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| 1 AN INSIGHT

COMPANIES BILL 2012

Presented By CA PRATIK ARORA

BACKGROUND

ADAPTATION

STRUCTURE

TIMELINE

KEY HIGHLIGHTS

NEW / AMENDED TERMS

NEW CONCEPTS

AUDIT & AUDITORS

PENAL PROVISIONS

LOANS & INVESTMENTS

DIRECTORS & KMP

CORPORATE SOCIAL RESPONSIBILITY

MERGER & ACQUISITIONS

OTHER KEY ISSUES.

PRESENTATION STRUCTURE

The Companies Act 1956 was enacted with the object to consolidate the existing

corporate laws and to provide a new basis for corporate operation in independent

India.

With enactment of this legislation in 1956, the act has since provided the legal

framework for corporate entities in India.

The need for streamlining this Act was felt from time to time as the corporate sector

grew in pace with the Indian economy, with as many as 24 amendments taking place

since 1956. Major amendments to the Act were made based on recommendations of

various committees.

The Companies Bill 2012 is an embodiment of the changes/ revisions required to

reflect the new corporate scenario in India.

BACKGROUND

ADAPTATION Massive increase in number of Companies from about 30,000 in 1956 to nearly 8

lakhs; (How many active and compliant!!!)

Modernization & regulatory harmony in the wake of corporate scandals; (Satyam

Saga & Sahara OFCD’s issue)

The existing Companies Act, 1956 is a voluminous document with 781 sections

containing provisions that cover aspects which are essentially procedural in nature.

This format has also resulted in the law becoming very rigid since any change

requires an amendment of the law through the parliamentary process.

The law has failed to take into account the changes in the national and international

economic scenario speedily.

Structure of the Companies Bill, 2012

STRUCTURE

470 CLAUSES

29 CHAPTERS

95 DEFINITIONS

7 SCHEDULES

AN INSIGHT

Companies Bill 2008 was introduced on 23rd October 2008 in the Lower House to replace existing Companies Act, 1956

Companies Bill, 2009 was reintroduced on 3rd August 2009 in the Lok Sabha to replace existing Companies Act 1956 (with minor modifications to the Companies Bill 2008)

Report of the SCF on Companies Bill, 2009 was introduced in the Lok Sabha on 31st August 2010

2008 2009 2010 2011

Due to the dissolution of the 14th Lok Sabha, the Companies Bill 2008 has lapsed

Bill was referred to the Standing Committee on Finance of the Parliament (the SCF) for examination and report on 9th September 2009

Companies Bill 2011 introduced in the Lok Sabha on 14th December 2011

TIMELINE

KEY HIGHLIGHTS • Number of permissible members in a private company has been raised to 200

from 50.

• The concept of One Person Company has been introduced.

• Provisions relating to further issue of capital to be applicable to all companies.

• Shares cannot be issued at a discount except sweat equity shares.

• Time gap between 2 buy-backs shall be minimum 1 year.

• Any deposit accepted before the commencement of 2012 Act or any interest due

thereon to be repaid within 1 year from the commencement of 2012 Act or from

the date on which such payments are due, whichever is earlier.

• Stringent norms provided for acceptance of fresh deposits including creation of

deposit repayment reserve account of 15% of the amount of deposits maturing in

the Current Year and the next Financial Year.

• National Financial Reporting Authority (NFRA) to be constituted by Central

Government to provide for matters relating to accounting and auditing policies

and standards Consolidation of financial statements made mandatory.

• 2% of average net profits of last 3 years to be mandatorily spent on Corporate

Social Responsibility for specified class of companies.

• Mandatory transfer of profits to reserves for dividend declaration done away with.

Companies may voluntarily transfer a portion of its profits to reserves.

• Individual auditors are to be compulsorily rotated every 5 years and audit firm

every 10 years in listed companies & certain other classes of companies, as may

be prescribed.

• One of the directors of a company shall be a person who has stayed in India for

182 days or more.

KEY HIGHLIGHTS

• Prescribed class of companies to have at least 1 woman director. Existing

companies to comply with this requirement within 1 year.

• Independent Director (ID) is not liable to retire by rotation.

• A Chairperson can be an MD or CEO at the same time, if the Articles of the

company permits or if the company does not have multiple businesses or where

the company has multiple businesses and has appointed 1 or more CEO for

each such business

• Provisions for loan to directors applicable to private companies and need to

obtain CG approval for such loans removed.

• Restriction on multilayer investment subsidiaries.

• Rate of interest on loan granted shall not be lower than the prevailing yield of 1

year, 3 year, 5 year or 10 year. Government Security closest to the tenure of the

loan.

KEY HIGHLIGHTS

• Requirement of obtaining CG approval for related party transactions done away

with.

• Approval of CG required for certain managerial remuneration.

• Indian company can be merged with a foreign company.

• Fast track merger for small companies and holding-WOS introduced.

• Person / group of persons holding 90% or more equity shares by virtue of

amalgamation etc. can purchase the remaining equity shares of the company

from minority shareholders.

• Inability to pay debts will be considered as criteria for determining a sick

company .

• Provisions of revival and rehabilitation of sick companies to apply to all

companies and not only to an "industrial company“

KEY HIGHLIGHTS

NEW /AMENDED TERMS

PROMOTERS RELATED PARTY SMALL COMPANY ONE PERSON COMPANY

FOREIGN COMPANY

CONTROL LISTED COMPANY

DORMANT COMPANY

FINANCIAL YEAR ASSOCIATE COMPANY

OFFICER IN DEFAULT

SUBSIDIARY

NEW CONCEPTS

NEW CONCEPTS

ONE PERSON COMPANY Under the Companies Act, 1956, at least two people are required to form a company. The new concept will provide an opportunity to Indian entrepreneurs to enter the corporate world without even adding a family member to the venture, which they, at times, do just for the sake of a second name.

An OPC can be formed by subscribing

the name of a person to the memorandum and complying with the requirements of the Act in respect of registration. As regards the name of an OPC, new Bill provides that the words “one person company” shall be mentioned in brackets below the name of such a company, wherever its name is printed, affixed or engraved.

NEW CONCEPTS

SMALL COMPANY Company other than a public company, Having paid up share capital not exceeding fifty lakh rupees or such amount, not exceeding rupees five crores, as may be prescribed . Or having turnover not exceeding rupees two crores or such amount not exceeding rupees twenty crores, as may be prescribed, as per its last profit and loss account .

Various relaxation in terms of reporting

requirement, board meeting and procedure for mergers/amalgamation have been introduced. However, a holding / subsidiary or a

section 8 Company( section 25 as per Companies Act 1956) cannot be a small company.

DORMANT COMPANY A company formed for a future project or hold an asset or intellectual property and has no significant accounting transaction such a company or an inactive company can apply to the registrar for the status of dormant company. Company other than a public company. The registrar on consideration of the application shall allow the status of dormant company to the applicant and issue such certificate as may be prescribed to that effect. The registrar shall maintain the register of dormant company in the form as may be prescribed.

The dormant company shall have a

minimum number of directors , files such documents and pay such annual fees as may be prescribed to the registrar to retain its dormant status in the register.

The registrar will strike off the name of

that company form the register of dormant company when it fails to comply with the requirement of this section.

NEW CONCEPTS

NEW CONCEPTS

COMPLIANCE REQUIREMENTS PARTICULARS ONE PERSON

COMPANY SMALL COMPANY DORMANT

COMPANY

Cash flow requirement Not applicable Not applicable Not applicable

Annual return CS/ Director Not applicable

Board meetings One meeting in each half of the calendar year and gap not less than 90 days

Quorum Not applicable 2 members personally present Not applicable

Others Limited liability and flexibility in compliance

Relatively less Compliance and easy to operate

Can be converted to an Active Co later

AUDIT & AUDITORS

AUDIT & AUDITORS Appointment of Auditor in unlisted companies

APPOINTMENT PERIOD OF APPOINTMENT    

At first AGM to hold office till conclusion of 6th AGM subject to ratification by members at every AGM Subsequent to hold office till conclusion of 6th meeting, subject to ratification by members at every AGM

Appointment of Auditor in listed and specified class of companies

APPOINTMENT PERIOD OF APPOINTMENT    

Individual 1 term of 5 consecutive years. Audit Firm 2 terms of 5 consecutive years

Cooling off period of 5 years before next appointment

AUDIT & AUDITORS A limit of 20 audits per partner without any distinction between public and private

companies, as against the current ICAI imposed limit of 30 audits.

Ratification of appointment of auditors, by the members at every annual

general meeting of the company, has been made mandatory

Shareholders at liberty to decide by passing resolution that audit partner and the

audit team, be rotated every year

Company bound to re-open and recast its financial statements if application

having been made by following and an order has been made by the NCLT or a

other Court.

Consolidated financial statements of companies are required to also include

financial statements of associate companies and joint ventures

AUDIT & AUDITORS Class action suits, can be filed against auditors to claim damages or

compensation for improper or misleading statement of particulars in the audit report or for fraudulent, unlawful or wrongful actions.

Auditor cannot provide following services "directly or indirectly" to the company or its holding company or subsidiary company, namely:— ‒ accounting and book keeping services; ‒ internal audit; ‒ design and implementation of any financial information system; ‒ actuarial services; ‒ investment advisory services; ‒ investment banking services; ‒ rendering of outsourced financial services; ‒ management services; and ‒ any other kinds of services as may be prescribed.

An auditor or audit firm who or which has been performing any non-audit services on or before the commencement of 2012 Act shall comply with the above before the closure of the 1st FY after the date of such commencement.

PARTICULARS UNDER COMPANIES ACT,1956 UNDER COMPANIES BILL

Mandatory rotation No mandatory rotation

Mandatory rotation ofIndividual Auditor afterterm of 5 yrs & AuditFirm after 10 yrs

Whistleblower No such provision Immediate reporting byAuditors to Government incase of fraud

Restriction on services

No such provisions

Prohibition of renderingclassified services byAuditors toCo./Holding/Subsidiary

Other disqualification

Sec 226 prescribes qualification & disqualification criteria Additional disqualification of Auditors

Additional disqualificationof Auditors

AUDIT & AUDITORS APPOINTMENT OF AUDITORS -COMPARISON

AUDIT & AUDITORS RESIGNATION & REMOVAL OF AUDITORS PARTICULARS UNDER COMPANIES ACT,1956 UNDER COMPANIES BILL

Reasons for resignation

No such provision

Statement indicating thereasons for resignation shallbe filed within 30 days tocompany, Registrar & CAGin case of Governmentcompanies

Special resolution on removal of auditor

No special resolution for removing auditor on expiry of tenure

Special resolution requiredfor appointment of auditorother than retiring auditor

Change of auditor by Tribunal

No such provisions

Tribunal can suo-moto or onapplication from Centralgovernment/ any person candirect change of Auditor

AN INSIGHT

PENAL PROVISIONS

PENAL PROVISIONS

UNDER COMPANIES ACT 1956 Penalty for non- compliance by auditor with sections 227 and 229. If any auditor' s report is made, or any document of the company is signed or authenticated, otherwise than in conformity with the requirements of sections 227 and 229, the auditor concerned, and the person, if any, other than the auditor who signs the report or signs or authenticates the document, shall, if the default is willful, be punishable with fine which may extend to one thousand rupees.

If default is made by a company in complying with any of the provisions contained in sections 225 to 231, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to five thousand rupees.

PENAL PROVISIONS

If any of the provisions of sections 139 to 146 is contravened, the company shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than ten thousand rupees but which may extend to one lakh rupees, or with both

COMPANIES BILL 2012

If an auditor of a company contravenes any of the provisions of section 139,section 143, section 144 or section 145, the auditor shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees.

LOANS & INVESTMENTS

LOANS & INVESTMENTS PARTICULARS COMPANIES ACT 1956 COMPANIES BILL 2012

Applicability Not applicable to Private Company Applicable to all Companies

Coverage

Loans given by one company to another company Guarantees and securities in favour of a person who has given any loan to the company Acquiring by subscription or otherwise, securities of a company by other company

Loan to any person or otherbody corporate Guarantee or provide securityin connection with a loan toany other body corporate orperson Acquiring by subscription orotherwise, securities of anyother body corporate.

Exemptions Exemption available for loans, investments and guarantees given by Holding Co to its WOS

No such exemption

Exemptions

Exemption available to infrastructure companies for loans, provision of security and guarantee, investments

The exemption available toinfrastructure companiescontinues for loans, provisionof security and guarantee butnot for investments

LOANS & INVESTMENTS PARTICULARS COMPANIES ACT 1956 COMPANIES BILL 2012

Rate of loan At the prevailing bank rate

At a rate not lower than theprevailing yield of the 1, 3, 5or 10 years G-Sec closest to the tenor of

the loan

Upper limit/ Capping

Higher of 60%(Paid-up share capital+ free reserves) or 100% (free reserves and)

Higher of 60% (Paid-up sharecapital+ free reserves +Securities premium) or 100%(free reserves and securitiespremium)

Approval for exceeding the limit

No change. Prior approval by Special resolution passed in general meeting

No change. Prior approval bySpecial resolution passed ingeneral meeting

DIRECTORS & KMP

DIRECTORS & KMP Duties of the directors towards a company prescribed (not prescribed in the

companies Act 1956.

Maximum number of directors can be 15. This number can go up by passing a

special resolution.

In certain prescribed companies at least one woman director should be

appointed.

Every company to have a resident director , i.e. a director who has stayed in

India for a minimum 182 days in the previous calendar year.

Every company belonging to such class or description of companies as may be

prescribed shall have Managing Director (MD) or chief Executive.

Every whole time KMP to be appointed by BOD meeting .

A whole time KMP not to hold office in more than one company at a time.

Any vacancy in the office of any KMP to be filled by the BOD within 6 months.

DIRECTORS KMP’S & GOVERNANCE

Concept of independent directors has been introduced for the first time in

Company Law.

All listed companies shall have at least one-third of the Board as independent

directors.

Such other class or classes of public companies as may be prescribed by the

Central Government shall also be required to appoint independent directors.

The independent director has been clearly defined in the Bill.

Nominee director nominated by any financial institution, or in pursuance of any

agreement, or appointed by any government to represent its shareholding shall

not be deemed to be an independent director.

INDEPENDENT DIRECTOR

An independent director shall not be entitled to any remuneration other than

sitting fee, reimbursement of expenses for participation in the Board and other

meetings and profit related commission as may be approved by the members.

An Independent director shall not be entitled to any stock option.

Only an independent director can be appointed as alternate director to an

independent director.

DIRECTORS KMP’S & GOVERNANCE

INDEPENDENT DIRECTOR

CORPORATE SOCIAL RESPONSIBILITY

CORPORATE SOCIAL RESPONSIBILITY

PARTICULARS COMPANIES BILL 2012

Who is covered Companies that have a turnover of Rs 1,000 crore, or Have a net worth of Rs 500 crore, or That have recorded a net profit of Rs 5 crore

Provisions These companies are expected to spend 2 per cent of their profit in preceding three financial years towards CSR

Punishment

The bill says they are “expected” to …meaning it is not compulsory to spend money . But , the same bill also provides that -Board of director will be responsible for seeing that

company spends money for CSR. -It is compulsory to send report on the CSR spending to the

corporate affairs minister. - If company is not spending, it has to give reasons for it.

MERGER & ACQUISITIONS

MERGER & ACQUISITIONS Merger of Indian companies with companies incorporated in foreign jurisdictions (as may be notified separately by central government) is permitted. Only the persons holding 10 per cent or above of relevant shareholding or having outstanding debt of 5% or above in the company are now entitled to oppose a scheme of arrangement. Bill requires a company to file certificate from its auditors with the tribunal to the effect that accounting treatment in the scheme is in accordance with prescribed accounting standards. The Bill also has provisions stating that in case of merger of a listed company into an unlisted company , the transferee company shall remain unlisted until it becomes listed company. Bill Proposes that where a transferor company is dissolved pursuant to an arrangement , the fees paid by transferor company on its authorized share capital shall be set-off against fees paid by transferee company.

PARTICULARS COMPANIES ACT 1956 COMPANIES BILL 2012

Merger of Indian Co into Foreign Co Not permitted

Permitted Prior approval of the RBIrequired before any foreigncompany merges with an Indiancompany or vice versa

Merger or amalgamation between small companies or between holding companies and a WOS or prescribed companies

No such provision

Proposed new process ofmerger amalgamation of smallcompanies or group companies involves theapproval of shareholdersholding at least 90% of theshares of the company

MERGER & ACQUISITIONS

PARTICULARS COMPANIES ACT 1956 COMPANIES BILL 2012

Auditors certificate No such provision for Private Cos

Auditor to certify accounting treatment in the scheme is in conformity with the AS prescribed under Clause 133 of the Bill

Dispensation of the meeting of creditors

Possible to seek approval of dispensation based upon consent letters received

Creditor or class of creditors, having at least 90% value agree and confirm, by way of an affidavit to the scheme

MERGER & ACQUISITIONS

OTHER KEY ISSUES Recognition of Electronic form of Books Of accounts.

Provision of reopening /recasting of books of accounts

Provision of revision of financial statement

Authority to prescribe Accounting Standards now vested with central government.

Appointment of registered valuer made mandatory

Appointment of registered valuer to be effective by audit committee or Board of

Directors.

Exit opportunity to the dissenting shareholders of transferor company/listed

company being merged with an unlisted company.

Submission of valuation report by liquidator in the event where tribunal has made

a winding up order

Acquisition of minority shareholding by holders of at least 90% of issued equity

share capital of a company