COMPANIES ACT 2013 – Urgent & Important actions before March 15 By CS Makarand Joshi makarandjoshi@mmjc.in

Coverage of Session Borrowings / Deposit Allotment of Shares / Securities Fixed Assets Group Company Loans Other Loans / Investments CSR Related Party Transactions Remuneration to Directors ROC Filings

Borrowing

Who can approve borrowing? Board of Directors can approve borrowing Board can delegate this power to committee or to MD If borrowing exceeds paid up capital + free reserves, it requires prior special resolution All the resolutions [shareholders / directors] to be filed with ROC

Charge – secured loan Means an interest or lien created on – Property or Asset of a company or Any of its undertaking as a security and includes mortgage Now requires charge registration for lien on FD or pledge of shares Charge on vehicle is also required to be registered.

What if not complied? If charge is not registered – secured lender is at part with unsecured lender Penatly = 100,000 – 500,000 + imprisonment of 6 months If borrowing made without special resolution, borrowing may be considered as ultra vires

Summary Check that all borrowings has board resolution AND filed with ROC Check that charges is registered for all secured loans Check that borrowing is within limits or Special Resolution is filed with ROC

Deposit

Repayment of Deposits Deposits as on 1 April 2014 to be repaid till 31 March 2015 Deposit under Old act or Under New Act? Penalty for non repayment = 1cr >10 cr + officer liable for imprisonment >7 years and fine 25 lacs>2cr

What is ‘deposit’ under acceptance of deposit rules? The major highlights of this definition are – This is an inclusive definition. It says ‘deposit’ includes any receipt of money by way of deposit or loan or any other form, by a company, but does not include..... There are 14 exclusions from the definition of deposit Here any other manner has to be read in the context of receipt either as deposit or loan.

What are 14 exclusions? Any amount received from government or from any other source whose repayment is guaranteed by central government Any amount received from foreign source, so long as it is in compliance with Foreign Exchange Management Act Any loan or facility received from Bank Any loan or financial assistance received from public financial institutions Any amount received against issue of commercial paper or any other instrument issued under guidance of RBI

What are 14 exclusions? Any amount received from any other company Any application money received under this act, against issue of any securities [so long as the allotment is done in 60 days of receipt of money] Any amount received from Director of the Company [however the amount received should not be out of borrowed funds] Any amount received against issue of secured bond or debentures OR Any amount received against issue of compulsory convertible bond or debentures [bond should be convertible into shares within a period of 5 years]

What are 14 exclusions? Any security deposit received from employee of the company [not exceeding 12 months salary]. This deposit should be non interest bearing. Any non interest bearing amount received or held in trust [by the company] Any amount received in the course of and for the purpose of business of the company – as an advance for the supply of goods or provisions of services accounted for in the manner, provided that such advance is appropriated against supply of goods or services within a period of 365 days from acceptance of deposit

What are 14 exclusions? as advance accounted for in any manner, received in connection with consideration for property as security deposit for performance of contract for supply of goods or services as advance under long term projects for supply of capital goods any amount brought by promoters in pursuance of stipulation imposed by the lending institution any amount accepted by a Nidhi Company in accordance with section 406 of the Companies Act 2013.

Does it mean, if any amount falls under either category it is not deposit?

Acceptance of Deposit Private Company can take deposit only upto 25% of paid up capital + free reserves, if – Credit rating is obtained deposit insurance is obtained Special Resolution is passed Only Public companies with min. networth of Rs.100 Cr or turnover of Rs.500 can accept Public Deposit [other than shareholders] Limits may be relaxed to 100% of paid up capital for private companies!!

What is the solution? Let money received fall under any of 14 exemptions ELSE Repay the Deposits before March 15 OR Convert Promoters Money into Capital and accept Deposit Seek extension of time from CLB for repayment of Deposit

Compliances On or before 30th Day of June, return of deposit – Registrar in Form DPT-3 Depositing on or before 30th April of each year not less 15% of the amt maturing during the financial year and following year in a scheduled bank to be maintained separately as deposit repayment reserve The Amt so deposited shall not be used for any purpose other than for repayment.

Share Capital

Share Capital Allotment Shareholders Rights Issue Bonus Issue Outsiders Public offer Private Placement Sweat Equity ESOP Others

Share Capital All Shares to be offered on rights basis; ELSE It is Private Placement Private Placement requires - Special Resolution + valuation report Private Placement offer document!!! Separate Bank account required in private placement Funds can not be used till allotment is completed Any mis statement in Offer document can be alleged as ‘Fraud’

What if loan is getting converted into Equity / Preference ?

What to do with respect to Share Application money carry forward from earlier years?

Prohibition of Loans, Guarantees and Securities

Prohibited Loan/ Guarantee/ Security Section 185 prohibits loans / guarantee/ security to director or person in whom director is interested Such loans can not be given This section has become effective from 12 September 2013

What is the consequence of default? For Company granting loan fine 5-25 lacs For director / entity receiving loan – imprisonment upto 6 months OR fine 5-25 lacs If director does not disclose his interest – vacation of directorship Loan granted may be considered as ultra vires and person granting it may be personally responsible Directors personal default in his duties

Section 185 Provisions of section 185 prohibits loan / security guarantee given by any company to following entities – Director of lending company Director of holding company of lending company Partner/ relative of such director Firm in which such director is partner Firm in which relative of such director is partner Private company in which such Director is a Director or member

Section 185 Body corporate at general meeting of which not less than 25% of total voting power may be exercised or controlled by such director or by two or more such directors together; Body corporate, the board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company

How to comply with Section 185?

How to comply with Section 185? Loan from company other than prohibited entity Loan from exempted entities Change Shareholding / Directorships Don’t take loan. Take investment Don’t take loan. Take business advance Merge entities Convert companies into LLP Convert Partnership Firms to Company and change shareholding / directorship

Directors of Operating Companies Are different Model - 1 Investment Company Operating Company I Operating Company 2 Directors of Operating Companies Are different Operating Cos provide loan to each other

Model - 2 1] A can provide to B & C 2] B & C can provide each other Investment cum operating Company [A] Operating Company I [B] Operating Company 2 [C] Directors of all Companies Are different 1] A can provide to B & C 2] B & C can provide each other 3] B & C can not provide A

Whether section 185 covers all book debts?

Exemption: Any loan given to MD as part of employee benefits OR under some scheme approved by shareholders Advance loan, give guarantee or provide security in respect of loan made by any person to wholly owned subsidiary Give guarantee or provide security in respect of loan made by any bank or financial institution to subsidiaries companies NBFC can give loans/ provide guarantee / security If borrowing party is anybody other than prohibited list

Investments, And Permitted Loans, Guarantees and Securities

Comparison Nature of Transaction Section 179 Section 185 Section 186 Investments Applicable wrt to every investment Not applicable Applicable wrt every investment made in securities of body corporate Lending Applicable wrt to all loans Applicable if loan is given to director or person in whom director is interested Applicable wrt to all loan Guarantee -do- Security

What is Investment? Laying of money in such a manner that it would produce some revenue [dictionary meaning] It may include following – Shares, Debentures Property [which is not purchased for business] Fixed Deposit is investment? – Yes, it can be said as Investment for the purpose of section 179

Investments – Who can approve? Every Investment requires approval of the Board of Directors If loans / investments / guarantee/ security made in excess of 100% of free reserves or 60% of paid up capital + free reserves, it requires prior approval of shareholders Approval of public financial institutions, in certain cases, is required Every such Board / Shareholder resolution to be filed with ROC

Loans and Investments Limits on Investment /Loan /Guarantee /Security Given(186) Interest rate note lower than yield on Govt. Security Applicable even to private limited company Applicable even for loan given to employees Requires approval of board – to be filed with ROC Register to be maintained

Loans and Investments Special Resolution and Board resolution to be filed with ROC Exemption: Loan given or guarantee or security provided by holding company to wholly owned subsidiary or joint venture company Investment in shares by holding company to its wholly owned subsidiary company. This section shall not apply to NBFC

Summary Check that all loans carry interest Check that none of the loan is in violation of section 185 Check that Shareholding / Directorship is organized to cope up with se. 185 Check if your company is becoming NBFC?

Fixed Assets

Assets All ‘investments’ in assets should be made in company’s name Motor Car? Agricultural Land? Depreciation to be changed on useful life from next financial year

Disposal of Assets Any disposal/ lease / sell of undertaking OR substantial undertaking of the Company requires Special Resolution Undertaking includes – property / investment / business undertaking Undertaking = undertaking in which investment of the company exceeds 20% of its net worth OR Undertaking which generates 20% of total income of the Company as per last financial year This section does not apply to company, where selling and leasing property is an Ordinary Course of Business

What if special resolution is not obtained?

Disposal of Assets Buyer will not be impacted if he proves that he acted in good faith If buyer is aware about this non compliance, title will be faulty It is subject to litigation If you are acquiring property from the Company, get this special resolution passed and filed with ROC

Check if all assets are in the name of the Company. Summary Check if all assets are in the name of the Company. Check if there is any sale of undertaking by your client.

Related Party Transactions

Approach TOWARDS Related Party Transaction Scope is widened Transactions to be at arms length And in Ordinary Course If not in ordinary Course OR if not at arms length –requires approval of board and may be Special Resolution of Shareholders Interest Directors not to participate at board meetings Related Party shareholders not to vote at General Meeting Transactions with Wholly Owned Subsidiary Exempted

Remuneration to Directors

Remuneration Board and Shareholder approval essential Require compliance of schedule V Appt of Non Resident MD /WTD requires CG approval No remuneration restriction on private company, if – no default in payment of debts Disclosure is required in the annual report Interested Directors should not vote [section 166] Related Shareholders can vote [Se. 188 does not cover these transactions]

Is it mandatory to have Managing Director?

Liabilities Every working Director/ KMP is officer in default Director made accountable is officer in default If there is no working Director, all Directors will be officer in default Non executive / independent Directors are liable for acts / omissions occurred with his knowledge attributable through broad process

What if company has passed resolution before 31 March 2014 for appointment of MD?

Summary Ensure that Directors Salary from 1 April 2015 is approved Ensure that every company has at least one MD / WTD

Corporate Social Responsibility

Who is covered under CSR? Every company having: Net worth of Rs. 500 crore or more, or Turnover of Rs. 1000 crore of more, or Net profit of Rs. 5 crore or more during 3 previous financial year Foreign company havg branch office or project office are also included

How much to be spend? At least 2 % of the average net profits of the company made during the three immediately preceding financial years Profit to be calculated as prescribed under section 198 of the Act

What if not spend? The reason for same shall be mentioned in Board report Section 450? Duties of Director

Monitoring and Reporting of CSR Spending MONITORING - CSR Committee to formulate and recommend CSR Policy, recommend amount to be spent and monitor the CSR policy REPORTING: In Board report as per prescribed format In case of foreign company, the balance sheet to contain as annexure

Ensure that CSR is spent on prescribed causes Summary Ensure that CSR is spent on prescribed causes

Type of Company - What is the relevance?

Importance of Type of Companies Small Company – Need not prepare Cash Flow Statement, Need not do rotation of Auditor Does not require certification of A/R by PCS u/s 92(1)

Holding / Subsidiary / Associate Holding Subsidiary requires consolidation Books of Associate to be consolidated with Holding Holding – Subsidiary – enjoys exemption u/s. 185, 186 and 188 Subsidiary – Subsidiary – no exemption Holding – Associate – no exemtion

Changes with respect to Directorships

Directorships Max. number of Directorship per person is 15 Resident Director is mandatory Non filing of Fin. Statement or A/R makes director disqualified and his existing offices would vacate Non attendance of BM for 12 months – VACATION Appt of – Woman / Independent directors Appointment of CS / CFO Appointment of one level below KMP to be intimated to ROC

Appointment of Different Auditors

Auditors Disqualification norms changed Restriction on Number of audits Auditor Rotation [3 yrs transition] Appointment of Internal Auditor Appointment of Cost Auditor Appointment of Secretarial Auditor

Companies (Indian Accounting Standards) Rules, 2015 Ministry has issued Companies (Indian Accounting Standards) Rules, 2015. The Cos., may comply for the accounting period on or after 1st April, 2015 with the comparatives for the periods ending on 31st March, 2015 or thereafter Mandatory for the following Cos., for the accounting period on or after 1st April, 2016 with the comparatives for the periods ending on 31st March, 2016 or thereafter Equity or debt listed or are in process of being listed on any stock exchange in India or outside AND net worth of Rs. 500 cr or more Cos., other than above AND net worth of Rs. 500 cr or more holding, subsidiary, joint venture or associate companies of above mentioned Cos.

Companies (Indian Accounting Standards) Rules, 2015 Mandatory for the following Cos., for the accounting period on or after 1st April, 2017 with the comparatives for the periods ending on 31st March, 2017 or thereafter Equity or debt listed or are in process of being listed on any stock exchange in India or outside AND net worth les than Rs. 500 cr or more Cos., other than above AND net worth of Rs. 250 cr or more but less than Rs. 500 cr holding, subsidiary, joint venture or associate companies of above mentioned Cos.

Audit Report Apart from reporting items as per sec- 143, other imp items to be disclosed Impact of pending litigations on financial position material foreseeable losses, if any, on long term contracts including derivative contracts Delay in transferring amt to IEPF

Annual Return Other Imp contents Principal business activities along with % to total turnover of the Company Total turnover and networth Details of promoters, directors, key managerial personnel along with changes therein since the close of the previous financial year15. Details of all board & committee meeting along with details of attendance Details of attendance of all directors in board and committee meetings

Annual Return Details of remuneration of whole-time & managing directors, manager and key managerial personnel in terms of Salary & perquisites Stock option and sweat equity Commission Details of remuneration of other directors in terms of Sitting fee commission Amount spent on Corporate Social Responsibility Limits under sections 186 i.e. Loan and investment by company and section 180 (1)(c) i.e. Restrictions on powers of board

Directors Report Other Imp contents Extract of Annual return Statement on declaration given by Independent directors as per section 149(6)] Related party transaction as per section 188 A statement indicating development and implementation of a risk management policy for the Company including identification therein of elements of risk, if any, which in the opinion of the Board may threaten the existence of the company Details of Deposits

Directors Report Details of significant and material orders passed by the Regulators or courts or tribunals impacting the going concern status and company’s operations in future Disclosures in respect of voting rights not exercised directly by the employees in respect of shares to which the scheme relates (67(3)(c) Issue of equity shares with differential rights ( Rule 4(4) of chapter Share Capital and Debentures) 2014 Provision of money by company for purchase of its own share by employees or by trustees for the benefit of employees. ( Rule 16(4) of chapter Share Capital and Debentures) 2014

Other Important Matters

Other Important Matters Change in Financial Year Alteration of Articles of Association of the Company Updation of Statutory Registers Writing date of entering minutes in minute book Various Policies to be adopted by the Companies Mandatory Forms filing with ROC

List of Forms to be filed with ROC DPT 4 – Deposit MGT 14 – For MBP 1 / Loan / Investment / Borrowing MGT 14 – For special resolution for AOA alteration / Borrowing in excess of cap + reserves / appt of MD / WTD MGT 14 – adoption of accounts / directors report ADT 1 – Appointment of Auditor 23 AC /23 ACA – Balance Sheet / Profit and Loss 20B – Annual Return MR 1 – appointment of CS / CFO / MD DIR 12 - appointment of CS / CFO / MD

New Act New Challenges New Approach Brand NEW SOLUTIONS

Change in approach…Change in Solutions Shift from shareholder protection to stakeholder protection Strengthening of doctrine of constructive notice Change in Solutions More capital intensive companies? Self sufficient companies? All transactions at arms length? Strict AND Timely Compliances

Actions Required for Pvt. Co.

Actionable for Private company Printing of CIN, website, mail id, phone, fax, registered office on letterhead and official publication Induction of new directors Appointment of CS (?)/ MD / WTD Appointment of Internal Auditor Policy for related party transaction Articles of Association needs revision Borrowing in excess of paid up capital + reserves require special resolution to be filed with ROC Repayment of deposit in 1 year

Actionable for Private company Every borrowing / loan / investment requires prior board resolution and interest to be charged Private Company can not give loan/ guarantee / security to another entity in which Director is interested Minutes/ Registers / Share Certificates to be maintained Statutory Registers to be maintained in new format [since incorporation] ROC filing to be maintained up to date without any delay Every Director to mention his DIN / Address etc in correspondence Constitute CSR Policy and Spend 2% of avg. profits

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