Friday, January 31, 2014

Highlights of Companies Act, 2013

Highlights of Companies Act, 2013
  • Appointment of auditors for 5 years shall be subject to ratification by members at every Annual General Meeting.

  • The amended legislation also limits the number of companies an auditor can serve to 20.

  • It also makes auditors subject to criminal liability if they knowingly or recklessly omit certain information from their reports.

  • The new bill also says the rotation of audtiors will take place every five years, while an audit firm cannot have more than two terms of five consecutive years.

  • It also makes auditors subject to criminal liability if they knowingly or recklessly omit certain information from their reports.

  • Auditors have to comply with Auditing Standards.

  • A company’s auditor shall not provide, directly or indirectly, the specified services to the company, its holding and subsidiary company.

  • The term for independent directors have been fixed for five years too. The maximum number of directors in a private company

  • has been increased from 12 to 15, which can be increased further by special resolution.

  • The new law also makes its mandatory for companies that one-third of their board comprises independent directors to ensure transparency.

  • Also, at least one of the board members should be a woman.

  • Independent directors' shall be excluded for the purpose of computing 'one third of retiring directors'.

  • The Bill has a provision that keeps tabs on exorbitant remunerations for the board of directors and other executives of the companies. This will protect the interest of shareholders as well as employees.

  • Every company shall have at least one director who has stayed in India for a total period of not less than one hundred and eighty-two days in the previous calendar year.

  • Besides the Audit Committee, the constitution of Nomination and Remuneration Committee has also been made mandatory in the case of listed companies and such other class or classes of companies as may be prescribed

  • The Companies Bill also states that corporates must disclose the difference in salaries of the directors and that of the average employee. This will protect the interest of shareholders as well as employees.

  • The new legislation has more provisions to guard the interests of employees. It mandates payment of two years' salary to employees in case a company which wind up operations.

Shareholders & Members:
  • The bill increased the number of members of private companies from 50 to 200. This allows companies access to large pool of capital without going public.

  • The new bill gives recognition to transfer restrictions on inter-se shareholders – ‘Right of First Refusal’ will be enforceable. This would clear existing ambiguity on legal enforceability on transfer restrictions under JV/shareholder Agreements.

  • Companies can accept deposits only from its members, that too after obtaining shareholders approval. Acceptance of deposit also subject to compliance with certain conditions.

  • Companies with more than 1,000 shareholders, debenture-holders, deposit-holders and any other security holders at any time during a financial year to constitute a Stakeholders Relationship Committee, with a non-executive director as a chairperson and such other members as may be decided by the board.

Corporate Social Responsibility:
  • Under the new bill, companies are required to spend at least 2 per cent of their average net profits for the three immediately preceeding financial years on CSR. This is applicable to companies with a networth of Rs 500 crore or more, or Rs 1,000 crore turnover or Rs 5 crore net profits, who have to set up a corporate social responsibility committee. The companies will also have to give preference to the local areas of their operation for such spending.

  • The new law would require companies that meet certain set of criteria, to spend at least two percent of their average profits in the last three years towards Corporate Social Responsibility (CSR) activities. But only companies reporting Rs 5 crore or more profits in the last three years have to make the CSR spend.

  • The Bill allows companies the freedom to choose areas of work for CSR and the mandate of a rotation in auditors every 5 years gives the process added credibility.

  • In case, entities are unable to comply with the CSR rules, they would be needed to give explanations. Otherwise, they would face action, including penalty.

Mergers & Acquisitions:
  • While the old bill only permitted merger of a foreign company with an Indian company, the new bill allows merger of Indian companies into foreign companies which would aid in consolidation of cross-border businesses/assets.

  • The new bill permits merger of a listed company with an unlisted one, subject to exit opportunity being offered to shareholders of the listed company.

  • While the old bill depended on precedents for merger of a subsidiary with a parent (or between two small companies), the new bill provides a separate and simplified regime for this without any approval from High Court.

  • The new bill also gives rights for objections to schemes to only creditors who owed over 5 per cent and minority shareholders with over 10 per cent stake against no thresholds earlier.

  • The new bill also has a detailed mechanism for acquisition of shares by majority shareholder from minority shareholders.

  • The bill restricts creation of multi-layered holding structures, prohibiting making investments through more than two layers of investment companies.

  • The new bill bans holding ‘Treasury Stock’, which is often used by companies to increase shareholding or future monetisation after consolidation.

  • The proposed legislation would ensure setting up of special courts for speedy trial and stronger steps for transparent corporate governance practices and curb corporate misdoings.

  • The bill provides for class action suit, which is key weapon for individual shareholders to take collective action against errant companies. The move is being seen as a positive as it empowers small shareholders to seek answers in case they feel that a company’s management or its conduct of affairs is prejudicial to its interests or its members or depositors.

  • The law also gives more statutory powers to the government’s investigative arm Serious Fraud Investigation Office (SFIO) to tackle corporate fraud.

  • The new bill will speed amalgamations and mergers.

  • To help in curbing a major source of corporate delinquency, introduces punishment for falsely inducing a person to enter into any agreement with bank or financial institution, with a view to obtaining credit facilities.

Karan Mansukhani


  1. MCA issues clarification on section 185 of the Companies Act 2013
    MCA after receiving number of representations on the. applicability of
    Section 185 of the Companies Act, 2013 with reference to loans made,
    guarantee given or security provided under Section 372A of the Companies
    Act, 1956, has come out with necessary clarification vide circular No.
    3/2014 dated 14th Feb 2014, which will definitely provide much needed
    relief to corporates. It is clarified that in order to maintain harmony with
    regard to applicability of Section 372A of the Companies Act, 1956 till the
    same is repealed and Section 186 of the Companies Act, 2013 is notified,
    any guarantee given or security provided by a holding company in respect
    of loans made by a bank or financial institution to its wholly owned
    subsidiary company, exemption as provided in clause (d) of sub-section (8)
    of Section 372A of the Companies Act, 1956 shall be applicable. This
    clarification will, however, be applicable to cases where loans so
    obtained are exclusively utilized by the subsidiary for its principal
    business activities.

    It is noteworthy to mention that the relief is not given with respect to loan
    given by holding Company to its wholly owned subsidiaries

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