HIGHLIGHTS | COMPANIES ACT 2013
- BACKGROUND AND INTRODUCTION
- After a run of around 56 years, the (Indian) Companies Act, 1956 (1956 Act) is now in the process of being substituted by a new law.
- The new Companies Bill 2012 (Bill) was approved by the Lok Sabha (the lower house of India) on 18 December 2012 and by the Rajya Sabha (the upper house of India) on 9 August 2013. The Bill received presidential assent on 29 August 2013 to become law i.e. (Indian) Companies Act, 2013 (2013 Act). Recently, the Ministry of Corporate Affairs (MCA) has notified a list of provisions (around 98 Sections) of the 2013 Act that came into force with effect from 12 September 2013.
- 2013 Act has 470 Sections and 7 Schedules as against 658 Section and 15 Schedules in 1956 Act. 2013 Act seems to be logically rearranged unlike 1956 Act wherein the provision were scattered all across the statute. However, substantial part of 2013 Act is governed via company rules (Rules) which are in process of being drafted and notified in due course.
- This update is our endeavor to provide you with our analyses of the key highlights of 2013 Act. We hope it is helpful to you for understanding the significant changes and potential implications of 2013 Act.
- KEY HIGHLIGHTS
- NEW CONCEPTS AND DEFINITIONS
2013 Act has introduced several new concepts and definitions. Few of them which we believe to be the most crucial are analyzed below:
- One Person Company: 2013 Act now allows one person to form a company vis-à-vis the earlier position where a minimum of two persons were required to form a company (private). This new concept will be beneficial as entrepreneurs will be able to singly set up a corporate entity, restrict the liability of business and reduce compliances. Further, it will now be easier for foreign companies to set up wholly owned private subsidiaries in India, as it will not require divesting any part of stake in such subsidiaries to its group or subsidiary companies unlike under the 1956 Act wherein such divestment was required to meet the minimum two person rule to set up a company. [Section 2(62) and Section 3(1) (c)]
- Small Company: 2013 Act introduces this new concept of a small company, which means a company other than a public company having paid up share capital not exceeding INR 50,00,000 (or such higher amount as may be prescribed which shall not be more than INR 5,00,00,000) or turnover of which as per its last profit and loss account does not exceed INR 2,00,00,000 (or such higher amount as may be prescribed which shall not be more than INR 20,00,00,000). However, this section of small company will not be applicable to (a) holding or subsidiary company; (b) company registered under Section 8 of 2013 Act (i.e. companies form with the charitable object); or (c) company or a body corporate formed under the special act. [Section 2(85)]
- Dormant Company: 2013 Act now allows a company to be formed and classified as a dormant company for holding assets or intellectual property subject to the company not having any significant accounting transaction. Further, an inactive company can also make an application to the Registrar in such manner as may be prescribed for obtaining the status of a dormant company. [Section 455]
- Associate Company: 2013 Act now defines the much controversial Associate Company to mean a company which has ‘Significant Influence’ over the other company and which is not a subsidiary company but includes a joint venture company. Further it has been explained that ‘Significant Influence’ shall mean control of at least having 20% of total share capital or control of the business decision under an agreement. [Section 2(6)]
- Private Company: 2013 Act has now increased the total limit of number of members / shareholders in private company from 50 to 200. [Section 2(68)(ii)]
- Investments Companies: 2013 Act provides that any company (unless otherwise prescribed) shall not make investment through more than two layers of investment companies. However, this section has not been made applicable to a company acquiring any other company incorporated outside India, if such other company has investment subsidiaries beyond two layers as per the laws of such country. This Section may considerably restrict the flexibility of Indian companies in structuring their transactions. [Section 186]
- Object Clause: 1956 Act required the object clause (which is stated in the memorandum of association of a company) to be classified into (a) main object; (b) objects incidental or ancillary to the attainment of the main objects; and (c) other objects of the company. The reason for having such classification in the object clause was to restrict the company from commencing any other business unless it complies with certain requirements. However, this requirement of such classification has been done away with by the 2013 Act, i.e. all objects will now be the main objects of the company. [Section 4(1)]
- Key Managerial Personal (KMP): KMP is commonly used in investment agreements and now finds a place in the 2013 Act. KMP includes (a) Managing Director (MD) or Chief Executive Officers (CEO); (b) Whole time director; (c) Chief Financial Officer (CFO); (d) Company Secretary (CS) and; (e) such other officer as may be prescribed. 2013 Act requires certain companies to appoint KMPs which will be notified in the Rules. [Section 2(51)]
- Promoter: The term Promoter was not defined in the 1956 Act. However it was extensively used through company law. 2013 Act now specifically defines Promoter, which includes (a) a person who has been named as such in the prospectus or is identified as such in the annual return; or (b) who has control over the affairs of the company (other than in a professional capacity), as a shareholder or a director or otherwise; or (c) in accordance with whose advice or directions the Board is accustomed to act. [Section 2(69)]
- Class Action Suits: 2013 Act introduces the western concept of class action suits which allows requisite number of members, depositors or any class of them file a suit against the company, its directors, auditors and/or other experts or consultants or advisors, if they believe that affairs of the company are conducted in a manner prejudice to the company or its members or depositors. [Section 245]
- Buy back of Securities: 2013 Act provides that no buy back will be done by a company within one year from date of closure of previous buy back. Based on this provision, each company will now require having a cooling off period of one year between the two buy backs. Further, if a company has defaulted in repayment of its loans, deposits or interests payable then the company shall compulsorily have to wait for a period of three years after repayment of all such outstanding amount and rectifying such breach. [Section 68]
- MANAGEMENT AND ADMINISTRATION
2013 Act provides detailed role of the management by incorporating sections enunciating powers, duties and responsibilities of board of directors, KMP, etc. Following are some of the important changes in the 2013 Act vis-à-vis 1956 Act:
- Maximum Number of Directors: The maximum number of directors for a public company has been increased from 12 to 15. In case the company desires to further increase the board size, it may do so by passing a special resolution. The requirement of taking permission of the Central Government as provided in 1956 Act is done away with in 2013 Act. [Section 149(1)]
- Number of Directorships: A person cannot be a director (including alternate director) in more than 20 companies out of which he or she cannot be a director of more than 10 public companies. 2013 Act now restricts over all directorship of any individual as compared to 1956 Act which allowed 15 directorships of any person in a public company and any number of directorships in a private company. [Section 165]
- Resident Director: At least one director of the company is required to fulfill the residency test i.e. stay for not less than 182 days in India in the previous calendar year. [Section 149(3)]
- Woman Director: Certain class of the companies (which will be notified in the Rules) must have at least one woman director on the board. [Section 149(1)]
- Small Shareholder Director: A listed company may have one director elected by small shareholders. Small shareholder means a shareholder holding shares of nominal value of not more than INR 20,000 or such other sum as may be prescribed.
- Independent Directors: To align the company law with Clause 49 of Equity Listing Agreement (Clause 49), 2013 Act has introduced the concept of Independent Directors. In this respect, few of our general observations are as follows:
- The term independent director has been defined with certain prescribed qualification and disqualification. [Section 149(6)]
- Every listed company is required to have at-least one-third of the total number of directors as independent directors. Independent directors shall be entitled to sitting fees, commission from the profit and reimbursement of expenses. However, they will not be entitled to stock options. [Section 149(9)]
- The appointment of the independent director shall be approved by the members in a general meeting and they will not be required to retire by rotation. [Section 149(13)]
- An independent director can hold the office for consecutive two terms of five years each following which there should be three years break before he or she is reappointed as an independent director. [Section 149(11)]
- Nominee director shall not be considered as an independent director. [Section 149(6)]
- While the intention of 2013 Act is to align itself with Clause 49, there are few aspects which are different. All listed companies will now have to comply with Clause 49 and 2013 Act which will make the compliance process more cumbersome.
- Independent director shall only be liable for such act of omission, commission by a company which had occurred with his or her knowledge, attributable through Board processes, and with his/ her consent or connivance or where he or she had not acted diligently. [Section 149(12)]
- Duties of the Director: 2013 Act attempts to codify the duties of directors, including but not limited to the following, they are required to (a) act in good faith and in the best interest of the company; (b) not to have direct or indirect conflict of interest with the interest of the company; and (c) exercise duties with diligence and reasonable care and declares that it would be punishable offence to commit a breach of those duties. The liability of the director in default for contravention, for which no specific penalty is prescribed, has been increased from INR 50,000 to INR 500,000. [Section 166)]
- Board Meetings:
- The first board meeting is required to be held within 30 days of incorporation of a company and a minimum of four meetings are required to be held every year in such a manner that there are not more than 120 days between two meetings. [Section 173 (1)]
- A notice of minimum seven days is required to be given for convening a board meeting. The company can hold board meetings at a shorter notice to transact urgent business subject an independent director, if any shall be present in the meeting. In case of absence of independent directors from such a meeting, the decisions taken at such a meeting shall be circulated to all the directors and shall be final only upon the ratification thereof by at least one independent director, if any. [Section 173 (3)]
- The board meeting can be attended by the directors through video conferencing or other audio-visual modes, and such presence will be counted as quorum for the meeting, subject to the condition that they can be recorded and stored. [Section 173 (2)]
- Committees: Besides the Audit Committee, the 2013 Act requires listed and such other class of companies as may be prescribed to form Nomination and Remuneration Committee, Corporate Social Responsibility Committee and Stakeholders Relationship Committee. [Section 178]
- CORPORATE SOCIAL RESPONSIBILITY (CSR):The Ministry of Corporate Affair had introduced CSR Voluntary Guidelines in 2009. These guidelines are now part of the 2013 Act and mandates following companies with the CSR activities:
- Every company having net worth of INR 500,00,00,000 or more, or turnover of INR 1000,00,00,000 or more or a net profit of INR 5,00,00,000 or more during any financial year shall constitute a CSR Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.
- CSR Committee shall formulate the policy for activities specified in Schedule VII of the 2013 Act which broadly includes (a) eradicating extreme hunger and poverty; (b) promotion of education; (c) promoting gender equality and empowering women; (d) reducing child mortality and improving maternal health; (e) combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases; (e) ensuring environmental sustainability; (f) employment enhancing vocational skills; (g) social business projects; (g) contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government or the State Governments for socio-economic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women; (h) such other matters as may be prescribed.
- 2013 Act mandates companies to spent atleast two percent of the average net-profits of immediately preceding three years on CSR activities, and if not spent, an explanation with the reasons thereof shall be required to be given in the Director’s Report. [Section 135]
- SHAREHOLDERS MEETING
- Notice: A notice of clear 21 days is required to be given to each shareholder. 2013 Act now permits notice to be sent through electronic mode and should also be given to all the directors.
- Quorum: 2013 Act has revised the quorum requirement for a general meeting of public company. The new requirements are broadly linked to the total number of shareholders of the particular company. Quorum for the meeting will be as follows:
- Public Company
- Five members personally present shall be the quorum for the meeting, if the total number of members does not exceed 1000;
- 15 members personally present shall be the quorum for the meeting, if the total number of members are up to 5000; and
- 30 members personally present shall be the quorum for the meeting, if the total number of members exceeds 5000. [Section 103]
- Private Company: Two members personally present shall form the quorum for the meeting.
- Public Company
- Electronic Voting: Central Government shall prescribe class or classes of companies and the manner in which members may exercise his / her rights to vote by electronic means. [Section 108]
- Demand for Poll: A member having not less than 1/10th of the total voting power or holding shares of an aggregate of not less than INR 500,000 can demand poll. Further, 2013 Act removes the distinction between the private or public company in terms of eligibility of members for making demand for poll. [Section 109]
- Postal Ballot: Unlike 1956 Act wherein postal ballot was only applicable to listed companies, it appears that 2013 Act has extended postal ballot requirement to all the companies which includes pubic unlisted and private companies as well. Central Government has yet to provide what specific items would require members’ resolutions passed through postal ballot. [Section 110]
- MERGERS AND AMALGAMATION2013 Act introduces some new provisions with regard to mergers and acquisitions, apart from incorporating changes to the existing provisions in the 1956 Act. The objective of bringing these changes is to simplify the procedures involved and ensure higher standards of accountability. Some of the key new provisions in this respect are:
- Holding and subsidiary: A fast track procedure has been introduced for merger and amalgamation of holding company and its fully owned subsidiary. An approval of the court is not required as long as the Registrar of Companies (ROC) and official liquidator have no objection and the Central Government has granted its consent. [Section 233]
- Cross Border Mergers: 1956 Act did not permit Indian companies to merge with foreign companies. 2013 Act now allows Indian companies to merge with foreign companies subject to an approval of the Reserve Bank of India and foreign company being incorporated in the jurisdiction notified by Central Government. [Section 234]
- Listed to Unlisted: In the event of an arrangement between a listed transferor company and an unlisted transferee company, 2013 Act now permits for the (subject to consent of the tribunal) unlisted company to stay unlisted until it becomes listed. Further, if the shareholders of the transferor company decide to exit, the exit price cannot be less than the price as provided under Securities Exchange Board of India Regulations.
- Squeeze out of minority shareholding: 2013 Act now allows 90% majority shareholders of a company to squeeze out the minority shareholders at a price determined on the bases of value determined by the registered valuer. [Section 236]
- AUDIT AND AUDITORS
With the background of Satyam corporate scandal in India, 2013 Act extensively enhances accountability of the auditors. The key changes in this respect are as follows:
- Appointment of Auditors: Auditors will now be appointed for a term of five years. However, their term will be ratified at each annual general meeting. [Section 139(1)]
- Mandatory Rotation: Auditors for listed companies (and other class(es) of companies as may be prescribed) are now required to mandatorily rotate their auditors – every five years in case of the appointment of an individual as auditor and every 10 years in case of appointment of an audit firm with a uniform cooling off period of five years in both cases. Further, firms with common partners in the outgoing audit firm will also be ineligible for appointment as auditor during the cooling off period. [Section 139(3)]
- Non Audit Service: Any services to be rendered by an auditor of a company should be approved by the Audit Committee or the board of the company. Additionally, the auditor is restricted directly or indirectly from providing certain specific services, which include a) accounting and book keeping services; b) internal audit; c) design and implementation of any financial information system; d) actuarial services; e) investment advisory services; f) investment banking services; g) rendering of outsourced financial services; h) management services, and any other services which may be prescribed. [Section 144].
- Secretarial Audit: 2013 Act provides for a mandatory requirement to have secretarial audit which is required to form a part of the director’s report for all listed companies and other classes of companies that may be prescribed. [Section 204]
- FINANCIAL STATEMENT AND DIVIDEND
- Financial Year: Under the 1956 Act, companies were permitted to decide their own financial year. 2013 Act has taken away this liberty and requires all the companies to have a financial year ending as on the 31st of March. If any company desires to follow a different financial year because the holding company or subsidiary company requires following of different financial year for consolidation of its accounts, it will have to make an application to Tribunal. Tribunal, if satisfied, shall grant such an exemption. [Section 2(41)]
- Consolidated Statement: 2013 Act requires consolidation of certain financial statements of any company having subsidiary, associate or joint venture company to prepare and present in addition to stand alone financial statements.
- Dividend: Unlike the 1956 Act, the 2013 Act does not require certain percentage of profit to be transferred to the reserves before declaring the dividend. Further, a company which has incurred any loss during the current financial year upto to the end of the quarter immediately preceding the date of declaration of interim dividend, shall not be required to declared such interim dividend at a rate higher than the average dividends declared by the company during the immediately preceding three financial years. [Section 123]
- National Company Law Tribunal (NCLT or Tribunal): 2013 Act provides for constitution of Tribunal and Appellate Tribunal with the objective of facilitating expeditious disposal of proceedings. All the matters, issues and disputes falling within the ambit of 2013 Act will now be referred to NCLT. Appeal would lie before the Appellate Tribunal and thereafter can be challenged before the Supreme Court. High Courts will now have no jurisdiction in matters related to company law. [Section 407 to 434]
- National Financial Reporting Authority (NFRA): 2013 Act also provides for constitution of NFRA which will substitute the National Advisory Committee on Accounting and Auditing Standards. NFRA will supervise and regulate the activities of auditors and companies and see that they are in compliance with accounting and auditing standards. [Section 132]
- Serious Fraud Investigation Office (SFIO): SFIO is an expert body established by Central Government in 2003 as a special organization to examine serious cases of fraud and scams received from MCA. The body was formed to carry out investigations under the provisions of the 1956 Act and was formed in light of the rise in white collar crimes and stock market scams. 2013 Act now itself incorporates within its folds the mandate for setting up an investigative body and recognizes the already existing SFIO as the investigative body. [Section 211]
- REVIVAL AND REHABILITATION OF SICK COMPANY
- The existing provisions for revival and rehabilitation of sick companies have been substantially altered. 2013 Act now permits ‘any’ company and not just an ‘industrial’ company to be declared as sick company and avail benefits of this scheme.
- The determination of whether a company is a sick company or not has moved from the concept of ‘erosion of net worth’ to ‘inability to pay debt’. If a company fails to repay its debt within 30 days from receipt of a demand from the secured creditor representing 50% or more in value of the outstanding debt of the company, the company would be considered as a sick company.
- A secured creditor whose debt has not been repaid can apply to the Tribunal for declaration of the company to be sick. If the said company is unable to provide a scheme to the Tribunal for its revival, an interim administrator may be appointed by the Tribunal to take over the management of the sick company. The Tribunal may consider various options for the revival of the sick company including its acquisition by a solvent company, restructuring of its assets, etc. If the Tribunal is satisfied that revival is not possible, it will pass an order for winding up of the company. [Chapter XIX]
- 1956 Act provided three modes of winding-up of a company i.e. (a) Compulsory Winding-Up ordered by the court; (b) Voluntary Winding-Up by members; and (c) Winding-Up under supervision of the court. 2013 Act now prescribes only two modes i.e. a) Winding-Up by the Tribunal and b) Voluntary Winding-Up. Further, 2013 Act does not acknowledge the distinction between member voluntary winding up and creditor voluntary winding up vis-à-vis the position in the 1956 Act.
- 2013 Act adds following new grounds for winding-up of a company by NCLT:
- If the company has acted against the interests of the sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency or morality;
- If order has been made by NCTL under Chapter XIX (Revival and Rehabilitation of Sick Companies);
- If on an application made by the ROC or any other person authorised by the Central Government by notification under 2013 Act and NCLT is of the opinion that the affairs of a company have been conducted in a fraudulent manner or the company was formed for fraudulent and unlawful purpose or the persons concerned in the formation or management of its affairs have been guilty of fraud, misfeasance or misconduct in connection therewith and that it is proper that the company be wound up;
- If the company has made a default in filing with the ROC its financial statements or annual returns for immediately preceding five consecutive financial years; or
- If NCLT is of the opinion that it is just and equitable that the company should be wound up. [Section 270 to 365]
- NEW CONCEPTS AND DEFINITIONS
- OUR OBSERVATIONS
We believe the changes in the 2013 Act have far reaching implications and are all set to considerably change the manner in which the companies operate in India. The most important challenge it poses is transition of the companies to comply with the provisions of 2013 Act from the accustomed 1956 Act. One can only hope the government provides appropriate mechanism for such transition and 2013 Act is able to bring better corporate governance among the corporates which will act as stimulant for growth of the Indian economy.
This update was released on 27 Oct 2023.
Legal Update Team
MANSUKHLAL HIRALAL & COMPANY
Advocates, Solicitors and Notaries
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