Presentation by Mr. Deepak Gupta from PWC

Companies Act 2013
Strictly Private
and Confidential
May 2014
Substantively in force – w.e.f. April 1, 2014
Beyond “Company Law”
Procedural to “Substantive”
Man to Man Marking
Sections - 470
Chapter wise Rules
One Person Company
“One Person Company” means a company which has only one person as a member (who shall be a
natural person who is an Indian citizen and resident in India).
Max. paid up share capital = 50 lacs; Max. Turnover = 2 crores (if exceeded, convert into private or
public co.) [Rules]
Advantages to OPC:
All advantages as applicable to private co.
1 board meeting in each half of calendar year (min. gap b/w 2 meetings, not less than 90 days)
The provision relating to holding of AGM/ EGM / Notice & Quorum of meetings and related
provisions there in is not applicable for a OPC.
If OPC has only one director, it is exempted from holding Board meetings.
Financial statements to be signed by 1 director only;
No disclosure in board report required except for explanations or comments on the qualification ,
reservation or adverse remarks or disclaimer made by auditor in their report.
Small Company
‘‘small company’’ means a company, other than a public company,—
(i) paid-up share capital of which does not exceed Rs. 50 lakhs or such higher amount as may
be prescribed which shall not be more than Rs. 5 crore; or
(ii) turnover of which as per its last profit and loss account does not exceed Rs. 2 crore or such
higher amount as may be prescribed which shall not be more than Rs. 20 crore:
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.
Small Company = similar to Private Co.
- Annual return to be signed by the director.
- 1 board meeting in each half of calendar year (min. gap b/w 2 meetings, not less than 90
Board Composition
Board composition
• Minimum = 2/3 directors; Maximum = 15 directors (limit can be increased
beyond 15 after passing special resolution)
• 1 resident director i.e. resident in India ≥ 182 days in a calendar year
• Specified companies – woman director
• Additional directors
• Alternate directors
• Nominee directors
• Independent directors (in listed and specified class of public companies)
• Max. no. of directorships (including alternate directorships) = 20
• Shareholders by special resolution can restrict the no. of directorships.
Board composition- Snapshot
Status of the
Listed Co.
in India
for 182
n and
1/3rd or
Rs. 10cr
Rs. 10cr
Rs. 100cr
Rs. 100cr
Rs. 50cr
Rs. 50cr
Unlisted Public
Share Capital >
Rs.100 Cr
Rs. 10cr
Turnover >
Rs. 300 cr
Rs. 100cr
/ Deposits>
Rs. 50cr
** if, on account of composition of audit committee, a higher number of Independent directors are required, such
higher number will become applicable.
# Rules
Resignation/Disqualification of directors
Directors to furnish detailed reasons of resignation in writing – to be submitted to RoC within
30 days
Office of the director gets vacated if he absents himself from all the meeting of BoD held during
a period of twelve months with or without leave of absence
Grounds of disqualification –
Unsound mind or undischarged insolvent or adjudicated as an insolvent;
 convicted by court of an offence;
 disqualified by an order passed by a court or tribunal;
if convicted for offence dealing with RPT any time during last 5 years.
No person to be appointed as director
 if a
director of co. which has failed to file financial statements or annual return for any
continuous 3 FYs; or
Has failed to
repay deposits or interest thereon or redeem any debentures on due date or
paid interest thereon or divided for a continuous period of one year or year.
Board Proceedings
Board Proceedings
New provisions
What it means
 Gap between two consecutive meetings
not to exceed 120 days
Review board calendar to meet
prescribed requirements
 Minimum 7 days’ notice, shorter notice
with consent
infrastructure to enable this.
 Matters not to be dealt in VC/ audiovisual meeting:
Electronic infrastructure to have
adequate security measures to
Recording facility.
Check the quorum before every
meeting depending on the number of
interested directors.
 Approval of annual financial
 Approval of board’s report;
 Approval of prospectus;
 Approval of matter w.r.t.
amalgamation, merger, demerger,
acquisition and takeover.
• Quorum = 1/3rd of Board or 2, whichever
higher (Quorum discounted to 2 not
interested directors, in case, interested
directors ≥ 2/3rd )
Matters to be passed in Board’s meeting – ACT
Following powers to by the board of directors only by means of resolution passed at meeting of the
 to make calls on shareholders in respect of money unpaid on their shares;
 to authorise buy-back of securities under section 68;
to issue securities, including debentures, whether in or outside India;
 to borrow monies;
 to invest the funds of the company;
 to grant loans or give guarantee or provide security in respect of loans;
 to approve financial statement and the Board’s report;
 to diversify the business of the company;
 to approve amalgamation, merger or reconstruction;
 to take over a company or acquire a controlling or substantial stake in another company.
Matters to be passed in Board’s meeting - RULES
In addition, the rules prescribe following additional powers to be exercised by the board at its
meeting :
 to make political contributions;
 to appoint or remove key managerial personnel (KMP);
 to take note of appointment(s) or removal(s) of one level below the Key Management
 to appoint internal auditors and secretarial auditor;
 to take note of the disclosure of director’s interest and shareholding;
 to buy, sell investments held by the company (other than trade investments), constituting five
percent or more of the paid up share capital and free reserves of the investee company;
 to invite or accept or renew public deposits and related matters;
 to review or change the terms and conditions of public deposit;
 to approve quarterly, half yearly and annual financial statements or financial results as the case
may be.
Board Meeting.. Some matters of immediate attention
Propose Loans and Borrowings – 180(1)(c) borrowing + 180 (1) (a) creation of charge/disposal
ALL COMPANIES : Resolutions - S.188 - Related Party Transactions – Board Approval (except
arms length+ ordinary course)
Recommend for SR by Shareholder approvals
Paid Up capital Rs 10 Cr or more – for all RPTs
For other Companies : If as per limits prescribed under Rule 15(3) of Chapter XII- SR
Amendment of Articles – to review if JVs
Deposits (S. 73(2)) new definition of deposits – ordinary resolution+ deposit insurance +
Authorisation for signing of documents and maintaining registers – under 2013 Act
Independent Directors
Independent Directors…criteria
Listed Public Company – 1/3rd of total no. of directors
Unlisted Public Company – Share Capital Rs 10 Cr/more; Turnover Rs 100 Cr or more,
Loans/Deb/Deposits over Rs 50Cr- At least 2 directors as independent
 Criteria of Independence: (includes himself or through any of his relative)
 Person of integrity, relevant expertise and experience in the opinion of Board
 Not a promoter neither related to promoters or directors of the company or its H/S/A.
Appropriate skills, experience and knowledge in one or more fields.
 Not a KMP/employee of the company or its H/S/A in immediately preceding 3 financial years
Not an employee or proprietor or partner in any firm of auditors/CS firms/cost auditors of the
company or its H/S/A in immediately preceding 3 Fys
 Not holding along with relatives 2% or more of total voting power of the company
 Conditions on pecuniary relationship in last 2 years or current FY {S.149(6)}
 ID- No pecuniary relationship at all - H/S/A or their promoters or directors
 Relatives of IDs – Not over 2% of Company’s turnover or Rs. 50 lakh, whichever is lower
 Lawyers/Consultants- Not over 10% of their turnover
Independent Directors…some compliances
 Declaration of independence
– to be given - at first meeting of BoD where he/she participates as director and thereafter
at first meeting of Board in every financial year or where there is any change of
circumstance that may affect his status as ID.
– Appointment approved by shareholder’s/formalised through letter of appointment
– explanatory statement to indicate justification for appointment as ID
 Tenure:
– maximum of two consecutive terms of upto 5 years each (past period not to be counted);
– cooling period of 3 yrs with no association with the company for further appointment
 Not to retire by rotation
 Remuneration:
– Not entitled to ESOPs
– Only sitting fees + reimbursement of meeting expenses+ Profit related commission
Independent Directors….evaluation
 Mandatory Performance Evaluation to form basis of re-appointment.
 Conditions for liability of Independent Directors under the Act for acts of omission or
commission which
 occur with his knowledge attributable through Board process; AND
with his consent/connivance or where he does not act diligently.
Duties of directors – All including IDs
Acts in the best interest of company, employees,
shareholders, community and for the protection of
Takes reasonable care, skill and diligence and exercises
independent judgment
Avoids situations of direct / indirect interest that conflicts /
may conflict with the interest of the Company
Shall not achieve or attempt to achieve any undue gain or
Not to assign his office
Fine Rs. 1 lakh - Rs. 5 lakh
Code of Conduct for Independent Directors (Sch. IV)
 Both Company and Independent Directors to abide by Code
 Code prescribes Role , Functions and Duties to ensure active and responsible contribution
 Concerns about running the Company/proposed action to be addressed; if unresolved
 Ensure an adequate and functional vigil mechanism
 Report concerns about unethical behaviour, fraud, violation of policies
 Ensure Related party transactions are approved after adequate deliberations/in Co. best
 One meeting only of Independent Directors to :
 review performance of Non- Independent Directors and Board as a whole,
 review performance of Chairperson,
 Assess quality, quantity, timeliness of information flow between Management and Board
 Performance of each Independent Director to be reviewed by entire Board (excluding that
KMPs/Whole-time KMPs
Key Managerial Personnel
New definition
 Every listed company; and
 public company having a paid up capital of
Rs. 1o crore or more
to have whole time KMP
 Concept of KMP includes:
CEO/ MD/ Manager;
Company Secretary;
CFO; and
As may be prescribed.
 KMP (and relatives)
regarded as related
 Relative of KMP cannot
be the auditor
 Policy on remuneration
of KMP to be in board
 Covered under the
definition of ‘Officer
who is in default’
 Restrictions on forward
dealing of securities
Managerial Remuneration
Remuneration to Managerial Personnel- Directors/Mgr
Remuneration payable - to be determined either by articles, or by resolution or by special resolution if articles so
provide, subject to the provisions of 2013 Act.
Overall Managerial Remuneration in a FY (applicable to Public Companies) –
 not to exceed 11% of net profits of company in that FY
(i.e., remuneration payable to directors, MD, WTD and Manager, including services rendered by them in any
other capacity excluding professional nature);
 % can exceed with the approval of CG, subject to provision of Sch. V.
 Except with the approval of CG, Remuneration not to exceed (applicable to Public Companies) :
to any one MD or WTD or Manager - 5% of net profits and if more than 1 such director, then 10% of net
profits to all such directors taken together.
to directors other than MD/ WTD - 1% of net profits of the company if there is any MD/ WTD/ Manager. In
all other cases, capped at 3% of net profit.
Net profits to be computed in accordance with Section 198. The above remuneration limit excludes sitting fees
payable to directors.
 MD or WTD of a company receiving commission from the company, can also receive remuneration from holding
or subsidiary company, subject to disclosure in board report’s.
Premium paid on D & O’s insurance for MD/WTD/Manager/CEO/CFO/CS– not to part of remuneration, but if
“ the person is proved to be guilty” then premium paid treated as remuneration.??
Listed companies to disclose ratio of remuneration of each director to median employee remuneration.
Remuneration to Directors - inadequacy/loss
No profit or inadequate profits in a FY (all companies including Private, Public, small ? (197(3))
- remuneration to be paid in accordance with Part II of Sch V only, otherwise prior approval of CG required.
Rule 7(2)/Ch XII of Rules – (except Listed/Subsidiary of Listed Co . , may without CG approval, pay
remuneration beyond limits on complying with 5 conditions –
Board Approval,
No default in payment of debts/debentures/Pref .Shares/Interest/dividend thereon for 30 days in
preceding FY,
Shareholder resolution by SR –max 3 years,
Justification in notice,
B/S and A/R duly filed.
 Sch V requires increased level of disclosures required such as detailing the performance criteria along with fixed
and performance linked component, stock option details, service contracts etc., .
 Contravention with the above provisions - punishable with fine which shall not be less than INR 1 lakh but which
may extend to INR 5 lakh.
Board Committees
Board Committees- Audit/NRC/Stakeholders + CSR
Applicable to
Audit Committee
Nomination and
Listed Companies +
Listed Companies +
Public company with
paid up capital ≥ Rs.10
crores or turnover ≥ Rs.
100 crores or
out-standings > Rs.50
Public company with
paid up capital ≥ Rs.10
crores or turnover ≥ Rs.
100 crores or
out-standings > Rs.50
Minimum 3 with
majority of Independent
Independent director
3 or more NEDs out of
which not less than 50%
should be Independent
Independent Director
> 1000 shareholders /
debenture holders /
deposit holders/any
other security holders at
any time during the
financial year
Chair person: NED
Other members: to be
decided by Board
Board Committees...
Audit Committee
Nomination and
 Extensive review
 Enlarged Role
 Review and monitor
the auditor’s
independence and
performance, and
effectiveness of audit
 Identify persons
qualified to be
 Consider and resolve
grievances of security
 Examination of
financial statements
and the auditors report
 Approval of related
party transactions
 Formulate policy for
qualifications and
remuneration of
directors, KMPs.
Board Committees - CSR
• Applies to all companies, public or private:
- Net worth of 500 crore INR or more;
- Turnover of 1000 crore INR or more;
- Net profit of 5 crore INR or more
• CSR committee to have at least 1 independent
director (exceptions for unlisted public/private
/ foreign co.) Private company to comprise of 2
directors on CSR Committee
• Compliance required if above criteria met in
any financial year starting 1 April 2014
• Exempted - if criteria not met for 3 consecutive
• Endeavour to spend at least 2% of average net
profits else Board to give reasons (in board
report) for failure to spend
What it means
Assess the applicability based on
defined criteria
Review current CSR policies or
initiatives, if any, and identify
steps to align them with new
Identify structure for
implementation and tax
Shareholder meetings
Shareholder Meetings
New provisions
 AGM to be convened within 9 months of closure
of 1st financial year and thereafter, within 6
months of closure of financial year
Unless the articles of a public
company provide for larger
number, quorum of a public
company shall be :
 AGM to be called between 9 a.m. to 6 p.m. on
any day other than National Holiday and to be
held at the registered office or within city where
RO is situated.
 Notice can be given in writing or by electronic
5 members personally present,
if number of members is not
more than 1000,
present, if the number of
members is more than 1000
but up to 5000,
present, if the number of
members exceeds 5000.
 Notice of meeting to be given to every member.
Director and auditor of the company
 Place of EGM to be in India only.
 Quorum of the general meeting to be physically
 Postal ballot applicable if members > 200.
 Facility of Voting through electronic means to be
provided, if shareholders ≥ 1000/ listed
Shareholders Meetings - Matters
Loans and Borrowings – 180(1)(c) borrowing + 180 (1) (a) creation of charge/disposal
Resolution - S.188 - Related Party Transactions - SR
Paid Up capital Rs. 10 Cr or more – for all RPTs
Others limits prescribed under Rule 15(3) of Chapter XII
Sale/purchase/supply – exceeding 25% of annual turnover
Selling /buying property – exceeding 10% of net worth
Leasing of any property – exceeding 10% of net worth or 10% of turnover
Availing or rendering services – exceeding 10% of net worth
Appointment to any office or place of profit in Co./S/Assoc- monthly remuneration over
Rs. 2.5 lacs
Remuneration for Underwriting subscriptions for securities – over 1% of net worth
Amendment of Articles – to review if JVs
Deposits (S. 73(2)) new definition of deposits – ordinary resolution.
Board and Auditor’s Reports
Board’s report – New Matters
 Directors Statement on :
 LISTED COMPANIES : Internal financial controls are adequate and operating effectively
(“internal financial controls” means policies for ensuring orderly and efficient conduct of
its business, safeguarding assets, prevention and detection of frauds and errors,
accuracy and completeness of accounting records, and the timely preparation of reliable
financial information.)
 ALL COMPANIES : Devised proper systems to ensure compliance with all applicable laws
+ such systems are adequate and operating effectively
 ALL COMPANIES : Development and implementation of a risk management
policy/identification of risk
 LISTED + PUBLIC INR 25 Cr or more in previous year : Manner of annual evaluation of
performance of Board+ Committees+ Directors
 WHERE CSR APPLIES : Details of CSR initiatives
 ALL COMPANIES : All Related parties’ contracts along with justification thereof
 ALL COMPANIES : Explain qualifications, reservations or adverse remarks or disclaimers
made in Auditor’s Report + Secretarial audit report
Auditor’s Report – New Matters
Observations on financial transactions or matters which have any adverse effect on Company’s
Any qualification, reservation or adverse remark relating to the maintenance of accounts and
other matters connected therewith
Whether the company has adequate internal financial controls system in place and the
operating effectiveness of such controls
Auditor to report to the Central Government within such time and manner as may be
prescribed, if he has any reason to believe that any offence involving fraud is being committed
or has been committed against the company by its officers or employees
Compliance with “ALL” Applicable Laws… All companies
Company Secretary - statutory duties
 To report to Board about compliance with Companies Act AND Other applicable laws
 To ensure compliance with secretarial standards (Detailed minutes)
The duties of CS not to affect duties/functions of Board, Chairperson or MD or WTD, under
Companies Act or any other law.
Corporate Governance- Other Areas
Vigil Mechanism/Whistle Blower
Applicable on :
Co accepted deposits from public +
Co. borrowed monies from banks/PFIs over Rs 50 crores.
 Vigil mechanism to be established for employees and directors to report concerns
 To provide adequate safeguards against victimisation
 Provision for direct access to the chairperson of the Audit Committee
 Independent Directors to ensure that Vigil Mechanism is adequate and functional
 To be disclosed on website, if any, and in the Board’s report
Fraud in relation to affairs of a company includes :
any act, omission, concealment of any fact, or abuse of position,
committed by any person or any other person with the connivance ,
with intent : to deceive, to gain undue advantage from , or to injure the interests of, the
company or its shareholders or its creditors or any other person;
whether or not there is any wrongful gain or wrongful loss.
Imprisonment – Min. 6 months (3 yrs. if public interest) Max. 10 years and
Fine – Min. - Amount involved in the fraud, Max. - 3 times of amount
Auditor to report to the Central Government:
if he has any reason to believe that any offence involving fraud is being committed or has
been committed against the company by its officers or employees
Officer who is in Default
● If no KMPs, Board specified directors who have consented, else the entire
Any person, under the immediate authority of the Board or any KMP:
– who is charged with any responsibility including maintenance, filing or
distribution of accounts or records
– who authorises, actively participates in, knowingly permits or
knowingly fails to take active steps to prevent, any default
● Any person in accordance with whose advice, directions or instructions the
Board is accustomed to act (except professional advisors)
● Every director, who is aware of a contravention by virtue of receipt
by him of any proceedings of the Board or participation in such
proceedings without objecting to the same, or where the contravention is
with consent/connivance
Class Action Suits
Members / depositors empowered to file class action suit.
If affairs of company are being conducted prejudicial to the interests of the company /
members / depositors
Requisite number of members for filing a suit is as under:
o At least 100 depositors or 100 members or specified percentage of depositors/members
by number or value (as prescribed) whichever is lower .
Relief includes claim for :
Compensation, or
Any other suitable action
Thank You!
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should
not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty
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by law, PricewaterhouseCoopers Private Limited, its members, employees and agents do not accept or assume any liability, responsibility or
duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this
publication or for any decision based on it.
© 2013 PricewaterhouseCoopers Private Limited. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers Private
Limited which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.
Related Party Transactions
Who is a Related Party
Companies Act
A director or his ‘relative’
A firm in which a director or his relative is a partner
A private company in which a director or manager is a member or director
A public co in which a director along with relatives hold more than 2% of paid up capital
Any body corporate whose Board or MD is accustomed to act per instructions of a director of
the Co.
Any person on whose instruction a director is accustomed to act
A KMP or his relative
Holding co/Subsidiary co / Associate co (JV/ significant influence – 20% shareholding or
control of business decisions under agreement)/subsidiary companies of same holding
Director /KMP of the holding company or his ‘relative’
Listing Agreement
Person/‘Relatives’ exercising control/significant influence over entities; such entities
Group Companies
Associate co/JV co of group companies
Transactions covered
Companies Act
Sale, purchase or supply of goods or materials
Selling or disposing or buying property of any kind
Leasing of property of any kind
Availing or rendering of services
Related party appointment to any office/place of profit in Co./subsidiary/associate
Appointment of any agent for purchase/sale of goods, materials, services/property
Underwriting the subscription of any securities
Financial transactions with related parties/directors
Listing Agreement
Transfer of resources, services or obligations between co and related party, regardless of
whether price is charged
Prior approval of the Audit Committee and Board of Directors required
Special Resolution of Shareholders (within 3 months of entering)
Disclosure in Board Report +justification for contract/arrangement
Arms length/ordinary course of business criteria – not applicable under Listing
Related Party Transactions- When to go to shareholders?
For each transaction, if paid up capital of the company is INR 10 crores or more, or,
Sale/purchase/ supply of goods or materials (directly or through agents) exceeding
25% of annual turnover
Selling/ disposing/ buying property (directly or through agents) exceeding 10% of
the net worth
Leasing of property of any kind exceeding 10% of the net worth or 10% of turnover
Availing/ rendering of any services (directly or through agents) exceeding 10% of
the net worth.
Appointment to office/ place of profit (in company/ subsidiary/ associate co. ) at
monthly remunerations exceeding INR 2.5 lakh;
Remuneration for underwriting subscription/ derivatives exceeding 1% of net worth.
Approval of central government not required
Exemption in case of transactions in the ordinary course of business if done on
an arms’ length basis . NOT in CASE OF LISTING AGREEMENT
Restriction on non-cash transactions involving
directors (S. 192)
Unless prior approval is accorded in general meeting (of co. or holding co.), a company not to
enter into an arrangement by which –
 its director or of its H/S/A co. or person connected with such director – acquires or is to
acquire assets for consideration other than cash, from the company; or
the company acquires or is to acquire assets for consideration other than cash, from such
director or persons so connected.
Corporate Social Responsibility
Corporate Social Responsibility - Matters
• Can set up its own Sec. 8 company, trust
or society or work with other such entities
(to have a 3-year track record)
• Surplus out of CSR activity not to be part of
business profits
• Direct/ indirect contribution to a political
party under Sec. 182 not to be considered
CSR activity
• Excludes activities undertaken in
pursuance of the normal course of
business of a company
• Excludes activities benefitting only the
employees and their families
Establish CSR Committee
Establish governance mechanism
Earmark CSR corpus
Develop and approve CSR policy
Set-up for implementation
Implement projects
Monitor progress
Report and disclose performance
CSR areas – Schedule VII (1)
Development oriented
• Eradicating hunger,
poverty and malnutrition
• Promoting preventive
• Promoting sanitation and
making available safe
drinking water
• Livelihood enhancement
• Promotion and
development of
traditional arts and
• Rural development
Environment oriented
• Ensuring environmental
• Ecological balance
• Protection of flora and
• Animal welfare
• Agro forestry
• Conservation of natural
• Maintaining quality of
soil, air and water
Promoting art, culture,
• Protection of natural
heritage, art and culture
including restoration of
buildings and sites of
historical importance and
works of art
• Setting up public
• Training to promote rural
sports, nationally
recognized sports,
Paralympics sports and
Olympic sports
CSR areas – Schedule VII (2)
Beneficiary oriented
• Promoting education,
including special
education especially
among children, women,
elderly and the differently
• Promoting employment
enhancing vocational skills
especially among children,
women, elderly and the
differently abled
Beneficiary specific
• Promoting gender equality
and empowering women
• Setting up homes and
hostels for women and
• Setting up old age homes,
day care centres for senior
• Measures for reducing
inequalities faced by
socially /economically
backward groups
• Measures for benefit of
armed forces veterans, war
widows, etc.
Contribution to Funds
• Contribution to the PM’s
relief fund or any other
fund setup by the central
government for socioeconomic development
and relief and welfare of
SC, ST, other backward
class, minorities and
• Contributions or funds
provided to technology
incubators located within
academic institutions
which are approved by the
Central Government
Board Composition
Board Proceedings
Independent Directors
Key managerial Personnel
Managerial Remuneration
Board Committees
Shareholder Meetings
Board & Auditor’s report
Corporate Governance

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