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16. Secretarial audit has been made mandatory for every listed company and other specified
companies.
17. Certain Secretarial Standards issued by the Institute of Company Secretaries of India (ICSI)
shall be mandatory.
18. National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal
(NCLAT) shall now be a reality.
19. The existing restrictions on the merger of an Indian company with a foreign company in
specific jurisdictions removed, allowing for corporate flexibility.
20. A new provision prohibiting insider trading in securities by a Director or Key Managerial
mandatory;
boards; allows for class action suits; and looks forward to overhaul the way companies function
and are regulated in the country.
IMPORTANT PROVISIONS OF THE ACT IN A NUT SHELL
Organisation and Applicability of the Act
The Companies Act, 2013 comprises of 29 Chapters, 470 Sections and 7 Schedules as against
658 Sections, 13 parts and 14 Schedules in the existing Act. However, substantial part of 2013
Act is governed via company rules (Rules) which are in the process of being drafted and notified
in due course. The new Act, which has been developed with a view to enhance selfregulation,
encourage corporate democracy and reduce the number of required government approvals,
extends to the whole of India.
Vital Concepts Introduced/Redefined in the Act
Several significant concepts have been introduced or redefined and their implications made clear
under the new Act such as:
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
[Section 2 (76)]
An Expert is a person who has authority to issue certificates e.g. Chartered Accountant,
Company Secretary etc.
A stakeholder may claim damage from the expert under the Act. Hence, an expert should
take utmost care while issuing certificate/giving advice to a company. An expert should
maintain records to defend his position if claim is made against him.
[Section 2 (38)]
Free Reserves
Free Reserves are the reserves available for distribution as dividend as per the latest
audited balance sheet of the company but exclude:
(i)
(ii)
[Section 2 (43)]
Net-worth
Net-worth inter alia includes securities premium account but excludes writing back of
depreciation in Net-worth.
[Section 2 (57)]
Officer-in-default
Officer-in-default includes Key Managerial Personnel (i.e., MD, CEO, CFO, Company
Secretary and other prescribed authorities).
[Section 2 (60)]
Hence, Key Managerial Personnel should take utmost care while discharging their
respective responsibility to avoid damage claim, penalty and prosecution under the Act.
Private Company
2013 Act permits a private company to have total members up to 200 persons.
[Section 2 (68)]
Public Company
Public company will include a private company which is a subsidiary of a public
company.
[Section 2 (71)]
Independent Director
Independent Director means a director other than a managing director or a whole-time
director or a nominee director,
(a) who, in the opinion of the Board, is a person of integrity and possesses relevant
expertise and experience;
(b) (i) who is or was not a promoter of the company or its holding, subsidiary or associate
company;
(ii) who is not related to promoters or directors in the company, its holding, subsidiary or
associate company;
(c) who has or had no pecuniary relationship with the company, its holding, subsidiary or
associate company, or their promoters, or directors, during the two immediately
preceding financial years or during the current financial year;
(d) none of whose relatives has or had pecuniary relationship or transaction with the
company, its holding, subsidiary or associate company, or their promoters, or directors,
amounting to two per cent or more of its gross turnover or total income or INR fifty lakh
or such higher amount as may be prescribed, whichever is lower, during the two
immediately preceding financial years or during the current financial year;
(e) who, neither himself nor any of his relatives
(i) holds or has held the position of a key managerial personnel or is or has been
employee of the company or its holding, subsidiary or associate company in any of the
three financial years immediately preceding the financial year in which he is proposed to
be appointed;
(ii) is or has been an employee or proprietor or a partner, in any of the three
financial years immediately preceding the financial year in which he is proposed to be
appointed, of
(A) a firm of auditors or company secretaries in practice or cost auditors of the
company or its holding, subsidiary or associate company; or
(B) any legal or a consulting firm that has or had any transaction with the
company, its holding, subsidiary or associate company amounting to ten per cent. or more
of the gross turnover of such firm;
(iii) holds together with his relatives two per cent. or more of the total voting power of
the company; or
(iv) is a Chief Executive or director, by whatever name called, of any nonprofit
organisation that receives twenty-five per cent. or more of its receipts from the company,
any of its promoters, directors or its holding, subsidiary or associate company or that
holds two per cent or more of the total voting power of the company; or
(f) who possesses such other qualifications as may be prescribed.
Key Managerial Personnel (KMP)
Key Managerial Personnel, in relation to a company means
(i) the Chief Executive Officer or the managing director or the manager;
(ii) the company secretary;
(iii) the whole-time director;
6
below
[Section 2(62)]
Related Party
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 company in which a director or manager is a member or director;
(v) a public company in which a director or manager is a director or holds along with his
relatives, more than two per cent. of its paid-up share capital;
(vi) a body corporate whose Board of Directors, managing director 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.
However,
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.
[Section 2(76)]
Small Company
Small Company means a company, other than a public company,
(i) paid-up share capital of which does not exceed INR fifty lakh or such higher amount
as may be prescribed which shall not be more than INR five crore; or
(ii) turnover of which as per its last profit and loss account does not exceed INR two
crore or such higher amount as may be prescribed which shall not be more than INR
twenty crore.
Small company shall be subjected to a lesser stringent regulatory framework. [Section 2(85)]
Subsidiary Company
If a company holds more than one-half of total share capital of other company, then the
other company will be subsidiary of the former company. Hence, target percentage is
more than 50% (and not 51% or more) and holding in total capital including preference
shares is to be considered.
[Section 2 (87)]
advantage from, or to injure the interests of, the company or its shareholders or its
creditors or any person, whether or not there is any wrongful gain or wrongful loss.
[Explanation to Section 447]
The 2013 Act provides for punishment for fraud as under:
A person, found to be guilty of fraud, shall be punishable with imprisonment for a term of
6 months to 10 years and shall also be liable to fine shall not be less than the amount
involved in the fraud, but which may extend to three times the amount involved in the
fraud.
[Section 447]
[Section 211]
Commencement of Business
A company having a share capital shall not commence business or exercise any
borrowing powers unless a declaration is filed with the Registrar of Companies (ROC) by
a director, verified in the manner as may be prescribed, that:
Every subscriber to the memorandum has paid the value of shares agreed to be taken by
him;
Paid-up capital is not less than INR five lakhs in the case of public company and INR one
lakh in case of a private company; and
The company has filed with the ROC the verification of its registered office. [Section 12(1)]
Acceptance of Deposits
Under new Companies Act, there are elaborated provisions for acceptance and/or
renewal of deposits from members and public.
No company shall invite, accept or renew deposits under this Act from the public except
in a manner provided under the Act.
However, the above shall not apply to a banking company and non- banking financial
company as defined in the RBI Act, 1934 and to such other company as the Central
Government may, after consultation with the RBI, specify in this behalf [Section 73(1)]
A company may, subject to passing of a resolution in general meeting and subject to such
rules as may be prescribed in consultation with the RBI, accept deposits from its
members on such terms and conditions, including the provision of security, if any, or for
the repayment of such deposits with interest, as may be agreed upon between the
company and its members, subject to the fulfilment of the following conditions, namely:
(a)
financial position of the company, the credit rating obtained, the total number of
depositors and the amount due towards deposits in respect of any previous deposits
accepted by the company and such other particulars in such form and in such manner as
may be prescribed;
(b) Filing a copy of the circular along with such statement with the Registrar within
thirty days before the date of issue of the circular;
(c) Depositing such sum which shall not be less than fifteen per cent of the amount of its
deposits maturing during a financial year and the financial year next following, and kept
10
[Section 73(2)]
11
3. In case of an OPC and a Small Company, the annual return is required to be signed by
the Company Secretary, or where there is no Company Secretary, by one director of the
company.
4. Every company shall file with the Registrar a copy of the annual return, within sixty
days from the date on which the annual general meeting is held or where no annual
general meeting is held in any year within sixty days from the date on which the annual
general meeting should have been held together with the statement specifying the reasons
for not holding the annual general meeting, with such fees or additional fees as may be
prescribed, within the time as specified, under section 403.
5. If a company fails to file its annual return under sub-section (4), before the expiry of
the period specified under section 403 with additional fee, the company shall be
punishable with fine which shall not be less than INR fifty thousand but which may
extend to INR five lakhs and every officer of the company who is in default shall be
punishable with imprisonment for a term which may extend to six months or with fine
which shall not be less than INR fifty thousand but which may extend to INR five lakh,
or with both.
6. If a company secretary in practice certifies the annual return otherwise than in
conformity with the requirements of this section or the rules made thereunder, he shall be
punishable with fine which shall not be less than INR fifty thousand but which may
extend to INR five lakh.
[Section 92]
12
[Section 94]
day that is not a national holiday. A notice of clear 21 days is required to be given to each
13
shareholder. The new Act now permits notice to be sent through electronic mode and
should also be given to all the directors.
2. The requirement of holding Statutory Meeting has been done away.
3. A general meeting of a company may be called by giving not less than clear twentyone days notice either in writing or through electronic mode in such manner as may be
prescribed.
5. To encourage wider participation of shareholders at general meetings, the Central
Government may prescribe the class or classes of companies in which a member may
exercise his or her right to vote by electronic means.
6. Every listed company shall prepare a report on each AGM including confirmation to
the effect that the meeting was convened, held and conducted as per the provisions of the
Act and the Rules made there under. A copy of the report shall be filed with the Registrar
within 30 days of the conclusion of the AGM.
7. If any default is made in holding a meeting of the company in accordance with
Sections 96 - 98 or in complying with any directions of the Tribunal, the company and
every officer of the company who is in default shall be punishable with fine which may
extend to INR one lakh and in the case of a continuing default, with a further fine which
may extend to INR five thousand for every day during which such default continues.
8. Quorum for an AGM of the public company has been increased from 5 to 30 members
personally present depending upon the number of members as under:
Up to 1000 members
However, in case of private companies, two members personally present shall form the
quorum for the meeting.
14
9. The Board may, whenever it deems fit, call an extraordinary general meeting of the
company. The Board shall, at the requisition made by,
(a) in the case of a company having a share capital, such number of members who hold,
on the date of the receipt of the requisition, not less than one-tenth of such of the paid-up
share capital of the company as on that date carries the right of voting;
(b) in the case of a company not having a share capital, such number of members who
have, on the date of receipt of the requisition, not less than one-tenth of the total voting
power of all the members having on the said date a right to vote,
call an extraordinary general meeting of the company within twenty-one days from the
date of receipt of a valid requisition in regard to any matter.
If the Board does not, within the stipulated period of twenty-one days proceed to call a
meeting for the consideration of that matter on a day not later than forty-five days from
the date of receipt of such requisition, the meeting may be called and held by the
requisitonists themselves within a period of three months from the date of the requisition.
[Sections 96 -110]
Corporate Social Responsibility (CSR)
With a view to engage businesses in contributing to the societies where they operate the
New Companies Act has introduced provisions requiring certain companies to set up CSR
Committee and mandates CSR spending too. Constitution of CSR Committee, adoption
of CSR Policy and spending on CSR has become compulsory for companies having net
worth of INR 500 crore or more, or turnover of INR 1000 crore or more or a net profit of
INR 5 crore or more during any financial year.
Every company satisfying any of the above criteria has to mandatorily spend 2% of the
average net profits of the 3 immediately preceding financial years on CSR activities and
if not spent, an explanation with the reasons thereof shall be required to be given in the
Directors Report.
[Section 135]
15
Appointment of Auditors
Every company has to appoint, at the first AGM, an individual or a firm, being later shall
include LLP, as auditor(s) who shall hold office till the conclusion of the sixth AGM and
thereafter (in case of re-appointment) till the conclusion of every sixth AGM. The
appointment or re-appointment shall be subject to the ratification of the members at every
AGM.
Listed and certain other prescribed classes of companies cannot appoint or reappoint:(a) an individual as auditor for more than one term of five consecutive years; and
(b) an audit firm as auditor for more than two terms of five consecutive years.
Moreover, (i) an individual auditor who has completed his term under clause (a) shall not
be eligible for re-appointment as auditor in the same company for five years from the
completion of his term; and (ii) an audit firm which has completed its term under clause
(b), shall not be eligible for re-appointment as auditor in the same company for five years
from the completion of such term.
[Section 139]
Cost Audit
The prior approval of Central Government is no longer required for appointment of Cost
Auditor as the 2013 Act has dispensed with this requirement. Remuneration of the Cost
Auditor
also
will
also
be
decided
by
the
company.
[Section 148]
Directors
1. Maximum Number of Directors: The maximum number of directors for a public
company has been increased from 12 to 15. However, a company may appoint more than
15 directors after passing a special resolution in this behalf. The requirement of taking
permission of the Central Government, as provided earlier, is done away within 2013 Act
.
[Section 149(1)]
16
2. Resident Director: The new Act requires every company to have on its Board at least
one director who is a resident of India, having stayed in India for a total period of at least
182 days in the previous calendar year. Accordingly, existing companies with all the
foreign
directors
will
need
to
now
add
at
least
one
resident
director.
[Section 149(3)]
3. Woman Director: Such class or classes of companies as may be prescribed shall have
a woman director on their board.
[Section 149(1)]
(b) An independent director shall hold office for a term up to five consecutive years on
the Board of a company, but shall be eligible for reappointment on passing of a special
resolution by the company and disclosure of such appointment in the Board's report. This
means, no independent director shall hold office for more than two consecutive terms, but
such independent director shall be eligible for appointment after the expiration of three
years
of
ceasing
to
become
an
independent
director.
[Section 149(12)]
17
(d) 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)]
(e) Nominee director shall not be considered as an independent director. [Section 149(6)]
5. No. of Directorships: No person shall hold office as a director, including any alternate
directorship, in more than twenty companies at the same time. However, the maximum
number of public companies in which a person can be appointed as a director shall not
exceed ten. 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]
6. Duties of the Directors: 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
1. The first Board meeting is required to be held within 30 days of its incorporation and a
minimum of four Board meetings should be hold every year in such a manner that not
more than 120 days shall intervene between 2 consecutive board meetings.
[Section 171(1)]
2. The participation of directors in a meeting of the Board may be either in person or
through video conferencing or other audio visual means, as may be prescribed, which are
capable of recording and recognizing the participation of the directors and of recording
and storing the proceedings of such meetings along with date and time. Participation of
18
directors through video conferencing shall also be counted for the purpose of quorum.
[Section 171(2)]
3. Not less than 7 days notice is to be given for convening a board meeting which may be
given electronically as well. The board meetings can be held at a shorter notice to transact
urgent business provided that an independent director, if any, is 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.
19
However, key managerial personnel shall not be disentitled from being a director of any
company with the permission of the Board.
Whole-time key managerial personnel holding office in more than one company at the
same time on the date of commencement of this Act, shall, within a period of six months
from such commencement, choose one company, in which he wishes to continue to hold
the office of key managerial personnel:
If the office of any whole-time key managerial personnel gets vacated, the resulting
vacancy shall be filled-up by the Board at its meeting within a period of six months from
the date of arising of such vacancy.
[Section 203]
[Section 41]
constituted
by
Central
Government to provide for dealing with matters relating to accounting and auditing
policies
and
standards
to
be
followed
by
companies
auditors.
and
their
[Section 132]
services
by
an
20
(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 (i) any other kind of services as may be
prescribed.
However, an auditor or audit firm who or which has been performing any non-audit
services on or before the commencement of this Act shall comply with the provisions of
this section before the closure of the first financial year after the date of such commence
ment
[Section 144]
the company secretary in practice, who is in default, shall be punishable with fine which
shall not be less than INR one lakh but which may extend to INR lakh.
[Section 204]
Functions of Company Secretary
Functions of company secretary have been prescribed which include:
a. to report to the Board about compliance with the provisions of this Act, the rules made
thereunder and other laws applicable to the company;
b. to ensure that the company complies with the applicable secretarial standards; and
c.
to
discharge
such
other
duties
as
may
be
prescribed.
[Section 205]
For the purpose of the above section, the expression secretarial standards means
secretarial standards issued by the Institute of Company Secretaries of India constituted
under Section 3 of the Company Secretaries Act, 1980 and approved by the Central
Government.
Constitution of National Company Law Tribunal
The Central Government shall, by notification constitute, with effect from such date as
may be specified therein, a Tribunal to be known as the National Company Law Tribunal
(NCLT), consisting of a President and such number of Judicial and Technical members,
as the Central Government may deem necessary, to be appointed by it by notification, to
exercise and discharge such powers and functions as are, or may be, conferred on it by or
under this Act or any other law for the time being in force.
[Section 408]
affairs of the company are conducted in a manner prejudice to the company or its
members or depositors.
[Section 245]
[Section 230]
3. 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]
Winding up of Company
1. New Act prescribes only two modes of winding up (i) By Tribunal; and (ii) voluntary;
2. Powers of courts have been shifted to Tribunal;
3. Certain new grounds for winding up have been introduced while some have been
omitted;
4. Circumstances in which company may be wound up by Tribunal include:
a. If the company is unable to pay its debts;
b. If the company has, by special resolution, resolved that the company be wound up by
the Tribunal;
c. 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;
d. If the Tribunal has ordered the winding up of the company under Chapter XIX;
e. If on an application made by the Registrar or any other person, authorized by the
Central Government by notification under this Act, the Tribunal is of the opinion that the
affairs of the company have been conducted in a fraudulent manner or the company was
24
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;
f. If the company has made a default in filing with ROC its financial statements or annual
returns for immediately preceding five consecutive financial years; or
g. If the Tribunal is of the opinion that it is just and equitable that the company should be
wound up.
[Sections 271-272]
Powers of Tribunal
The Tribunal may, on receipt of a petition for winding up under Section 272 pass any of
the following orders, namely: (a) dismiss it, with or without costs; (b) make any
interim order as it thinks fit; (c) appoint a provisional liquidator of the company till the
making of a winding up order; (d) make an order for the winding up of the company with
or without costs; or (e) any other order as it thinks fit:
However, an order under this sub-section shall be made within ninety days from the date
of presentation of the petition.
Provided further that before appointing a provisional liquidator, the Tribunal shall give
notice to the company and afford a reasonable opportunity to it to make its
representations, if any, unless for special reasons, to be recorded in writing, the Tribunal
thinks fit to dispense with such notice.
Provided also that the Tribunal shall not refuse to make a winding up order on the
ground only that the assets of the company have been mortgaged for an amount equal to
or in excess of those assets, or that the company has no assets.
Where a petition is presented on the ground that it is just and equitable that the company
should be wound up, the Tribunal may refuse to make an order of winding up, if it is of
the opinion that some other remedy is available to the petitioners and that they are acting
25
unreasonably in seeking to have the company wound up instead of pursuing the other
remedy.
[Section 273]
It should be noted that the important provisions discussed above give a snapshot view of the
2013 Act. For a thorough understanding of the new legislation, kindly refer the bare Act of
Company Law, 2013.
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