors present in the BOD Meeting; PFI Approval – when required: if any term loan is subsisting; PFI Approval – when not required: If: Amounts Involved [present (+) proposed] < Ceiling Limit (supra); and No default in repayment of their loan instalments or payment of interest thereon

Loans And Investments By Company [Section 186] Default in the repayment of any deposits: Company prohibited to give any loan or give any guarantee or provide security or make an acquisition till such default is subsisting; Register of loan, guarantee, security, or acquisition: To be kept at the registered office, in manual or e-mode, in Form MBP 2; S. 186(2) to (10) not to apply in certain cases: Loan, Guarantee, Security by Banking Co./ Insurance Co./ HFC/ Company engaged in business of financing companies or providing infra facilities; Acquisitions made by NBFC in ordinary course of business; Acquisitions through Right Issue

Loans And Investments By Company [Section 186] Exemption to subsidiary company/joint ventures – conditions thereof: As per Rule 11(1) of the Companies (Meetings of Board and Its Powers) Rules, 2014: Where a loan or guarantee is given or where a security has been provided by a company to its: (i) wholly owned subsidiary company, or (ii) a joint venture company, or Where an acquisition is made by a holding company, by way of subscription, purchase or otherwise of, the securities of its wholly owned subsidiary company, the requirement of sub-section (3) of section 186 shall not apply.

Related Party Transactions under Companies Act, 2013 Part V Related Party Transactions under Companies Act, 2013

Related Party with reference to a Company - Meaning a Director or his relative; a KMP or his relative; a Firm, in which a director, manager or his relative is a partner; a Pvt. Co. in which a director or manager is a member or director; 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 share capital; any Body Corporate of which a director or manager of the company is a shadow director; any Shadow Director of the company; 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. such other person as may be prescribed

Related Party with reference to a Company - Meaning As per Rule 3 of the Companies (Specification of definitions details) Rules, 2014, for the purposes of sub-clause (ix) of clause (76) of section 2 of the Act: a director of the holding company; or KMP of the holding company; or his relative with reference to a company, shall be deemed to be a related party.

List of relatives [Rule 4 of Companies (Specifications of Definitions) Rules, 2014 A person shall be deemed to be the relative of another, if he or she is related to another in the following manner, namely: Father: Provided that the term “Father” includes step-father; Mother: Provided that the term “Mother” includes the step-mother; Son: Provided that the term “Son” includes the step-son; Son’s wife; Daughter; Daughter’s husband; Brother: Provided that the term “Brother” includes the step-brother; Sister: Provided that the term “Sister” includes the step-sister

Consent of Board in case of related party transaction A company can enter into: specified related party transaction only with approval of Board and subject to prescribed conditions - Section 188(1) of the 2013 Act; The consent must be obtained in the Board meeting and not by circular resolution; Director interested with a related party shall not be present at the Board meeting [Rule 15(2) of the Companies (Meetings of Board and Its Powers) Rules, 2014]

Consent of Board in case of related party transaction….contd. Specified Related Party Transactions: 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; related party's appointment to any office or place of profit (OPP) in the Co., its Subsidiary Co. or Associate Co.; and underwriting the subscription of any securities or derivatives thereof, of the company

Prior approval in general meeting by special resolution in case of large companies or large contracts In the case of a company having: paid-up share capital of > Rs. 10 crore, or transactions not exceeding prescribed sums, the contract or arrangement can be entered into by company only after prior approval by special resolution in general meeting No member of the company shall vote on such special resolution as above if such member is a related party

Prescribed Sums [Rule 15(1)] sale, purchase or supply of any goods or materials > 25% of the annual turnover; selling or otherwise disposing of, or buying, property of any kind > 10% of net worth; leasing of property of any kind > 10% of the net worth or turnover; availing or rendering of any services > 10% of the net worth; appointment to any OPP in the company, its subsidiary company or associate company > Rs. 2.5 Lakhs p.m.; remuneration for underwriting the subscription of any securities or derivatives > 1% of the net worth

The provisions relating to related party transactions do not apply in certain situations Any transactions entered into by the company in its ordinary course of business, other than transactions which are not on an arm's length basis - Third proviso to section 188(1) of the 2013 Act;

Disclosure in Board's report of related party transactions Every contract or arrangement entered into under section 188(1) shall be referred to in the Board's report to the shareholders along with the justification for entering into such contract or arrangement - Section 188(2) of the 2013 Act.

Consequences if contract or arrangement is not ratified by board/general meeting Such contract or arrangement shall be voidable at the option of the Board; The directors concerned shall indemnify the company against any loss incurred by it; Company can recover losses from director or other employee; A director is disqualified for appointment, if he has been convicted of the offence dealing with related party transactions under section 188 at any time during the last preceding five years

Disclosures Companies to maintain register for: contracts or arrangements which directors are interested; related party transactions Loans and advances from and to related parties shall be disclosed - General Instructions for Preparation of Balance Sheet - Schedule III of the 2013 Act; Disclosures as per AS 18 also required

Auditors Liabilities under Companies Act, 2013 Part VI Auditors Liabilities under Companies Act, 2013

Services which auditor should not provide to the auditee company Statutory auditor shall not directly or indirectly provide any of the prescribed "other services“ to the: auditee-company; or its holding company; or subsidiary company [Section 144]

Services which auditor should not provide to the auditee company… Services which auditor should not provide to the auditee company….contd. Prescribed Other Services: 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 any other kind of services as may be prescribed.

Requirement of highlighting certain comments in audit report in thick type or italics omitted Section 143(3)(f) omits requirement to highlight comments in thick type or italics; Section 143(3)(f) redrafts the requirement to provide that auditor's report shall state the observations or comments of the auditors on financial transactions or matters which have any adverse effect on the functioning of the company; Section 143(i) of the 2013 Act requires the auditor's report to state whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls

Auditor's duty to AGM Section 146 provides that the auditor shall attend any general meeting: by himself, or through his authorised representative who is qualified to be an auditor. Such attendance is compulsory unless otherwise exempted by the company.

Auditor's liabilities Section 147(2) provides as under: If an auditor of a company contravenes any of the provisions relating to: appointment of auditors (section 139), contents of audit report (section 143), compliance with auditing standards (section 143), rendering prohibited services (section 144), and signing of audit report (section 145), the auditor shall be punishable with fine which shall not be less than Rs. 25,000 but which may extend to Rs. 5,00,000

Auditor's liabilities….contd. If an auditor has contravened such provisions knowingly or wilfully with the intention to deceive: the company, or its shareholders; or creditors; or tax authorities, he shall be punishable with: imprisonment for a term which may extend to one year; and with fine which shall not be less than Rs. 1,00,000 lakh but which may extend to Rs. 25,00,000 [proviso to section 147(2)]

Auditor's liabilities….contd. Section 147(3) provides that where an auditor has been convicted of an offence as above, he shall be liable to- Refund the remuneration received by him to the company; and Pay for damages: to the company, to the statutory bodies or authorities, to any other persons for loss arising out of incorrect or misleading statements of particulars made in his audit report

Immediate Action Points under Companies Act, 2013 Part VII Immediate Action Points under Companies Act, 2013

Stationery requirements; Appointment of a woman director; Appointment of KMP; Uniform Financial year; Financial Statements (SFS and CFS); Audit committee and Nomination & Remuneration committee; Auditors report requirements; Internal Audit; Number of directorships; CSR; Increased powers of ROC; Deposits; Share Application Money

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