Synopsis of Companies Act, 2013

Companies Act, 2013

An Act to consolidate and amend the law relating to Companies

The Companies Bill 2012 was passed in Rajya Sabha on 8 August 2013 (during the monsoon session of the parliament). Earlier, the bill was passed by the Lok Sabha on 18 December 2012. It has also got the Presidential assent and has now become the Companies Act, 2013.

The existing Companies Act, 1956 has been amended at least 25 times in the past 57 years, with many of its provisions found to be outdated and inadequate. The passage of the bill, which is spread across nearly 30 sections and over 300 pages, was widely welcomed by stakeholders, including industry bodies, political leaders and consultants.

The next step is to finalize the Rules and define the procedural aspects of this Act. The Ministry of Corporate Affairs has put the draft rules for public comments. The draft rules are available at the website of Ministry at www.mca.gov.in. The relevant portions of the Act will be notified, in a step by step manner, along with the rules applicable.

Corporate Affairs Minister Sachin Pilot had earlier said the government plans to adopt a transparent and interactive process to finalise a detailed set of rules to be adopted under the new Companies Bill.

The new Act comprises of 29 chapters, 470 Sections and 7 Schedules as against 658 sections and 14 Schedules in the Companies Act, 1956. In 470 Sections the word “as may be prescribed” has been used at around 336 places.

The Act extents the whole of India and different provisions of the Act will be applicable on such date(s) as the Central Government, by notification in the official gazette, may appoint and different dates may be appointed for different provisions of the Act.

Several significant concepts have been defined for the first time under Companies Act, 2013 such as:

Financial Statement in relation to a company, includes—

(i) a balance sheet as at the end of the financial year;

(ii) a profit and loss account, or in the case of a company carrying on any activity not for profit, an income and expenditure account for the financial year;

(iii) cash flow statement for the financial year;

(iv) a statement of changes in equity, if applicable; and

(v) any explanatory note annexed thereto

Provided that the financial statement, with respect to One Person Company, small company and dormant company, may not include the cash flow statement; 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 fifty lakh rupees 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, 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;

(iv) the Chief Financial Officer; and

(v) such other officer as may be prescribed;

One Person Company means a company which has only one person as a member;

Promoter means a person—

(a) who has been named as such in a prospectus or is identified by the company in the annual return referred to in section 92; or

(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-clause (c) shall apply to a person who is acting merely in a professional capacity;

Small Company means a company, other than a public company,—

(i) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than five crore rupees; or

(ii) turnover of which as per its last profit and loss account does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than twenty crore rupees:

Provided that nothing in this clause shall apply to—

(A) a holding company or a subsidiary company;

(B) a company registered under section 8; or

(C) a company or body corporate governed by any special Act;

Important provisions at a glance:

Classification & Registration:

• Concept of One Person Company (OPC limited) introduced;

• Concept of Small companies have been introduced which shall be subjected to a lesser stringent regulatory framework;

• Provision for Conversion of Companies already registered has been introduced;

• Registration process has been made faster and compatible with e-governance.

• For the first time, articles may contain provisions for entrenchment;

• A declaration, in the prescribed form, required to be filed with the Registrar at the time of registration of a company that all the requirements of the Act in respect of registration and matters precedent or incidental thereto have been complied with, will be required to signed by both - a person named in the articles as a director, manager or secretary of the company as well as by an advocate, a chartered accountant, cost accountant or company secretary in practice, who is engaged in the formation of the company.

Registered office:

• A company shall, on and from the 15th day of its incorporation and at all times thereafter have a registered office capable of receiving and acknowledging all communications and notices as may be addressed to it.

• Company is required to furnish to the Registrar verification of its registered office within 30 days of its incorporation in the prescribed manner.

• Where a company has changed its name(s) during the last two years, it shall paint or affix or print, along with its name, the former name or names so changed during the last two years.

• Notice of change, verified in the manner prescribed, shall be given to the Registrar, within 15 days of the change, who shall record the same.

Commencement of business:

• A company having a share capital shall not commence business or exercise any borrowing powers unless a declaration is filed with Registrar 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 Rs. five lakhs in the case of public company and one lakh in case of a private company.

• the company has filed with the Registrar the verification of its registered office.

Acceptance of Deposits:

Under new Companies Act, there are elaborated provisions for acceptance and / or renewal of deposits. 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 Reserve Bank of India, 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 fulfillment of the following conditions, namely:—

(a) issuance of a circular to its members including therein a statement showing the 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 in a scheduled bank in a separate bank account to be called as deposit repayment reserve account;

(d) providing such deposit insurance in such manner and to such extent as may be prescribed;

(e) certifying that the company has not committed any default in the repayment of deposits accepted either before or after the commencement of this Act or payment of interest on such deposits; and

(f) providing security, if any for the due repayment of the amount of deposit or the interest thereon including the creation of such charge on the property or assets of the company:

Provided that in case where a company does not secure the deposits or secures such deposits partially, then, the deposits shall be termed as ‘‘unsecured deposits’’ and shall be so quoted in every circular, form, advertisement or in any document related to invitation or acceptance of deposits.

Registration of Charges:

Companies Act, 2013 requires the Company to register the particulars of EVERY CHARGE created by it on its property or assets or any of its undertaking including pledge.

Annual Return:

Every company shall prepare a return in the prescribed form containing the particulars as they stood on the close of the financial year. Annual Return is required to be signed by:

1. A director and the Company Secretary, or where there is no Company Secretary, by a Company Secretary in whole-time practice.

2. It means that now in respect of all the companies (except one person companies and small companies), whether private or public, listed or unlisted, the annual return has to be signed by either a company secretary in employment or by a company secretary in practice i.e. where no Company Secretary is appointed by the company, the Annual Return is compulsorily required to be signed by the Company Secretary in practice.

3. in addition to the above, the annual return, filed by a listed company or by a company having such paid-up capital and turnover as may be prescribed, shall be certified by a company secretary in practice that the annual return discloses the facts correctly and adequately and that the Company has complied with all the provisions of the Act.

4. It means, in case of a listed company and other prescribed companies, even if the Annual Return is signed by the Company Secretary in employment, it is further required to be certified by the Company Secretary in Whole time practice.

5. In relation to a One Person Company and 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.

6. Every listed company shall file a return in the prescribed form with the Registrar with respect to change in the number of shares held by promoters and top ten shareholders of such company, within fifteen days of such change.

Place of Keeping Registers:

The new Act permits a company to keep its registers or copies of returns at any other place other than the registered office in India (not necessarily within the city, village or town in which the registered office is situated) if following conditions are fulfilled:

1. More than 10% of the total members entered in the register of members reside at that place;

2. The keeping of registers or copies at that place is approved by a special resolution passed by the members in the general meeting;

3. The Registrar has been given a copy of the proposed special resolution in advance;

General Meeting:

1. Every AGM shall be called during business hours, i.e. between 9 A.M. to 6 P.M. on any day that is not a National Holiday;

2. The Concept of Statutory Meeting has been omitted;

3. First AGM is required to be held within 9 months from the end of the first financial year.

4. A general meeting of a company may be called by giving not less than clear twenty-one 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 their vote at meetings by electronic means.

6. One person companies have been given the option to dispense with the requirement of holding an AGM.

7. Every listed company shall prepare a Report on each Annual General Meeting 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.

8. Quorum of the public company has been increased from 5 to 30 members personally present depending upon the number of members as under:

1. Upto 1000 members =   5 members personally present

2. 1001 to 5000 members = 15 members personally present

3. More than 5000 members  = 30 members personally present

Corporate Social Responsibility:

Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director. The Board's report shall disclose the composition of the Corporate Social Responsibility Committee.

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 Corporate Social Responsibility.

Auditors:

Every company has to appoint, at the first Annual General Meeting, individual or a firm (firm shall include LLP) as an auditor who shall hold office till the conclusion of sixth Annual General Meeting and thereafter till the conclusion of every sixth AGM. Accordingly, the appointment of auditors is to be made for 5 years. The appointment is subject to the ratification of the members at every annual general meeting.

Listed and certain other prescribed classes of companies cannot reappoint:-

(a) an individual as auditor for more than one term of five consecutive years;

(b) an audit firm as auditor for more than two terms of five consecutive years:

All notices of, and other communications relating to, any general meeting shall be forwarded to the auditor of the company, and the auditor shall attend either by himself or through his authorised representative, who shall also be qualified to be an auditor, any general meeting and shall have right to be heard at such meeting on any part of the business which concerns him as the auditor.

Cost Audit:

The previous approval of Central Government is no longer required for appointment of Cost Auditor as section 148 of the Act has dispenses with this requirement. Remuneration of the Cost Auditor also will be decided by the members.

Directors:

1. The Board shall consists individuals as directors;

2. Maximum 15 directors. Company may appoint more than 15 directors after passing special resolution in this regard;

3. Such class or classes of companies as may be prescribed shall have a woman director;

4. Every company shall have at least one of the directors who has stayed in India for 182 days or more in the previous calendar year;

5. Every listed company shall have atleast 1/3rd independent directors;

6. 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. 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;

7. Every person proposed to be appointed as a director by the company in general meeting or otherwise, shall furnish his Director Identification Number and a declaration that he is not disqualified to become a director under this Act;

8. Consent is to be filed within 30 days and the director shall act as director only after filing of such consent;

9. A person who is not a retiring director be eligible for appointment to the office of a director at any general meeting, if he, or some member intending to propose him as a director, has, not less than fourteen days before the meeting, left at the registered office of the company, a notice in writing under his hand signifying his candidature as a director or, as the case may be, the intention of such member to propose him as a candidate for that office, along with the deposit of one lakh rupees or such higher amount as may be prescribed which shall be refunded to such person or, as the case may be, to the member, if the person proposed gets elected as a director or gets more than twenty-five per cent. of total valid votes cast either on show of hands or on poll on such resolution.

10. No person shall hold office as a director, including any alternate directorship, in more than twenty companies at the same time. Provided that the maximum number of public companies in which a person can be appointed as a director shall not exceed ten. The members of a company may, by special resolution, specify any lesser number of companies in which a director of the company may act as directors.

11. The provisions of qualification shares have been omitted;

Meeting of the Board:

1. Every Company shall hold first meeting of its Board of Directors within 30 days of its incorporation;

2. Four meetings of the Board of Directors should be hold every year in such a manner that not more than 120 days shall intervene between 2 consecutive board meetings;

3. 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;

4. Not less than 7 days notice is to be given for board meeting which may be given electronically;

5. Participation of Directors through video conferencing shall also be counted for the purpose of quorum;

6. Prohibition on insider trading on Directors and Key Managerial Personnel;

Managerial Personnel:

1. No company shall appoint or re-appoint any person as its managing director, whole-time director or manager for a term exceeding five years at a time;

2. Most of the provisions of schedule XIII of earlier Companies Act, 1956 have been incorporated in this Chapter;

3. No person shall be appointed as MD as well as Chairperson at a same time except articles provides otherwise;

4. Every company belonging to such class or classes of companies as may be prescribed shall have the following whole-time key managerial personnel,—

a. managing director, or Chief Executive Officer or manager and in their absence, a whole-time director;

b. company secretary; and

c. Chief Financial Officer

Every whole-time key managerial personnel of a company shall be appointed by means of a resolution of the Board containing the terms and conditions of the appointment including the remuneration. If the office of any whole-time key managerial personnel is vacated, the resulting vacancy shall be filled-up by the Board at a meeting of the Board within a period of six months from the date of such vacancy.

Company Secretary & Secretarial Audit:

1. Every listed company and a company belonging to other class of companies as may be prescribed shall annex with its Board’s report, a secretarial audit report, given by a company secretary in practice, in such form as may be prescribed.

2. Functions of Company Secretary have been prescribed which includes:

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;

c. to discharge such other duties as may be prescribed.

Compromises, Arrangements and Amalgamations:

1. No compromise or arrangement shall be sanctioned by the Tribunal unless a certificate by the company’s auditor has been filed with the Tribunal to the effect that the accounting treatment, if any, proposed in the scheme of compromise or arrangement is in conformity with the  accounting standards prescribed.

2. Separate provisions have been provided for the merger or amalgamation between two small companies or between a holding company and a wholly owned subsidiary company.

3. Provision for cross border amalgamations between Indian Companies and companies incorporated in the jurisdictions of such countries as may be notified from time to time by the Central Government.

4. Specific provision for purchase of minority shares in case an acquirer or person acting in concert with the acquirer become holder of 90% or more of the issued capital of the company, either directly or by virtue of any amalgamation, share exchange, conversion of securities or any other reason.

Winding up:

1. 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 and some has been omitted;

4. Circumstances in which company may be wound up by Tribunal:

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 authorised 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 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 the Registrar 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.

Restructuring and Liquidation:

The entire rehabilitation and liquidation process has been made time bound.

1. Winding up is to be resorted to only when revival is not feasible.

2. The Tribunal may appoint an interim administrator or a company administrator from the panel of Company Secretaries, CAs, CWAs, etc. maintained by the Central Government.

3. The Company Administrator shall prepare a scheme of revival and rehabilitation.

4. If revival scheme is not approved by the creditors, the Tribunal shall order for winding up of the company

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 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.