1. Companies Act -2013 Analysis of Provisions relating to Directors & Auditors Raju Ananthanarayanan Partner, SARK & Associates, Company Secretaries csrajuananth@gmail.com

2. Overview Major changes in Companies Act after 57 years. The Act contains 29 chapters, 470 clauses and 7 schedules. A substantial part of the law will be in the form of Rules. The Government of India empowered to notify different provisions of the Act at different points of time. Passed by both Houses of Parliament Received assent of President of India on 29 th August, 2012 Publish in Official Gazette on 30 th August, 2013 Rules being posted on MCA website on 9 th Sept 2013 2

3. Companies Act, 2013 Provisions relating to Board of Directors 3

4. Appointment of Directors Minimum Directors: Public company-3 Private-2, OPC-1. Maximum : limit increased to 15 from 12. More directors can be added by passing of special resolution without getting the approval of Central Government as earlier required. Prescribed class or classes of companies to have atleast one woman director. Atleast one director on the board to be a person who has stayed in India for not less than 182 days in the previous calendar year. 4

5. Independent Directors Concept of independent directors has been introduced for the first time in Company Law The independent director has been clearly defined in the Act A Code for Independent Directors to be prescribed The Schedule to the Act provides the following in respect of an Independent Director –Professional Conduct –Role & Functions –Duties –Manner of Appointment –Removal & Resignation etc –Removal & Resignation etc 5

6. Independent Directors Independent Director to hold office for a term of 5 consecutive years on the Board of a company but is eligible for re-appointment on passing of a special resolution by the company and disclosure of such appointment in the Director’s Report. No independent Director to hold office for more than 2 consecutive terms of 5 years each in one company But is eligible for appointment after the expiry of 3 years of ceasing to be a independent Director Independent Director to be held responsible for such acts of omission and commission of a company which had occurred with his knowledge, consent or where he had not acted diligently 6

7. Independent Directors All listed companies shall have at least one-third of the Board as independent directors Existing companies to be provided a transition period of one year from the date of commencement of the Act to comply. The Central Government to prescribe the number of Independent Directors for certain class or classes of Public Company. The Central Government to prescribe the number of Independent Directors for certain class or classes of Public Company. The duties of Independent Directors also specified 7

8. Independent Directors Nominee director nominated by any financial institution, or in pursuance of any agreement, or appointed by any government to represent its shareholding shall not be deemed to be an independent director. The Act provides provision for limiting the liability of Independent Director and Non Executive Director not being promoter or key Managerial Personnel. The Act provides provision for limiting the liability of Independent Director and Non Executive Director not being promoter or key Managerial Personnel. Independent Directors not entitled to any stock option. They may receive remuneration by way of fees and profit related commission as approved by the members. Only an independent director can be appointed as alternate director to an independent director 8

9. Appointment of Directors Independent Directors to hold atleast one meeting in a year, led by the lead independent director of the company, without the attendance of Non-Independent Directors and the members of management A person cannot become Director in more than 20 Companies instead of 15 as provided under the Companies Act, 1956 and out of this 20, he cannot be the Director of more than 10 public Companies. The limit of 20 companies includes private Companies whereas under the Companies Act 1956, there is no limit on the number of private companies in which a person can become a Director. 9

10. Appointment of Directors Persons acting as directors to be allowed a transition period of one year from the commencement of the Act to comply with the provisions on maximum number of directorships. Each company where the person intends to continue as a director as well as the Registrar needs to be informed of the choice. Certain new disqualifications for the directors given in the Act. 10

11. Retirement of Directors For the purpose of the calculation of the directors retiring by rotation, the independent directors shall be out of the ambit If a person other than retiring director stands for directorship but fails to get appointed, he or the member intending to propose him as a director, as the case may be, shall be refunded the sum deposited by him, if he gets more than twenty five per cent of total valid votes 11

12. Resignation of Director A director may resign from his office by giving notice in writing. The director shall also forward a copy of resignation along with detailed reasons for the resignation to the Registrar. The notice shall become effective from the date on which the notice is received by the company or the date, if any, specified by the director in the notice, whichever is later. 12

13. Resignation of Directors If all the directors of a company resign from their office or vacate their office, the promoter or in his absence the Central Government shall appoint the required number of directors to hold office till the directors are appointed by the company in General Meeting. Duties of Directors have been defined in the Act. This was not provided in the Companies Act, 1956 13

14. Board Meetings A director can participate in a board meeting through video conferencing or other audio visual mode as may be prescribed. The Central Government may however, by notification, specify such matters which shall not be dealt with in the meeting through video-conferencing and such other electronic means as may be prescribed A notice of not less than 7 days in writing is required to call a board meeting. The notice of meeting to be given to all directors, whether he is in India or outside India by hand delivery post or electronic means. 14

15. Board Meetings A Board Meeting may be called at shorter notice subject to the condition that atleast one independent director, if any, shall be present at the meeting At least four meetings to be held every year, and not more than 120 days to elapse between two consecutive meetings. No requirement to hold the meeting every quarter as provided under the Companies Act, 1956 15

16. Board Committees Every listed company and such other company as may be prescribed to have an audit committee. Audit committees to have a minimum of three directors, with majority being independent directors and majority of members of committee should have the ability to read and understand the financial statements. A vigilance mechanism in the prescribed manner to be established by every listed company. Every listed company shall constitute a nomination and remuneration committee consisting of three or more non- executive directors, of which not less than one half shall be independent directors. 16

17. Board’s Powers Every company with more than 1,000 shareholders, debenture-holders, deposit-holders and any other security holders at any time during a financial year shall constitute a Stakeholders Relationship Committee consisting of a chairperson who is a non-executive director and such other members as may be decided by the board. The Bill provides certain new matters that are required to be transacted by the board of directors at their meeting only. The Bill provides certain new matters that are required to be transacted by the board of directors at their meeting only. 17

18. Board’s Powers Certain powers which earlier can be exercised by the Board with the approval of general meeting by way of ordinary resolution under section 293 of the Companies Act 1956,, shall now to be passed by special resolution. The limits for political contribution by a company changed. Now instead of 5% that was allowed under the Companies Act, 1956, contribution cannot exceed 7.5% of the average net profits of the company during the three immediately preceding financial years. In a private company, an interested director cannot vote or take part in the discussion relating to any matter in which he is interested, whereas under the Companies Act, 1956, he can. 18

19. Board’s Powers The Companies Act, 1956 requirement of seeking permission of the central government for giving loan to director has been dispensed with. The provisions related to inter-corporate loans and investments (section 372A of Companies Act, 1956) has been extended to include loans and investments to any person. The provisions related to inter-corporate loans and investments (section 372A of Companies Act, 1956) has been extended to include loans and investments to any person. 19

20. Board’s Powers A company, unless otherwise prescribed, cannot make investment through more than two layers of investment companies subject to certain exemptions. A company, unless otherwise prescribed, cannot make investment through more than two layers of investment companies subject to certain exemptions. Apart from the existing transactions, certain new related party transactions are also provided for which approval of board will be required. No approval of the central government required for entering into any related party transactions. Under the Companies Act, 1956 approval is required under section 297. 20

21. Board’s Powers A company shall not enter into any arrangement by which a director of the company or of its holding company or any person connected with him can acquire assets for the consideration other than cash from the company & vice versa without the approval of company in general meeting. A company shall not enter into any arrangement by which a director of the company or of its holding company or any person connected with him can acquire assets for the consideration other than cash from the company & vice versa without the approval of company in general meeting. 21

22. Board’s Powers No approval of the central government required for appointment of any director or any other person to any office or place of profit in the company or its subsidiary. The Bill prohibits forward dealings in securities of company by any director or key managerial personnel. Under the Companies Act, 1956 there is no such provision. The Bill prohibits insider trading in the company. Under the Companies Act, 1956 there is no such provision. 22

23. Appointment of Managerial Persons Every company belonging to such class or description of companies as may be prescribed, to have managing director, or chief executive officer or manager and in their absence, a whole-time director, company secretary and chief financial officer. The Schedule to the Act provides the conditions under which a company can pay remuneration to its managerial personnel in excess of the limits prescribed therein, without the government approval 23

24. Appointment of Managerial Persons Provisions relating to the appointment of managing director/whole time director/manger to apply to a private company. The appointment of managing director/whole time director /manager to be approved by general meeting by special resolution and if the appointment is not in accordance with schedule V (Schedule XIII in the Companies Act, 1956), then the approval of central government is also required. The Bill provides for provision related to secretarial audit in certain prescribed class or classes of companies. 24

25. Appointment of Managerial Persons Where a company is required to re-state its financial statements due to fraud or non-compliance with any requirement under this Act and the rules made there under, the company shall recover from any past or present managing director or whole-time director or manager who, during the period for which the financial statements are required to be re-stated, the remuneration received (including stock option) arisen due to such statement or non-compliance in excess of what would have been paid to the managing director, whole-time director or manager under such re-stated financial statements. 25

26. Managerial Remuneration Provisions relating to limits on remuneration provided in the existing Act being included in the Act. Maximum limit of 11% (of net profits) being retained. For companies with no profits or inadequate profits remuneration shall be payable in accordance with new Schedule of Remuneration (Schedule V) In case a company is not able to comply with Schedule V, approval of Central Government would be necessary. 26

27. Other Provisions Affecting Directors Board’s Report (Director’s Report) made more detailed and comprehensive Every contract or arrangement entered into with a related party shall be referred to in the Board's Report along with the justification for entering into such contract or arrangement Provision for class action suits where the management and affairs of the company are conducted in a manner that is prejudicial to the interests of the company 27

28. Other Provisions Affecting Directors Corporate Social Responsibility (CSR) Every company having net worth of Rs 500 crore or more, or turnover of Rs1000 crore or more or a net profit of Rs 5 crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director The Board of every company shall ensure that the company spends in every financial year atleast 2% of the average net profits of the company made during the three immediately preceding financial years in pursuance of its CSR policy. 28

29. Other Provisions Affecting Directors Where the company fails to spend such amount, the Board shall in its report specify the reasons for not spending the amount. The approach is to 'comply or explain'. The company shall give preference to local areas where it operates, for spending amount earmarked for CSR activities. 29

30. Companies Act, 2013 Provisions relating to Accounts, Audit and Auditors 30

31. Accounts, Audit and Auditors A company shall appoint an individual or a firm as an auditor at annual general meeting who shall hold office till the conclusion of sixth annual general meeting. However, the company shall place the matter relating to such appointment for ratification by members at every annual general meeting. Mandatory rotation of auditors for listed companies after 5 years in case of auditor who is a individual CA and after 10 years in case of an auditor which is a CA firm Transitional period of 3 years to comply with above provisions LLP may be appointed as Auditors 31

32. Audit and Auditors A company can resolve for the annual rotation of auditing partners and his team within the audit firm appointed by it. The limit in respect of maximum number of companies in which a person may be appointed as auditor has been proposed as twenty companies The Auditor of the Company shall not provide directly or indirectly certain specified services to the company, its holding and subsidiary company. Prescribed class of companies shall be required to appoint an internal auditor to conduct internal audit of the functions and activities of the company. 32

33. Audit and Auditors An auditor contravening the provisions related to his appointment (including powers & duties, services that he cannot render and signing and reading of Auditor's Report at the general meeting), then in addition to punishment provided in the Act, has to refund the remuneration received from the company and also be liable to pay damages to the company or to any person for the loss arising out of misleading or incorrect information. 33

34. Audit and Auditors A partner or partners of the audit firm and the firm also to be jointly and severally responsible for the liability, whether civil or criminal as provided in the Bill or in any other law for the time being in force. If proved that the partner or partners of the audit firm has or have acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, then such partner or partners of the firm shall also be punishable in the manner provided in clause 447. If proved that the partner or partners of the audit firm has or have acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, then such partner or partners of the firm shall also be punishable in the manner provided in clause 447. 34

35. Accounts, Audit and Auditors The Central Government may by notification constitute a National Financial Reporting Authority (NFRA) to provide for matters related to accounting and auditing standards. In case of misconduct by an auditor or firm, NFRA has powers to debar the member or the firm from engaging himself or itself from practice as member of the institute for a minimum period of six months or for such higher period not exceeding ten years as may be decided by NFRA Auditors also made liable in class action suits 35

36. Accounts, Audit and Auditors Auditors, during the course of performance of its duties, are required to immediately report to the Central Government, any offence involving fraud that is being or has been committed against the company by its officers or employees.. The duties, which have been cast on an Auditor under clause 143, shall apply to both Cost Accountants for Cost Audit and Company Secretary in Practice for Secretarial Audit. 36

37. Accounts, Audit and Auditors Uniform financial year (April-March) for all companies. The Act does not state whether a financial year can be extended The Balance Sheet, the Profit & Loss Account and the cash flow statement have been collectively defined as the financial statements. The Balance Sheet, the Profit & Loss Account and the cash flow statement have been collectively defined as the financial statements. The books of accounts may be kept in electronic form. The Act provides for provisions relating to re-opening or re-casting of the books of accounts of a Company pursuant to order of Court or Tribunal. Private Companies will not be allowed to file their Balance Sheet & Profit and Loss account separately. Private Companies will not be allowed to file their Balance Sheet & Profit and Loss account separately. 37

38. Accounts, Audit and Auditors Along with the financial statements, consolidated financial statements of all subsidiaries and the company are to be prepared and laid before the annual general meeting. Subsidiary for the purpose of this requirement shall include associate company and joint venture. Along with the financial statements, consolidated financial statements of all subsidiaries and the company are to be prepared and laid before the annual general meeting. Subsidiary for the purpose of this requirement shall include associate company and joint venture. The requirement of attaching the Balance Sheet, the Profit & Loss account, the Directors’ Report, the Auditors’ Report, a statement of the holding company’s interest in the subsidiary and other reports as required by section 212 of the Companies Act, 1956 has been dispensed with. 38

39. Companies Act -2013 Analysis of Provisions relating to Directors & Auditors Raju Ananthanarayanan Partner, SARK & Associates, Company Secretaries csrajuananth@gmail.com