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The Companies Act – Being a Game changer

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The companies Act is a stock short title used for legislation in India, Malaysia, South Africa, and the United Kingdom in relation to company law. Company law- it means a group of person who took their need together. In India laws relating to companies are contained in the companies’ act 1956. The Companies Act 1956 is administered by the Government of India through the Ministry of Corporate Affairs and the Offices of Registrar of Companies, Official Liquidators, Public Trustee, Company Law Board, Director of Inspection, etc. The Act is 658 sections long. The Act contains provisions about Companies, directors of the companies, memorandum and articles of associations, etc. This act states and discusses every single provision requires or may need to govern a company. It mentions what type of companies their differences, constitution , management, members , capital, how should the shares should be issues, debentures, registration of charge, at the end of the act it concludes about the winding up of a company, discussing the situations a company needs to be winded up. The ways it should be done by volunteer or through courts. Since its commencement, it was amended many times, in which amendment of 1988, 1990, 1996, 2000, 2011and 2013 were notable.

Provisions of the Act

Article 3 of the act describes the definition of a company, the types of companies that can be formed e.g. public, private, holding, subsidiary, limited by shares, unlimited etc. Further on in Article 10 E it explains about the constitution of board of company, it explains the companies’ name, the jurisdictions, tribunals, memorandums and the changes that can be made. Article 26 and further on explains about the article of association of the company which a very important part when forming a company and various amendments that can be made. Article 53 to 123, it explains about the shares, the share holders their rights, it explains about debentures, share capital, their procedure and powers within the company. Article 146 to 251 it explains about the management and administration of the company and the provisions registered office and name. Article 252 to 323 elaborates on the provisions of duties, powers responsibility and liability of the directors in the company which is a very integral part of the company when it is formed. Article 391 to 409 explains about the arbitration, the prevention and obsession of the company Article 425 to 560 it explains the procedure of winding up of a company, the preventions the rights of shareholders, creditors, methods of liquidations, compensation provided and ways of winding up the company. Article 591 and further on explains about setting up companies outside India and their fees and registration procedure and all.

Company objective and legal procedure based on the Act

The basic objectives underlying the law are:

  • A minimum standard of good behavior and business honesty in company promotion and management.
  • Due recognition of the legitimate interest of shareholders and creditors and of the duty of managements not to prejudice to jeopardize those interests.
  • Provision for greater and effective control over and voice in the management for shareholders.
  • A fair and true disclosure of the affairs of companies in their annual published balance sheet and profit and loss accounts.
  • Proper standard of accounting and auditing.
  • Recognition of the rights of shareholders to receive reasonable information and facilities for exercising an intelligent judgment with reference to the management.
  • A ceiling on the share of profits payable to managements as remuneration for services rendered.
  • A check on their transactions where there was a possibility of conflict of duty and interest.
  • A provision for investigation into the affairs of any company managed in a manner oppressive to minority of the shareholders or prejudicial to the interest of the company as a whole.
  • Enforcement of the performance of their duties by those engaged in the management of public companies or of private companies which are subsidiaries of public companies by providing sanctions in the case of breach and subjecting the latter also to the more restrictive provisions of law applicable to public companies.

The transition from Companies Act, 1956 to Companies Act, 2013 has been an eventful one as several bills and committees have deliberated on the impact of global corporate law jurisprudence on Indian corporate houses. In terms of global competitiveness, the new Companies Act has important provisions that are unique to India. Some of the game-changing provisions include mandatory women directors, corporate social responsibility (CSR), audit reporting requirements and One Person Company.

The companies act 2013

The Companies Act 2013 passed by the Parliament received the assent of the President of India on 29th August 2013. The Act consolidates and amends the law relating to companies. The Companies Act 2013 was notified in the Official Gazette on 30th August 2013. Some of the provisions of the Act have been implemented by a notification published on 12th September, 2013. The provisions of Companies Act 1956 are still in force. Parliament approved the long-awaited overhaul of legislation governing Indian companies on 9 August 2013. The new law is aimed at easing the process of doing business in India and improving corporate governance by making companies more accountable. The 2013 Act also introduces new concepts such as One Person Company, small company, dormant company and corporate social responsibility (CSR) etc. The Act introduces significant changes in the provisions related to governance, e-management, compliance and enforcement, disclosure norms, auditors, mergers and acquisitions, class action suits and registered valuers. The act is now in force w.e.f. 1st April 2014.There are more than 450 + sections, 7 schedules and 29 chapters.

Highlights on companies act 2013

  • Immediate Changes in letterhead, bills or other official communications, as if full name, address of its registered office, Corporate Identity Number (21 digit number allotted by Government), Telephone number, fax number, Email id, website address if any.
  • One Person Company (OPC): It’s a Private Company having only one Member and at least One Director. No compulsion to hold AGM. Conversion of existing private Companies with paid-up capital up to Rs 50 Lacs and turnover up to Rs 2 Crores into OPC is permitted.
  • Woman Director: Every Listed Company /Public Company with paid up capital of Rs 100 Crores or more / Public Company with turnover of Rs 300 Crores or more shall have at least one Woman Director.
  • Resident Director: Every Company must have a director who stayed in India for a total period of 182 days or more in previous calendar year.
  • Accounting Year: Every company shall follow uniform accounting year i.e. 1st April -31st March.
  • Loans to director – The Company CANNOT advance any kind of loan / guarantee / security to any director, Director of holding company, his partner, his relative, Firm in which he or his relative is partner, private limited in which he is director or member or any bodies corporate whose 25% or more of total voting power or board of Directors is controlled by him.
  • Articles of Association- In the next General Meeting, it is desirable to adopt Table F as standard set of Articles of Association of the Company with relevant changes to suite the requirements of the company. Further, every copy of Memorandum and Articles issued to members should contain a copy of all resolutions / agreements that are required to be filed with the Registrar.
  • Disqualification of director- All existing directors must have Directors Identification Number (DIN) allotted by central government. Directors who already have DIN need not take any action. Directors not having DIN should initiate the process of getting DIN allotted to him and inform companies. The Company, in turn, has to inform registrar.
  • Financial year- Under the new Act, all companies have to follow a uniform Financial Year i.e. from 1st April to 31st March. Those companies which follow a different financial year have to align their accounting year to 1st April to 31st March within 2 years. It is desirable to do the same as early as possible since most the compliances are on financial year basis under the new Companies Act.
  • Appointment of Statutory Auditors- Every Listed Company can appoint an individual auditor for 5 years and a firm of auditors for 10 years. This period of 5 / 10 years commences from the date of their appointment. Therefore, those companies have reappointed their statutory auditors for more than 5 / 10 years; have to appoint another auditor in Annual General Meeting for year 2014.
  • Dormant Company- The Companies Act, 2013 introduces a concept of a dormant company within its ambit, the concept is defined as where a company is formed and registered under this Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction, such a company or an inactive company may make an application to the Registrar in such manner as may be prescribed for obtaining the status of a dormant company.

Comparison between companies act 2013 and Companies Act 1956

Sr.No.               Points      Companies Act 2013        Companies Act 1956
1. Financial Year Companies must have their financial year ending on 31 Mar every year Companies were permitted to have financial year ending on a date decide by Company
2. Formats of Financial Statement Schedule 3 Schedule 6
3. Maximum No of Partners As per rules, subject to Max 100.currently is 50 10 in banking business and 20 in any other business
4. Max Shareholders in Pvt Ltd Company 200 excluding past and present employees 50 excluding past and present employees
5. One Person Company Company which has only one person (natural person) as its member Did not exist
6. Issue of Share at discount Section 53 prohibits issue of shares at a discount However, Section 54   permits issue of ESOPs to its employees at a discount. Section 79 permitted issue of shares at a discount.
7. Security Premium Reserve Utilisation of Securities Premium Reserve is provided in Section 52(2) Utilisation of Securities Premium Reserve was provided in Sec 77A and 78
8. Interest in Calls in Arrears In the absence of a clause in the Articles of Association, the maximum interest chargeable on Calls-in-arrears is 10% p.a In the absence of a clause in the Articles of Association, maximum interest chargeable on Calls-in-arrears was 5% p.a.
9. Interest in Calls in Advance In the absence of a clause in the Articles of Association, the maximum  interest payable on Calls-in-advance is 12% p.a. In the absence of a clause in the Articles of Association, the maximum interest payable on Calls-in-advance was 6% p.a
10. Article of Association Table F applies where Companies Limited by shares does not adopt their own Articles of Association. Table A applied where Companies did not adopt their own Articles of Association

 

Benefits granted to Small Companies under Companies Act, 2013

Companies Act, 2013 has introduced the concept of small companies in India. As per S. 2 (85) of the Companies Act, 2013 there are 4 essentials for being a small company:

  • It is not a public company, holding company or a subsidiary company.
  • It is not registered under S. 8 of the Act.
  • It is not governed by any other special Act.
  • With regards to share capital/turnover:

 

It has a total paid up share capital of not more than 50 lakh rupees or any other prescribed amount not exceeding five crore rupees; or

It has a turnover of not more than two crore rupees or any other prescribed amount not exceeding 20 crore rupees.

This means, for a company to be classified as a small company, it should not be a public company or a holding company or a subsidiary company. If a company falls under any of these categories, it cannot be a small company (no matter howsoever low is the turnover or total paid up share capital). Also, a company which is registered u/s 8 of the Act cannot be classified as a small company, i.e., a limited company which has charitable or other objectives (as specified u/s 8 (1) (a)) and intends to utilise its income for promoting its objectives without making the payment of any dividends to its members cannot be considered to be a small company. In case a company or the body corporate is governed by a special  Act which is passed by the government, it cannot fall under the category of small company.

A company which is eligible to be known as a small company in one particular year might not be eligible to have the status of a small company in the subsequent year. This status is determined on the basis of the Annual return which is filed after the end of every financial year. This form needs to have an attached certificate (refer Form no MGT 7) which certifies the company to be a small company. If the company is no longer a small company; along with the change in status, the benefits which are accorded to a small company are also withdrawn. The moot question which remains unanswered here is regarding the benefits which are accorded to a small company. These benefits have been given in order to ensure that the interests of such companies are protected from the consequences of regulations designed to balance the interests of the stakeholders of large corporate blocs.

Exemptions & Benefits

Most of the benefits which are available to the small companies are the same as those which are available to a one person company. However, all the privileges which are available to a one person company are not available to a small company. The benefits which are accorded to a small company are:

Signatures in the Annual returns:

Company Secretary (CS) alone, or when there is no CS, a single director of the company can sign the annual returns of the Company. But since a small company need not have a CS, this section empowers the director to sign and authorise the annual returns.

Board meetings:

It may hold only two board meetings in an year. There should be a minimum gap of 90 days between the two meetings and they can be held in each half of the calendar year.

Financial statement:

The Company is not required to include the Cash Flow Statement as a part of its financial statement.

Auditor regulations:

The provision regarding mandatory rotation of the auditor or the maximum term of an auditor being 5 years in case of an individual and 10 years in case of a firm of auditors is also not applicable.

Merger Process:

The merger process of more small companies has to be approved on a fast track basis. Such merger also requires the  approval of

  • Official liquidator;
  • Registrar of Companies (ROC);
  • Members holding 90% of the total number of shares (or more); and
  • Majority of creditors who represent 9/10th in value of the creditors or class of creditors of the respective companies which are indicated in the meeting convened by the company by giving a notice of 21 days along with the scheme to its creditors for the purpose, or have otherwise been approved in writing.

Consolidated financial statements:

As per S. 129 (3), it appears that small companies are not required to prepare consolidated financial statements. But, the small companies which have an associate company or joint venture have to prepare the consolidated financial statements.

Fees u/s. 403 of Companies Act, 2013:

Fees for filings and other formalities u/s. 403 of the Companies Act, 2013 is also comparatively lower for the small companies.

New Companies Act will be a Game changer

Initially, there were some misgivings about the new Companies Act, which replaces an outdated legislation with more streamlined rules. Apparently, Union Corporate Affairs Minister Sachin Pilot seems to have worked harder on industry captains to view the new law as an investment opportunity to create a better work environment, rather than as forced expenditure.

In the event, any misgivings have begun to thin out and company secretaries in corporate India have started to view Companies Act 2013 – which has replaced the six-decade-old legislation governing the way corporate function – as a godsend since it elevates them to a new plane of corporate governance. Also, there is the additional professional opportunity of secretarial audits coming their way.

The new rules effective 2014 – 15 also require listed firms to set up a CSR committee of their board members, which will include at least one independent director. However, the worry for company secretaries is that they will have to use their judgement more often. Minority shareholders will have reason to smile as the new law seeks to improve the redressal mechanism available to them. One can use class action law suits to seek justice for any wrongdoings by company promoters or their auditors or consultants.

At the end of the day, the corporate entity stands to benefit the most. For, the new company law will help catapult Indian firms to the international stage through the merger and acquisition (M&A) route. With the new company law, domestic companies can go ahead with their M&A activity abroad without facing legal hurdles in India by setting up overseas listing vehicles.

Industry body Ficci says that the new Company law will revolutionize the administration and management of businesses in times to come. Its President Naina Lal Kidwai hopes that there are “no inconsistencies in various laws since consistency and certainty in laws helps in effective functioning of business”.

So, come April 1, 2014, all companies with turnover of Rs 1,000 crore and more — or a net worth of Rs 500 crore and more or net profit of Rs 5 crore and more — will have to spend at least 2 per cent of their three-year average profit every year on CSR activity. Effective next fiscal (2014-15), Pilot has made it amply clear that “this money would not come to the Centre. It is the companies’ money and they can spend in line with the decision taken by the CSR committee of their boards. But they must report the same.”

Many believe that this will not only boost corporate charitable activity in India but also gives companies varying tax benefits. Both tax and CSR consultants are now putting their heads together to chalk out a CSR strategy for India Inc which would also provide the best tax efficiency.

The fine print

For instance, writing a cheque towards the PM’s National Relief Fund (PMNRF) would entitle the donor company to a deduction of the entire donation amount from its taxable profits. On the other hand, if a company has constructed a school building in a village, no tax benefit may be available – at least not without long-drawn litigation.

While both the donations towards PMNRF and promotion of education are activities that qualify as CSR spends under the new Companies Act, the tax benefits could vastly differ.

And, the new law does not stipulate penalties for non-compliance, though companies are required to justify any shortcomings in this regard. “It is no surprise that the imposition of such obligations has not been well received by a large section of the corporates,” says Shardul Shroff, managing partner of law firm Amarchand Mangaldas, who also points out, “While the new Act does give companies leeway in case they are unable to make such contributions, most companies fear the obligation will eventually snowball into becoming a mandatory provision.”

To make the industry feel comfortable with the new law, Pilot says that a few areas prescribed under the law are only suggestive in nature and should not be seen as a restrictive list. “We have left the canvas very wide as we thought it would not be proper to make it restrictive,” he says. Also, corporate entities were asked to give preference to their local area of operations for such CSR activities, while those not being able to spend the required amount would need to specify reasons for the same in their annual CSR reports.

As an immediate impact, the CSR economy in India will grow manifold, say experts. By one estimate, registered companies in India will spend Rs 18,000 crore on CSR activities alone, according to Pavan Kumar Vijay of Corporate Professionals Capital Pvt Ltd, a legal and financial services firm, who notes, “Companies will now be required to spend on structured activities rather than religious causes and the like, which would mean that there is big scope for CSR consulting, and we expect this activity to grow.”

What’s more, the new company law also eases procedures for mergers and acquisitions within India. Without going to a court or tribunal, a holding company and a wholly-owned subsidiary can merge with just the Union Government’s permission. There will be faster decisions on approvals for M&As, making corporate restructuring smooth and efficient.

On a macro basis, the new Company Law is slimmer with 470-odd sections. But the subordinated legislation – Draft Rules – will be the real test on whether the new corporate framework is truly heralding a shift from control to self-regulation. Experts maintain that almost 75 per cent of the provisions in the new law are to be administered through the Rules, a clear pointer that Parliament and Indian law makers will have little to do regarding Company Law per se in coming years with most changes possible through the executive.

More empowerment

Another interesting facet of the new law is that it has defined “fraud” and dealt extensively with it. The earlier Companies Act did not define “fraud” or corporate misconduct. With an increase in corporate frauds in India, this may be the right approach as this law gives more statutory powers to the government’s investigative arm Serious Fraud Investigation Office (SFIO) to tackle corporate fraud.

Even as CSR spending envisaged in the new law is not specific to benefiting only employees of the company or their family members, it is seen as employee-friendly in some ways because it stipulates that firms must disclose the difference in salaries of directors and that of the average employee. In turn, this will protect the interests of shareholders as well as employees. To safeguard workmen, the new law also mandates payment of two years’ salary to employees in companies that wind up operations.

Based on available data, the new regulation would mean that the top 100 companies by annual net sales in 2012 will spend Rs 5,611 crore on CSR activities, compared with Rs 1,765 crore that they are spending now, according to a Forbes report. The state-run firms account for a significant portion of current CSR spending. So much so, that central public sector enterprise which were subject to CSR norms under separate guidelines, have now come within the purview of these new provisions.

Going by the Corporate Affairs Ministry’s assessment: if every company that is qualified for doing CSR actually does so, then Rs.15,000 to Rs.20,000 crore would be spent in a year on various projects such as environment, skill development, water and sanitation, with built-in safeguards to ensure they are not circumvented. Rajesh Dedhia, Director, Vantage Institute of Financial Markets, a listed BSE entity, observes that the CSR provisions could have a “cascading impact” on philanthropy.

Even in case of donations made to external agencies or a foundation set up by the company, it can be argued that it is a bonafide business expenditure which should be allowed fully as a deduction under section 37 of the I-T Act. Avers KPMG’s co-head (tax) Punit Shah: “The Supreme Court, in case of a donation made by a company to a public welfare fund, had held that the donation was directly connected or related to the company’s business. It resulted in a benefit to the carrying on of the business and was allowed as a business deduction. The same tenet should apply to donations under the company’s CSR policy.”

Concluding Remarks

The Companies Act, 2013 is a progressive and forward looking which promises improved corporate governance norms, enhanced disclosures and transparency, facilitation of responsible entrepreneurship, increased accountability of company managements and auditors, protection of interest of investors particularly small and minority investors, better shareholder democracy, facilitation of corporate social responsibility (CSR) and stricter enforcement processes.

 

By all means, the new Companies Act, 2013 is a step towards globalization and  successful attempt to meet the changing environment. It is expected to facilitate business friendly corporate regulation, improve corporate governance norms, enhance accountability on the part of corporate and auditors, raise levels of transparency and protect interest of investors, particularly small investors. As Industry Body FICCI says that the New Company Law will revolutionize the administration and management of businesses in times to come.

Now, let us see the Change that is going to Change the entire corporate affairs with sustainable growth and great accountability besides transparency.

 

Author 

RISHI SRIVASTAVA
Senior Manager(Faculty)
Union Bank Of India,
Staff Training Centre, Lucknow.
Mob: 9479871017

 

 

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