New Companies Act Salient Features of importance to the Industry and Opportunities / Critical Risks to the Chartered Accountants 1

Salient features 2

Salient Features… New Concepts Business Structures Board and Management Business Friendly Accounts Audit and Auditors Dispute Resolution CSR Cross Border Mergers Others 3

New Concepts One person Company Concept of Small Company and Dormant Company “Provisions of entrenchment” in AOA National Financial Reporting Authority (NFRA) from NACAS ◦ More than advisory; Charged with monitoring and enforcement ◦ Investigate into professional or other misconduct CSR obligations on companies ◦ Covered company to spend 2% of its average NP for 3 years Provision for cross border mergers Registered Valuers CG empowered to prescribe restrictions on layers of subsidiaries New Act is highly rule driven 4

Business structures 5

Structuring Advisory New formats of business ◦ One Person Company (OPC) ◦ Dormant Companies ◦ Small Company  Option to use these formats for business  Especially, potential to convert proprietorship into OPC Number of members enhanced from 50 to 200 for private limited companies  Effect on control and management  Potential to advice on structuring revolving around terms an conditions to be placed on members 6 Chapter I Sec. 2 (62), 2 (85), 455

New Structures ICAI could take up measures to develop ◦ Simplified format for financials ◦ Accounting Standards for small companies ◦ Simplified format of Audit report including CARO requirements ICAI could also help provide support in terms of prescribing process for registration, monitoring etc., of these type of companies ◦ Especially, considering the experience India has had with a huge lot of vanishing companies! 7 Chapter I Sec. 2 (62), 2 (85), 455

Restriction on layer of subsidiaries Step down subsidiaries restricted to two layers going forward Scope for advisory to groups which have significant number of subsidiaries across multiple layers 8 Chapter XII Sec. 186 (1)

Directors and Management A person can be a director in 20 companies (incl. 10 public companies) Duties and liabilities of directors has been prescribed Max. Directors – 15 (more through special resolution) At least one woman director mandatory for certain class of companies Every company to have at least one director who has stayed in India for over 182 days in the PY Independent Directors prescribed for class of companies ◦ Also tenure (10 years) and liability codified ◦ Nominee director cannot be an independent director ◦ Stringent requirements for independence Statutory recognition to audit committee, remuneration committee and stakeholders relationship committee as well as CEO, CFO and CS as KMP 9

Directors and Management Shares cannot be issued at a discount Use of securities premium Inter corporate loans will include loans to and investment into “any person” ◦ Minimum interest on ICD to be G Sec rates More disclosures on related party transactions 10

Business Friendly - Process Speedy incorporation process Private limited members limit enhanced to 200 Simpler and single forum approval for M&A ◦ Simple and short process for holding and WOS or small companies ◦ Concept of deemed approval in some cases Squeeze out provisions – purchase of minority shareholding when 90% holding reached Simplified process for voluntary removal of name from register 11

Business Friendly - E-enable Voting through electronic means by members at meeting Board meetings can be held by video conferencing / electronic means ◦ Such participation will count for quorum too Maintenance and allowing inspection of documents by companies in electronics form 12

Business Friendly – Deleted Certificate of Incorporation is the conclusive evidence Provisions relating to certificate of commencement of business Statement in lieu of prospectus Statutory meeting and statutory report Share warrants Public trustee Payment of interest out of capital Transfer to general reserve for declaration of dividend Special audit Share qualification Restrictions on appointment and remuneration of sole selling / sole-purchasing agents Employee’s Security and PF amounts Receivers and Managers 13

Accounts Consolidated Financials made mandatory Company’s financial year made standard – 1 st April to 31 st March (except for exceptional cases) No need to attach full annual reports of subsidiaries Provision for revision of accounts ◦ On being ordered by the authority ◦ Voluntary revision Internal audit by members of professional body being made mandatory Mandatory secretarial audit for bigger companies including listed companies 14

Audit and auditors 15

NFRA New oversight body for the accounting and auditing profession Functions hitherto with NACAS will also move over to NFRA NFRA will deal with ◦ Prescribing Standards based on ICAI’s standard setting – Accounting as well as Auditing ◦ Monitor compliance with the accounting and auditing standards ◦ For prescribed class of companies / auditors deal with disciplinary mechanism 16 Chapter IX Sec. 132

Audit Rotation Rotation of auditors after 5 / 10 years for CA / firm ◦ Rotation of team and partner if the members so resolve 5 year tenure for auditors appointed in AGM ◦ Automatic reappointment in AGM where no auditor is appointed / reappointed Scope to move into Statutory Audits for more firms Opportunity to specialise in specific industries by firms to become the automatic choice for such rotation 17 Chapter X Sec. 139 (2)

Onerous Responsibility… 245 (1) (g) (ii) and 245 (2) – Class Action suits a major area of concern for CA professionals 143 (3) (i) – to be limited to internal financial controls that would materially impact the financial statements ( like ICOFAR under SoX ) 18 Chapter X and XVI Sec. 245, 143

Audit Execution and Reporting 143 (3) (a) – Details of ◦ How audit to be performed to be left to Auditing Standards ◦ Discretion on reporting issues to Auditor’s judgement 19 Chapter X Sec. 143

Fraud and Auditor’s Responsibility 143 (12) and 143 (15) – To be limited to fraud, if identified in the course of the audit ◦ Audit is only seeking reasonable assurance ◦ Primary responsibility to protect from fraud and error lies with Management and TCWG ◦ Audit procedures  May be effective to identify material errors  But not to identify all frauds 20 Chapter X Sec. 143

Auditor’s Eligibility and Disqualifications 141 (1) - Firms / LLP with majority partners being Chartered Accountants can be auditors ◦ Could lead to non professionals and foreign entities taking advantage ◦ Only multi disciplinary firms under CA Act to be permitted 141 (3) (d) – Relatives to be redefined as “financially dependent relatives” 141 (3) (e) – Arms length transactions in the ordinary course of business to be permitted 141 (3) (e) - “Business relationship” should exclude permitted professional services 21 Chapter X Sec. 141

Audit and Auditor Tribunal can direct change of auditors if it is satisfied that the auditors have colluded in a fraud… LLPs may be appointed as auditors Auditing Standards to be made mandatory 22

Prohibited Services Differentiate “public interest entities” and others Can provide for safeguards where applicable (like ICAI code of conduct) Clarity needed on its application on services rendered outside India Services prohibited to be specifically defined for their meaning Over stringent norms could lead to services slipping away from CA professionals to other professionals 23 Chapter X Sec. 144

Dispute Resolution Class Action Suits Disgorgement provisions in such cases Resigning directors to also notify ROC with detailed reasons Investigation into the affairs by SFIO Vigil mechanism (whistle blowing…) Mediation and Conciliation Panel Prohibition of insider trading Personal and unlimited liability on directors, promoters, experts etc., in case of fraudulent purpose Special court to deal with offences under the Act 24

CSR Companies requiring to constitute a CSR committee ◦ Networth of Rs.500 crore or more ◦ Turnover of Rs.1,000 crore or more ◦ Net profit of Rs.5 crore or more in any financial year CSR committee to have ◦ Three or more directors ◦ At least one is to be an independent director CSR committee will ◦ Formulate CSR policy and recommend to board ◦ Recommend the amount of expenditure to be incurred ◦ Monitor CSR policy from time to time Schedule VII lists out the activities which can be considered Company to give preference to local areas / areas around which it operates 25

Cross Border Mergers Critical look required into the following aspects: ◦ India shareholder’s interest ◦ Implications of FEMA and other such regulations ◦ Indian worker interest ◦ Dual listing ◦ Implication to Indian tax revenue scenario 26 Chapter XV Sec. 234

Others Revival and Rehabilitation Provisions for Sick Companies Sickness to be determined not based on negative networth but based on ability to repay debts Stringent control over Not for profit companies Companies which can raise public deposits restricted Dividend claim not extinguished after 7 years 27

Others Relaxation that association / partnerships could have up to 100 persons ◦ No ceiling on partners / members in case of associations of persons / partnerships for professionals regulated by special acts 28

AS vs. Companies Act The definitions in Bill different from Accounting Standard ◦ Control ◦ Associate ◦ Subsidiary ◦ Related Party Recommend ◦ For preparation of CFS, definition as per AS will prevail and ◦ For regulatory purposes definition as per Act will apply 29 Chapter I Sec. 2 (6), 2 (27), 2 (76), 2 (87)

New opportunities 30

Valuation – Registered Valuers Introduction of registered valuer CA in practice could take benefit of this requirement Also, to look into more areas where such registered valuer services could be made mandatory 31 Chapter XVII Sec. 247

Serious Fraud Investigation Office ICAI could work with SFIO ◦ Opportunities to work on forensic investigations ◦ Development of early warning systems for being implemented for online monitoring and tracking ◦ SFIO being viewed as a large employment provider for CA professionals 32 Chapter XIV Sec. 211

Uniform Financial Year Help companies with the transition Identify feasibility of a different financial year where scope exists and the company would find it beneficial 33 Chapter I Sec. 2 (41)

Consolidated Financial Statement Requirement to file consolidated financial statements extended to more companies ◦ Opportunity to advice groups into a relook at their structures and implications ◦ Automatic requirement for more professional services in view of this 34 Chapter IX Sec. 129 (3)

Independent Directors More opportunities for independent directors Need to create a database and panel as a professional development initiative Focused training sessions to make CA’s as the choice for independent directors 35 Chapter XI Sec. 149 (4)