Companies Act 2013 free essay sample

Introduction Companies Act, 2013 is an Act of the Parliament of India which regulates incorporation of a company, responsibilities of a company, directors, and dissolution of a company. The 2013 Act is divided into 29 chapters containing 470 clauses as against 658 Sections in the Companies Act, 1956. The Act has replaced The Companies Act, 1956 (in a partial manner) after receiving the assent of the President of India on 29 August 2013. The Act came into force on 12 September 2013 with only certain provisions of the Act notified. It consists of 29 Chapters , 470 Clauses (i. e Sections) and 7 Schedules. Background Companies Act, 2013 (2013 Act) has been assented by the President of India on 29 August 2013 and published in Official Gazette on 30 August 2013. 2013 Act empowers the Central Government to bring into force various sections from such date(s) as may be notified in the Official Gazette. The 2013 Act stipulates enhanced self-regulations coupled with emphasis on corporate democracy and provides for amongst others, business friendly corporate regulation / pro-business initiatives, e-governance initiatives, good corporate governance, Corporate Social Responsibility (CSR), enhanced disclosure norms, enhanced accountability of management, stricter enforcement, audit accountability, protection for minority shareholders, investor protection and activism and better framework for insolvency regulation and institutional structure. Ministry of Corporate Affairs (MCA), Government of India (GOI) has initiated the process to implement 2013 Act in consultation with concerned regulatory authorities, Ministry of Law Justice and other stakeholders. In this regard, first set of draft rules have been placed for public comments on 9 September 2013. GOI decided to enforce the provisions of 2013 Act in phases. The provisions of the 2013 Act which require statutory or regulatory consultation or functioning of new bodies or description of relevant rules and forms will be brought in force after the preparatory action is completed. Keeping this in mind, GOI has notified those provisions of 2013 Act which do not require such preparations. Accordingly, GOI has notified 98 sections of 2013 Act which will come into force effective 12 September 2013. This document is prepared keeping the provisions of the 2013 Act and does not capture provisions of the Rules as the same are in Draft stage and are subject to change once the feedback of the stakeholders is received by MCA and incorporated in the final Rules. Prescribed or as prescribed or as may be prescribed used in this document means the Rules as may be finalized by the CG. Content Chapter I -Preliminary (1 2) Chapter II -Incorporation of Company and Matters Incidental Thereto. Chapter III -Prospectus and Allotment of Securities (23 42). Chapter IV -Share Capital and Debentures (43 72). Chapter V -Acceptance of Deposits by Companies (73 76). Chapter VI -Registration of Charges (77 87) Chapter VII -Management and Administration (88 122) Chapter VIII -Declaration and Payment of Dividend (123 127) Chapter IX -Accounts of Companies (128 138) Chapter X -Audit and Auditors (139 148) Chapter XI -Appointment and Qualifications of Directors (149 172) Chapter XII -Meetings of Board and its Powers (173 195) Chapter XIII-Appointment and Remuneration of Managerial Personnel(196-205) Chapter XIV -Inspection, Inquiry and Investigation(206 229) Chapter XV -Compromises, Arrangements and Amalgamations (230 240) Chapter XVI-Prevention of Oppression and Mismanagement (241 246) Chapter XVII-Registered Valuers (247) Chapter XVIII-Removal of Name of companies from the Register of Companies(248-252 Chapter XIX-Revival and Rehabilitation of Sick Companies (253 269) Chapter XX-Winding Up (270 365) Chapter XXI Companies Authorised to Register Under This Act Winding up of unregistered companies(366-378) Chapter XXII-Companies Incorporated Outside India (379- 393) Chapter XXIII-Government Companies (394 395) Chapter XXIV-Registration offices and fees (396 404) Chapter XXV-Companies to Furnish Information or Statistics (405) Chapter XXVI-Nidhis (406) Chapter XXVII-National Company Law Tribunal and Appellate Tribunal (407-434) Chapter XXVIII- Special Courts (435 446) Chapter XXIX Miscellaneous (447 470) Background 2003 (Bill was introduced in 2003 by MCA in Rajya Sabha on 07. 05. 2003. For want of large number of changes comprehensive review required) 2004 (Concept Paper on new company law was placed on ministry’s website. Government constituted JJ Irani Committee which gave report on 31. 05. 2005. Comprehensive review required) 2008 (Companies bill’2008 introduced but lapse due to Lok Sabha Dissolution) 2009 Bill was introduced in Lok Sabha and referred to Parliamentary Standing Committee. In view of numerous amendments Govt. withdrew this bill and introduced Cos. Bill ‘2011. This is the bill was introduced in Dec’2011 and passed in 2012. Reasons for the change The changing national and international economic environment. Exponential growth of the Indian economy. Changes in the stakeholders’ expectations. Manifold Increase in Number of Companies. Year No. of Companies 1956 30,000 approx 2013 11, 00,000 approx The need of a legal framework was felt to enable the Indian corporate sector to adopt the best international practices in a globally competitive manner, fostering a positive environment for investment and growth. Companies Bill 2012 was passed by Lok Sabha on 18th December, 2012 and subsequently, was passed by the Rajya Sabha on 8th August, 2013. The bill comprises of 29 chapters, 470 Clauses with 7 Schedules as against 658 sections and 14 Schedules in the Companies Act, 1956. Substantively a law based on Rules (as may be prescribed). In 470 Clauses the word â€Å"as may be prescribed† has been used at around 336 places. New Concepts Private company to have a maximum of 200 members (earlier limit was up to 50). (Clause 2 (68)) E-Governance – maintenance and allowing inspection of documents by companies in electronic form. (Clause 120) Vigil mechanism (whistle blowing) introduced. (Clause 177 (10)) In prescribed class or classes of companies, there should be at least 1 woman director. (Clause 149 (1)) Restrictions on layers of subsidiaries. (Clause 2 (87)) The Financial Year of any Company can be only from April-March. Existing companies has to align within 2 years of the commencement of the Act. (Clause 2 (41)) Memorandum not to have ‘other objects’. (Clause 4 (1)) A person cannot become director in more than 20 companies instead of 15 as provided in the Companies Act 1956 and out of this 20, he cannot be director of more than 10 public companies. (Clause 165) Shareholders to have exit option if money raised has not been utilized. (Clause 27) A company can make buyback even if it had at any time defaulted in repayment of deposit or interest payable thereon, redemption of debentures or preference shares or payment of dividend to any shareholder or repayment of any term loan or interest payable thereon to any financial institution or bank, provided that default must have been remedied and a period of 3 years must have lapsed after such default ceased to subsist. (Clause 66 (6)) Concept of CSR introduced. (Clause 135) Definition of independent Directors introduced. (Clause 149 (5)) Condition and manner for issue of Bonus shares has been introduced. (Clause 63) New provisions suggested for allowing re-opening of accounts in certain cases with due safeguards. (Clause 130) Consolidation of Accounts (Clause 129) Secretarial Audit Report given by a company secretary in practice is required to be attached with Boards’ report in case of bigger companies. (Clause 204) Key definitions and concepts The 2013 Act has introduced several new concepts and has also tried to streamline many of the requirements by introducing new definitions. This chapter covers some of these new concepts and definitions in brief. A few of these significant aspects have been discussed in detail in further chapters. 1. Companies 1. 1 One-person company: The 2013 Act introduces a new type of entity to the existing list i. e. apart from forming a public or private limited company, the 2013 Act enables the formation of a new entity a ‘one-person company’ (OPC). An OPC means a company with only one person as its member [section 3(1) of 2013 Act]. 1. 2. Private company: The 2013 Act introduces a change in the definition for a private company, inter-alia, the new requirement increases the limit of the number of members from 50 to 200. [Section 2(68) of 2013 Act]. 1. 3. Small company: A small company has been defined as a company, other than a public company. (i) Paid-up share capital of which does not exceed 50 lakh INR or such higher amount as may be prescribed which shall not be more than five crore INR (ii) Turnover of which as per its last profit-and-loss account does not exceed two crore INR or such higher amount as may be prescribed which shall not be more than 20 crore INR: As set out in the 2013 Act, this section will not be applicable to the following: †¢ A holding company or a subsidiary company †¢ A company registered under section 8 †¢ A company or body corporate governed by any special Act [section 2(85) of 2013 Act] 1. 4. Dormant company: The 2013 Act states that a company can be classified as dormant when it is formed and registered under this 2013 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 one may apply to the ROC in such manner as may be prescribed for obtaining the status of a dormant company. [Section 455 of 2013 Act] 2. Roles and responsibilities 2. 1 Officer: The definition of officer has been extended to include promoters and key managerial personnel [section 2(59) of 2013 Act]. 2. 2 Key managerial personnel: The term ‘key managerial personnel’ has been defined in the 2013 Act and has been used in several sections, thus expanding the scope of persons covered by such sections [section 2(51) of 2013 Act]. 2. 3. Promoter: The term ‘promoter’ has been defined in the following ways:†¢ A person who has been named as such in a prospectus or is identified by the company in the annual return referred to in Section 92 of 2013 Act that deals with annual return; or †¢ who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or †¢ in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act. The proviso to this section states that sub-section (c) would not apply to a person who is acting merely in a professional capacity. [Section 2(69) of 2013 Act] 2. 4: Independent Director: The term’ Independent Director’ has now been defined in the 2013 Act, along with several new requirements relating to their appointment, role and responsibilities. Further some of these requirements are not in line with the corresponding requirements under the equity listing agreement [section 2(47), 49(5) of 2013 Act]. 3. Investments 3. 1 Subsidiary: The definition of subsidiary as included in the 2013 Act states that certain class or classes of holding company (as may be prescribed) shall not have layers of subsidiaries beyond such numbers as may be prescribed. With such a restrictive section, it appears that a holding company will no longer be able to hold subsidiaries beyond a specified number [section 2(87) of 2013 Act]. 4. Financial statements 4. 1. Financial year: It has been defined as the period ending on the 31st day of March every year, and where it has been incorporated on or after the 1st day of January of a, the period ending on the 31st day of March of the following year, in respect whereof financial statement of the company or body corporate is made up. [Section 2(41) of 2013 Act]. While there are certain exceptions included, this section mandates a uniform accounting year for all companies and may create significant implementation issues. 4. 2. Consolidated financial statements: The 2013 Act now mandates consolidated financial statements (CFS) for any company having a subsidiary or an associate or a joint venture, to prepare and present consolidated financial statements in addition to standalone financial statements. 4. 3. Conflicting definitions: There are several definitions in the 2013 Act divergent from those used in the notified accounting standards, such as a joint venture or an associate,, etc. , which may lead to hardships in compliance. 5. Audit and auditors 5. 1 Mandatory auditor rotation and joint auditors: The 2013 Act now mandates the rotation of auditors after the specified time period. The 2013 Act also includes an enabling provision for joint audits. 5. 2 Non-audit services: The 2013 Act now states that any services to be rendered by the auditor should be approved by the board of directors or the audit committee. Additionally, the auditor is also restricted from providing certain specific services. 5. 3. Auditing standards: The Standards on Auditing have been accorded legal sanctity in the 2013 Act and would be subject to notification by the NFRA. Auditors are now mandatorily bound by the 2013 Act to ensure compliance with Standards on Auditing. 5. 4 Cognisance to Indian Accounting Standards (Ind AS): The 2013 Act, in several sections, has given cognisance to the Indian Accounting Standards, which are standards converged with International Financial Reporting Standards, in view of their becoming applicable in future. For example, the definition of a financial statement includes a ‘statement of changes in equity’ which would be required under Ind AS. [Section 2(40) of 2013 Act] 5. 5. Secretarial audit for bigger companies: In respect of listed companies and other class of companies as may be prescribed, the 2013 Act provides for a mandatory requirement to have secretarial audit. The draft rules make it applicable to every public company with paid-up share capital Rs. 100 crores*. As specified in the 2013 Act, such companies would be required to annex a secretarial audit report given by a Company Secretary in practice with its Board’s report. [Section 204 of 2013 Act] 5. 6. Secretarial Standards: The 2013 Act requires every company to observe secretarial standards specified by the Institute of Company Secretaries of India with respect to general and board meetings [Section 118 (10) of 2013 Act], which were hitherto not given cognizance under the 1956 Act. 5. 7. Internal Audit: The importance of internal audit has been well acknowledged in Companies (Auditor Report) Order, 2003 (the ‘Order’), pursuant to which auditor of a company is required to comment on the fact that the internal audit system of the company is commensurate with the nature and size of the company’s operations. However, the Order did not mandate that an internal audit should be conducted by the internal auditor of the company. The Order acknowledged that an internal audit can be conducted by an individual who is not in appointment by the company. The 2013 Act now moves a step forward and mandates the appointment of an internal auditor who shall either be a chartered accountant or a cost accountant, or such other professional as may be decided by the Board to conduct internal audit of the functions and activities of the company. The class or classes of companies which shall be required to mandatorily appoint an internal auditor as per the draft rules are as follows: * †¢ Every listed company †¢ Every public company having paid-up share capital of more than 10 crore INR †¢ Every other public company which has any outstanding loans or borrowings from banks or public financial institutions more than 25 crore INR or which has accepted deposits of more than 25 crore INR at any point of time during the last financial year 5. 8. Audit of items of cost: The central government may, by order, in respect of such class of companies engaged in the production of such goods or providing such services as may be prescribed, direct that particulars relating to the utilisation of material or labour or to other items of cost as may be prescribed shall also be included in the books of account kept by that class of companies. By virtue of this section of the 2013 Act, the cost audit would be mandated for certain companies. [section 148 of 2013 Act]. It is pertinent to note that similar requirements have recently been notified by the central government. 6. Regulators 6. 1. National Company Law Tribunal (Tribunal or NCLT): In accordance with the Supreme Court’s (SC) judgement, on 11 May 2010, on the composition and constitution of the Tribunal, modifications relating to qualification and experience, etc. of the members of the Tribunal has been made. Appeals from the Tribunal shall lie with the NCLT. Chapter XXVII of the 2013 Act consisting of section 407 to 434 deals with NCLT and appellate Tribunal. 6. 2. National Financial Reporting Authority (NFRA): The 2013 Act requires the constitution of NFRA, which has been bestowed with significant powers not only in issuing the authoritative pronouncements, but also in regulating the audit profession. 6. 3. Serious Fraud Investigation Office (SFIO): The 2013 Act has bestowed legal status to SFIO. 7. Mergers and acquisitions The 2013 Act has streamlined as well as introduced concepts such as reverse mergers (merger of foreign companies with Indian companies) and squeeze-out provisions, which are significant. The 2013 Act has also introduced the requirement for valuations in several cases, including mergers and acquisitions, by registered valuers. 8. Corporate social responsibility The 2013 Act makes an effort to introduce the culture of corporate social responsibility (CSR) in Indian corporates by requiring companies to formulate a corporate social responsibility policy and at least incur a given minimum expenditure on social activities. 9. Class action suits The 2013 Act introduces a new concept of class action suits which can be initiated by shareholders against the company and auditors. 10. Prohibition of association or partnership of persons exceeding certain number The 2013 Act puts a restriction on the number of partners that can be admitted to a partnership at 100. To be specific, the 2013 Act states that no association or partnership consisting of more than the given number of persons as may be prescribed shall be formed for the purpose of carrying on any business that has for its object the acquisition of gain by the association or partnership or by the individual members thereof, unless it is registered as a company under this 1956 Act or is formed under any other law for the time being in force: As an exception, the aforesaid restriction would not apply to the following: †¢ A Hindu undivided family carrying on any business †¢ An association or partnership, if it is formed by professionals who are governed by special acts like the Chartered Accountants Act, etc. [section 464 of 2013 Act] 11. Power to remove difficulties The central government will have the power to exempt or modify provisions of the 2013 Act for a class or classes of companies in public interest. Relevant notification shall be required to be laid in draft form in Parliament for a period of 30 days. The 2013 Act further states no such order shall be made after the expiry of a period of five years from the date of commencement of section 1 of the 2013 Act [section 470 of 2013 Act]. 12. Insider trading and prohibition on forward dealings The 2013 Act for the first time defines ‘insider trading and price-sensitive information and prohibits any person including the director or key managerial person from entering into insider trading [section 195 of 2013 Act]. Further, the Act also prohibits directors and key managerial personnel from forward dealings in the company or its holding, subsidiary or associate company [section 194 of 2013 Act]. Corporate Social Responsibility The Ministry of Corporate Affairs (MCA) had introduced the Corporate Social Responsibility Voluntary Guidelines in 2009. These guidelines have now been incorporated within the 2013 Act and have obtained legal sanctity. Section 135 of the 2013 Act, seeks to provide that every company having a net worth of 500 crore INR, or more or a turnover of 1000 crore INR or more, or a net profit of five crore INR or more, during any financial year shall constitute the corporate social responsibility committee of the board. This committee needs to comprise of three or more directors, out of which, at least one director should be an independent director. The composition of the committee shall be included in the board’s report. The committee shall formulate the policy, including activities specified in Schedule VII, which are as follows: †¢ Eradicating extreme hunger and poverty and promotion of education †¢ Promoting gender equality and empowering women †¢ Reducing child mortality and improving maternal health †¢ Combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases and ensuring environmental sustainability †¢ Employment enhancing vocational skills and social business projects †¢ Contribution to the Prime Minister’s National Relief Fund or any other fund set-up by the central government or the state governments for socio-economic development and relief, and funds for the welfare of the scheduled castes and Tribes, other backward classes, minorities and women There have been mixed reactions to the introduction of the ‘spend or explain’ approach taken by the MCA with respect to CSR. It may take a while before all of Corporate India imbibes CSR as a culture. However, activities specified in the Schedule are not elaborate or detailed enough to indicate the kind of projects that could be undertaken, for example, environment sustainability or social business projects could encompass a wide range of activities. The committee will also need to recommend the amount of expenditure to be incurred and monitor the policy from a time-to-time. The board shall disclose the contents of the policy in its report, and place it on the website, if any, of the company. The 2013 Act mandates that these companies would be required to spend at least 2% of the average net-profits of the immediately preceding three years on CSR activities, and if not spent, explanation for the reasons thereof would need to be given in the director’s report(section 135 of the 2013 Act). Conclusion The 2013 Act 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 interests of investors, particularly small investors. It has brought on many new concepts and it will be helpful as the old companies act was not up to date with the new competitive world as it was made many years ago. So it would be helpful for growth of companies in India.