The Companies Act, 2013 – “Opportunities” in Threats Dr P T Giridharan Joint Director The Institute of Chartered Accountants of India

Introduction Companies Bill 2012 passed by Lok Sabha on 18th December, 2012 and was passed by the Rajya Sabha on 8th August, 2013. 1 The Act comprised of 29 chapters, 470 Sections (282 sections so far notified) with 7 Schedules (all notified) as against 658 sections and 14 Schedules in the Companies Act, 1956 2 Substantively a law based on Rules 3 In 470 Sections the word “as may be prescribed” has been used at around 336 places.

Professional Opportunities to grow expoentially The changing national and international economic environment Exponential growth of the Indian economy Changes in the stakeholders’ expectations Manifold Increase in Number of Companies The need of a legal framework was felt to enable the Indian corporate sector to adopt the best international practices in a globally competitive manner, fostering a positive environment for investment and growth. Year No. of Companies 1956 30,000 approx As on 28th Feb 2014 13,85,000 approx (9.44 lakh active companies)

New Concepts 33 New Definitions introduced in Section 2 Private company to have a maximum of 200 members (earlier limit was upto 50). (Section 2 (68)) - One Person Company & Small Company & Dormant allowed E-Governance – maintenance and allowing inspection of documents by companies in electronic form. (Section 120) Definition of independent Directors introduced. (Section 149 (5)) In prescribed class or classes of companies, there should be at least 1 woman director. (Section 149 (1))

Monitoring and Regulatory Authorities National Financial Reporting NFRA National Company Law Tribunal NCLT Serious Fraud Investigation Authority SFIO Investor Education and Protection Fund Authority IEPF

Opportunities Internal Audit & Risk Management Registered Valuers & Meditation & Conciliation Experts CSR Audit CA’s in NFRA Internal Audit & Risk Management Video Conferencing & Mail Management Professional Liquidator Fraud Detection Experts & Forensic Accountant & Auditor

Opportunities Section 138 & Rule 9.13 : Companies required to appoint Internal auditor.- The following class of companies shall be required to appoint an internal auditor or a firm of internal auditors, namely:- (a) every listed company ; (b) every unlisted company having – (i) paid up share capital of fifty crore rupees or more during the preceding financial year; or (ii) turnover of two hundred crore rupees or more during the preceding financial year; or (iii) outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees or more at any point of time during the preceding financial year; or (iv) outstanding deposits of twenty five crore rupees or more at any point of time during the preceding financial year; and (c) every private company having-

Internal Audit … contd (i) turnover of two hundred crore or more during the preceding financial year; or (ii) outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees or more at any point of time during the preceding financial year: Provided that an existing company covered under any of the above criteria shall comply with the requirements of section 138 and this rule within six months of commencement of such section. Explanation.- For the purposes of this rule (i) the internal auditor may or may not be an employee of the company; (ii) the term “Chartered Accountant” shall mean a Chartered Accountant whether engaged in practice or not. (2) The Audit Committee of the company or the Board shall, in consultation with the Internal Auditor, formulate the scope, functioning, periodicity and methodology for conducting the internal audit.

Registered Valuers (Section 247) Rule 17.2 Where any valuation is required to be made of any property, stocks, shares, debentures, securities or goodwill or any other assets (herein referred to as the assets) or net worth of a company or its liabilities under the provision of this Act , it shall be valued by a person having such qualifications and experience and registered as a valuer in such manner, on such terms and conditions as may be prescribed and appointed by the audit committee or in its absence by the Board of Directors of that company. The following persons shall be eligible to apply for being registered as a valuer (a) a chartered accountant, company secretary or cost accountant who is in whole-time practice, or retired member of Indian Corporate Law Service or any person holding equivalent Indian or foreign qualification as the Ministry of Corporate Affairs may recognise by an order;

Opportunities Provisional Liquidator (Section 275) For the purposes of winding up of a company by the Tribunal, the Tribunal at the time of the passing of the order of winding up, shall appoint an Official Liquidator or a provisional liquidator from the panel maintained by the Central Government as the Company Liquidator. CSR Audit (Section 135) Corporate Social Responsibility (CSR) Concept of CSR introduced & Board to have a CSR Committee consisting of three or more directors, out of which at least one director shall be an independent director for companies  having networth of Rs. 500 crore or more or  turnover of Rs. 1000 crore or more or  net profit of Rs. 5 crore or more during any financial year The committee shall recommend the policy for CSR to the Board  Board to ensure at least 2% of average net profits may during 3 immediately preceding years spent every year on CSR

Mediation and Conciliation Panel Rule 28.2 Qualifications of persons to be empanelled as experts under . The following persons may be enlisted as experts in the panel of mediators/conciliators under Rule 28.1, namely: (g) Professionals with at least fifteen years of continuous practice as Chartered Accountant or Cost Accountant or Company Secretary;

Threats – Rotation Section 139 Every company shall, at the first annual general meeting, appoint an individual or a firm as an auditor who shall hold office from the conclusion of that meeting till the conclusion of its sixth annual general meeting and thereafter till the conclusion of every sixth meeting. Provisions for compulsory rotation of individual auditors in every five years and of audit firm every 10 years in the listed company & certain other class of companies, as may be prescribed. A transition period of 3 years from the commencement of this Act has been prescribed for the Company existing on or before the commencement of this Act to comply with the provision of the rotation of auditor.  The members of a company can resolve for rotation of auditing partner and also for audit to be conducted by more than auditor. (Section 139) Where a company constitutes an Audit Committee, all appointments including the filling of a casual vacancy of an auditor shall be made after taking into account the recommendations of Audit Committee.  appointment is done once for 5 years Ratification done every year confusion between “ratification” and “reappointment” taken as these two expressions to mean the same Mandatory retirement after 5 years in case of individual and 10 years in case of firms no auditor/audit firm/ audit firms having common partners, shall take audit for a consecutive term of 5 years after 5 years have been completed

Applicability of Companies for Rotation Rule 9.5. Class of Companies.- For the purposes of sub-section (2) of section 139, the class of companies shall mean the following classes of companies excluding one person companies and small companies:- (a) all unlisted public companies having paid up share capital of rupees ten crore or more; (b) all private limited companies having paid up share capital of rupees twenty crore or more; (c) all companies having paid up share capital of below threshold limit mentioned in (a) and (b) above, but having public borrowings from financial institutions, banks or public deposits of rupees fifty crores or more.

Reporting on Fraud Section 143 – Rule 9.13 For the purpose of sub-section (12) of section 143, in case the auditor has sufficient reason to believe that an offence involving fraud, is being or has been committed against the company by officers or employees of the company, he shall report the matter to the Central Government immediately but not later than sixty days of his knowledge and after following the procedure indicated herein below: (i) auditor shall forward his report to the Board or the Audit Committee, as the case may be, immediately after he comes to knowledge of the fraud, seeking their reply or observations within forty-five days; (ii) on receipt of such reply or observations the auditor shall forward his report and the reply or observations of the Board or the Audit Committee along with his comments (on such reply or observations of the Board or the Audit Committee) to the Central Government within fifteen days of receipt of such reply or observations; (iii) in case the auditor fails to get any reply or observations from the Board or the Audit Committee within the stipulated period of forty-five days, he shall forward his report to the Central Government alongwith a note containing the details of his report that was earlier forwarded to the Board or the Audit Committee for which he failed to receive any reply or observations within the stipulated time.

Reporting on Fraud The report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed cover by Registered Post with Acknowledgement Due or by Speed post followed by an e-mail in confirmation of the same. (3) The report shall be on the letter-head of the auditor containing postal address, e-mail address and contact number and be signed by the auditor with his seal and shall indicate his Membership Number. (4) The report shall be in the form of a statement as specified in Form ADT-4. (5) The provision of this rule shall also apply, mutatis mutandis, to a cost auditor and a secretarial auditor during the performance of his duties under section 148 and section 204 respectively

Disqualifications of auditor – Section 141 – Rule 9.10 For the purpose of proviso to sub-clause (i) of clause (d) of sub-section (3) of section 141, a relative of an auditor may hold securities in the company of face value not exceeding rupees one lakh: Provided that the condition under this sub-rule shall, wherever relevant, be also applicable in the case of a company not having share capital or other securities: Provided further that in the event of acquiring any security or interest by a relative, above the threshold prescribed, the corrective action to maintain the limits as specified above shall be taken by the auditor within sixty days of such acquisition or interest. (2) For the purpose of sub-clause (ii) of clause (d) of sub-section (3) of section 141, a person who or whose relative or partner is indebted to the company or its subsidiary or its holding or associate company or a subsidiary of such holding company, in excess of rupees five lakh shall not be eligible for appointment. (3) For the purpose of sub-clause (iii) of clause (d) of sub-section (3) of section 141, a person who or whose relative or partner has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, or its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of one lakh rupees shall not be eligible for appointment.

Disqualifications of auditor – Section 141 – Rule 9.10 For the purpose of clause (e) of sub-section (3) of section 141, the term “business relationship” shall be construed as any transaction entered into for a commercial purpose, except – (i) commercial transactions which are in the nature of professional services permitted to be rendered by an auditor or audit firm under the Act and the Chartered Accountants Act, 1949 and the rules or the regulations made under those Acts; (ii) commercial transactions which are in the ordinary course of business of the company at arm’s length price - like sale of products or services to the auditor, as customer, in the ordinary course of business, by companies engaged in the business of telecommunications, airlines, hospitals, hotels and such other similar businesses.