COMPANIES ACT 2013: BEGINNING OF A NEW ERA RAJA DEY Faculty Member Department of Commerce Maheshtala College 1 Companies Act, 2013

Agenda for Today’s presentation Introduction and Structure Impact of New Act Related Party Transactions 1 Companies Act, 2013

Journey of Companies Act , 2013 Bill passed by Lok Sabha Sec 135 (CSR) notified Feb27,2014 w.e.f April 1, 2014 Co.’s Bill, 2008 introduced SCF report submitted to Lok Sabha SCF report submitted to Lok Sabha in August Oct 2008 Aug 2010 Aug 2012 Dec 2012 2014 Oct 2012 2013 Aug 2009 Dec 2011 2015 Co.’s Bill, 2009 reintroduced Revised Bill introduced in Lok Sabha- Bill referred back to SCF Cabinet approves amendments to the Bill Bill passed by Rajya Sabha, Presidential assent on August 29, 2013 & 98 Sections Notified w.e.f September 12, 2013 26th March, 2014 ,183 Sec. notified w.e.f 1.4.14, & Co.’s Amendment Act came on 2015 Companies Act, 2013

Structure The Companies Act, 1956 The Companies Act, 2013 18 Chapters 658 Sections 15 Schedules 67 Definitions 29 Chapters 470 Sections 7 Schedules 95 Definitions In approx. 75% of the Sections the words “to be specified” or “as may be prescribed” has been used – depicting extensive “delegated legislation”. The rules have been made available for public debate Companies Act, 2013

Notification and Circulars issued GC No.16/2013 dt.18.09.13 Corresponding 98 sections of the Act 1956 will cease GC No. 18/2013 dt. 19.09.2013 Section 186(3) – ICD as per 372A of the Act 1956 GC No. 19/2013 dt. 10.12.13 Section 182(3) – Electoral trust GC No.20/2013 dt. 27.12.13 Section 2(87) – holding shares or exercising powers in fiduciary capacity will not be considered for deciding holding subsidiary relationship No. 3/2014 dt. 14.02.2014 GC No. 3/2014 dt. 14.02.14 Section 185 - Guarantee given or security provided by holding company to its wholly owned subsidiary company Companies Act, 2013

Rules Notified under The Act Chapter No. Citation Chapter I The Companies (Specification of definitions details) Rules, 2014. Chapter II The Companies (Incorporation) Rules, 2014. Chapter III The Companies (Prospectus and Allotment of Securities) Rules, 2014. Chapter IV The Companies (Share Capital and Debentures) Rules, 2014. Chapter V The Companies (Acceptance of Deposits) Rules, 2014. Chapter VI The Companies (Registration of Charges) Rules, 2014. Chapter VII The Companies (Management and Administration) Rules, 2014. Chapter VIII The Companies (Declaration and Payment of Dividend) Rules, 2014. Chapter IX The Companies (Accounts) Rules, 2014. Chapter X The Companies (Audit and Auditors) Rules, 2014. Chapter XI The Companies (Appointment and Qualification of Directors) Rules, 2014. Companies Act, 2013

Rules Notified under The Act Chapter No. Citation Chapter XII The Companies (Meetings of Board and its Powers) Rules, 2014. Chapter XIII The Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014. Chapter XIV The Companies (Inspection, Investigation and Inquiry) Rules, 2014. Chapter XXI The Companies (Authorised to Registered) Rules, 2014. Chapter XXII The Companies (Registration of Foreign Companies) Rules, 2014. Chapter XXIV The Companies (Registration Offices and Fees) Rules, 2014. Chapter XXVI Nidhi Rules, 2014. Chapter XXIX The Companies (Adjudication of Penalties) Rules, 2014. The Companies (Miscellaneous) Rules, 2014.   Companies (Corporate Social Responsibility Policy) Rules, 2014 Companies Act, 2013

TYPES OF COMPANY Companies Act, 2013

Companies Act, 2013 Small Company [Section 2(85)] Private Company Turnover does not exceed Rs. 2 crores to 20 crores Paid up capital does not exceed Rs. 50 lakhs to 5 crores. Excludes Holding Company Subsidiary Company Non profit company registered u/s 8 Company governed by Special Act Companies Act, 2013

Significant transaction excludes Dormant Company (Sec. 455) NEW For a future project with no significant transaction To hold an asset with no significant transaction To hold intellectual property with no significant transaction Inactive company Significant transaction excludes Payment of fees by a company to a Registrar Payments made to fulfill the requirements of this Act or any other law Allotment of share to fulfill the requirements of this Act Payment for maintenance of its office and records Companies Act, 2013

Subsidiaries and Associates Companies Act, 2013

Subsidiary Company-Section 2(87)-notified Subsidiary company in relation to any other company (that is to say the holding company), means a company in which the holding company— controls the composition of the Board of Directors; or exercises or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary companies: The term ‘subsidiary company’ has been defined with reference to words “total share capital” instead of “total voting power” Rule 2(r)[CO.spf & defn rules] 14 for Section 2(6) & 2(87) Total Share Capital means Paid up Share Capital + Convertible Preference Share Capital Companies Act, 2013

Subsidiary Company-Section 2(87) Subsidiary shall include associate and joint venture 2(87): Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed (rules are silent) Section 186(1) restricts layers of Investment Subsidiary up to 2 except in case of: a company from acquiring any other company incorporated in a country outside India if such other company has investment subsidiaries beyond 2 layers as per the laws of such country a subsidiary co. from having any investment subsidiary for the purposes of meeting the requirements under any law or under any rule or regulation framed under any law for the time being in force Companies Act, 2013

Associate Company - Section 2(6) - notified Associate Company means a company in which other company has significant influence and is not a subsidiary of other company and includes JV Significant influence means control of at least 20% of total S/C, or of business decisions under an agreement The term ‘Associate Company’ is defined to include ‘joint venture’ also and both terms also refer to ‘Total Share Capital’ instead of ‘Voting Power’ Further vide explanation to section 129(3) it is provided that for purpose of ‘consolidation’ the word ‘subsidiary’ shall include ‘an Associate’ or ‘JV’ Companies Act, 2013

Associate Company - Section 2(6) - notified AS-23 makes holding of 20% or more of voting power as rebuttable presumption that company is an ‘Associate’ The combined reading of these provisions give rise to conflict as to consolidation of ‘Associate’ & ‘JV’ & manner thereof However, the rule 6 [Co’s Accounts Rules 2014] attempts to remove the ambiguity w.r.t. to Consolidation and clarifies that Consolidation of FS shall be made in accordance with the Accounting Standards Companies Act, 2013

New Definitions Promoter [Section 2(69)] - the definition of promoter has been introduced to also include a person—(Notified on 12th September, 2013) (a) who has been named as such in a prospectus is identified by the company in the annual return (b) who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or (c) in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act: Provided that nothing in sub-section (c) shall apply to a person who is acting in a professional capacity; Companies Act, 2013

Free Reserves & Net worth - notified Section 2(43): Reserves which are as per the latest audited balance sheet of a company available for distribution as dividend Following shall not be treated as free reserve: any amount representing unrealized gains, notional gains or revaluation of assets, whether shown as a reserve or otherwise,or any change in carrying amount of an asset or of a liability recognized in equity, including surplus in profit and loss account on measurement of the asset or the liability at fair value Section 2(57): net worth means the aggregate value of the paid-up S/C and all reserves created out of the profits and S.P. account, after deducting the aggregate value of the accumulated losses, deferred expenditure & miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets, write-back of depreciation and amalgamation Companies Act, 2013

Turnover Section 2(91) Turnover means the aggregate value of the realization of amount made from the sale, supply or distribution of goods or on account of services Reference to the other sections (eg.) Sec 2(85) : Small Company Sec 76 : Acceptance of deposits from public Sec 135 : Corporate Social Responsibility Whether adjustment needed for opening and closing trial balances Any impact on preparation of financial statements Companies Act, 2013

Financial Year Section 2(41) Companies Act, 2013 Particulars Act 2013 Period ending 31st March of the year Transitional period of 2 years for existing companies Applicable to all companies except foreign holding or subsidiary companies which requires – Compulsory consolidation outside India; and With prior approval of Tribunal Period for which profit & Loss account placed before AGM FY Period (except 1st FY of incorporation) 12 months Can not be less or more than 12 months Normally it cannot exceed 15 months Can extend it to 18 months, after getting permission from the registrar Companies Act, 2013

IMPACT ON COMPANIES Companies Act, 2013

KEY MANAGERIAL PERSON Companies Act, 2013

Definitions – KMP [Section 2(51)] Key Managerial Personnel [Section 2(51)] (Notified on 12th September, 2013) - in relation to a company, means The CEO or the MD or the manager Company Secretary Whole – time Director CFO Any other prescribed officer As per AS – 18: KMP means those persons who have the authority and responsibility for planning, directing and controlling the activities of the reporting enterprise Companies Act, 2013

Related Party Transactions What does the Companies Act, 1956 say ? [Section 297 (1)] Central government approval required for entering into specific contracts, where paid-up capital of the company is not less than Rs.1 crore; for other Companies – the Board approval where interested Directors are not to participate Following transactions are covered: Sale, purchase or supply of any goods, material or services Underwriting the subscription of any shares or debentures Sale/purchase of goods/services for cash at prevailing market prices not exceeding Rs 5K – are exempted No specific disclosure required in the Board Report Companies Act, 2013

Related Party Transaction (notified) Sec 2(76) -Related party with reference to a company, means: (i) a director or his relative; (ii) a key managerial personnel or his relative; (iii) a firm, in which a director, manager or his relative is a partner; (iv) a private co. in which a director or manager is a member or director; (v) 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 S/C; (vi) any body corporate whose BoD, M.D or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager; (vii) any person on whose advice, directions or instructions a director or manager is accustomed to act: Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions given in a professional capacity; (viii) 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; (ix) such other person as may be prescribed Companies Act, 2013

Related Party Transactions ….cont’d Provisions of Sec 188 of New Act Prior approval by SR at GM required if paid-up capital of Co is Rs.10 Cr or more OR the transaction with RP does not exceed such sum, as may be prescribed (The word “not” is mis-placed in Section). The limits for clauses (a) to (e) as per rules are prescribed as 25% of annual Turnover or 10% of Net worth of Co as per last audited FS Interested member not to vote on SR – (issue for some Co’s) Disclosure in board report required along with appropriate justification for RPT Section exempts: Any transaction entered by company in its ordinary course of business other than transactions which are not an arm’s length basis Companies Act, 2013

Related Party Transaction Limited scope of transactions and persons covered under Co Act (Sec. 297) Prior approval of Central Govt. required in case paid-up capital exceeds Rs. 10 Crore Enhanced scope of transactions Enhanced scope of related parties to include KMP and relatives, directors with certain shareholding, persons in advisory capacity (other than professional advice) to board Prior approval of shareholders by SR if: paid-up capital exceeds Rs. 10 Cr Transaction exceeding higher of 25% of T/O or 10% of N/W as per last audited FS Appointment exceeding Remuneration of Rs. 2.5 Lac pm Underwriting remuneration etc exceeding 1% of net worth No member shall vote if he is related party Companies Act, 2013

Related Party Transactions …cont’d Following transactions are covered u/s 188 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; such related party's appointment to any office or place of profit in the company, its subsidiary company or associate company; and (Rs. 2.5 Lakh per month or more) underwriting the subscription of any securities or derivatives thereof, of the company (remuneration not more than 1% of net worth) Companies Act, 2013

“Related Parties”- Defined Term 2013 Act 1956 act KMP or his relative Yes No Senior Management of the Co. (All members of management 1 level below the executive directors, including the functional heads)- as per rules A firm in which such director, manager or relative is a partner Some changes Public co. in which a director or manager is a director Holding, subsidiary , fellow sub. or an associate co. along with their directors & relatives, their KMPs & relatives, their Senior management Companies Act, 2013

“Related Parties”- Defined Term 2013 Act 1956 act Public co. in which a director or manager is a Director holds along with his relatives, > 2% of its paid-up S/C Yes Some changes Any person on whose advice, directions or instructions a director or manager is accustomed to act, unless advice is given in a professional capacity Body corporate whose BOD’s, MD or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager unless advice is given in a professional capacity Companies Act, 2013

Change in Definition - (Relative) [Co’S spf & defn.rules 2014] Section 2(77) Rule Act 2013 Act 1956 Members and HUF Y Husband and wife Father (including step-father) Mother (including step-mother) Father’s father N Mother’s father Father’s mother Mother’s mother Son (including step-son) Daughter (NOT MENTIONED including step-daughter) Son’s wife Daughter’s husband Son's son/ daughter Daughter’s son daughter Son’s son’s wife Daughter’s son’s wife Son’s daughter’s husband Daughter’s daughter’s husband Brother Sister Companies Act, 2013

RPT: Disclosure Requirements What has changed? Boards’ report to capture RP arrangement – this was not required as per the old act Boards’ report shall also capture the justification of undertaking such RPT Sec 186 disclosure around loans, investments etc now through the ‘FS’ – earlier through ‘register’ (Sec372 A) Companies Act, 2013

Any Questions or Queries? Companies Act, 2013

Companies Act, 2013