The Companies Bill 2012, tabled in the Indian Parliament in 2011 was passed by the Lok Sabha on December 18, 2012 and thereafter by the Rajya Sabha on August 8, 2013. The Bill received the assent of the President on August 29, 2013 and was notified in the Official Gazette on August 30, 2013. The Companies Act, 2013 (2013 Act) is progressive, aims at better governance and a higher level of transparency & disclosures, and endeavours to harmonize various laws relating to companies under the Companies Act, SEBI regulations and Listing Agreements. Ministry of Corporate Affairs has also published the Draft Rules for a total of 16 chapters (Draft Rules) for public comments. So far, 98 Sections of the 2013 Act have been notified with effect from September 12, 2013. In this paper, we attempt to draw a comparative analysis of the 2013 Act with the provisions of the Companies Act, 1956 (1956 Act).
Incorporation and ancillary matters
Types of Companies
The 2013 Act has introduced following new concepts and types of private limited companies:
A private company with a paid-up share capital not exceeding INR 50 lakhs (or such higher amount as may be prescribed which shall not be more than INR 5 crore), or with a turnover (as per its last profit and loss account) not exceeding INR 2 cr (or such higher amount as may be prescribed which shall not be more than INR 20 crore) is a ‘small company’. “Turnover” means the aggregate value of the realisation of amount made from the sale, supply or distribution of goods or on account of services rendered, or both, by the company during a financial year. However, the concept of small company shall not apply to a holding company or a subsidiary company or a non-profit company registered with charitable objects.
Relaxations to small companies:
- Two Board meetings may be held in each half of a calendar year provided the gap between 2 meetings should not be less than 90 days;
- Not required to prepare Cash Flow Statement as one of the mandatory financial statements; and
- Annual Return may be signed just by its Company Secretary (CS) or any Director in absence of CS.
One Person Company:
A private company with only a sole member is ‘one person company’. Its Memorandum of Association (MOA) shall indicate the name of another person, with his consent, who shall, in the event of the subscriber’s death or his incapacity to contract become the member of the company (“Successor”). The Draft Rules provide that only a natural person may be a member or the successor. This will enable the unorganised sector of proprietorship firms with unlimited liability to transform into the organised version of a private limited company with limited liability.
Relaxations to One Person Companies:
- All the relaxations applicable to small companies
- May have a single director
- Not required to hold any general meeting - the relevant resolution may be communicated by the sole member to the company and entered in the minutes-book;
- Not required to hold any Board Meeting where there is only one director. The relevant resolution may be communicated by the sole director to the company and entered in the minutes-book;
A company which has not been carrying on any business or operation, or has not made any significant accounting transaction during the last two financial years, may apply to the Registrar of Companies (ROC) for according them the status of ‘Dormant Company’. This status may be retained by the company by filing such documents and by paying such annual fee to the ROC. This concept shall be specifically helpful for investors who are anticipating award of a project in future or simply desire to hold an asset.
Private Company may have 200 Members: The maximum number of members for a private company has now been increased to 200 from 50 under the 2013 Act, thus enabling a private company to reach out to more investors.
Incorporation of companies
New requirements for incorporation of all kinds of companies: a) Furnishing of correspondence address till the registered office is established; b) Filing of affidavit from each of the subscribers and from the first directors, that he qualifies to act as designated; c) Filing of declaration by a professional, person named in the Articles as director, manager or secretary to comply with the procedures laid down; d) Filing of particulars of interests of the persons mentioned in the articles as the first directors of the company in other firms or bodies corporate.
Board of Directors
Maximum of 15 Directors
The 2013 Act provides that any company (including a private company) can have a maximum of 15 directors and a provision for a higher number of directors requires approval by a special resolution of the shareholders.
Resident Director: At least one director of the company should be a person who has lived in India for not less than 182 days in the previous calendar year. All companies shall be required to comply with this requirement within one year of notification of this provision.
Woman Director: As per the Draft Rules, every listed company shall, within 1 year, and every other company having a paid-up share capital of INR 100 Crore or more shall within 5 years, of notification of this provision, appoint at least 1 woman director.
Key Managerial Personnel
The 2013 Act introduces the definition of "Key Managerial Personnel" (KMP) to mean the Chief Executive Officer (CEO) or the Managing Director (MD) or the Manager; the Company Secretary; the Whole-time Director; the Chief Financial Officer (CFO); and any such other officer as may be prescribed. KMP has been included within the definition of “Officer in Default” and consequently, where there is no KMP, all the directors shall be deemed as the officers in default, provided no specific director has been specified by the Board and has given his consent for compliance of any specific provision.
Certain class of companies as may be prescribed, shall be required to appoint a "whole-time" key managerial personnel comprising an MD or CEO or manager and in their absence a WTD; and a Company Secretary; and a CFO. The 2013 Act also provides that an individual will not be eligible for appointment or re-appointment as chairperson of the company as well as MD or CEO, after the commencement of the 2013 Act unless the same is permitted by the AOA or the company is not engaged in multiple businesses. A whole time key managerial personnel cannot hold office in more than one company at the same time, with the exception of the subsidiary company or is the managing director of both companies and has been so appointed with the consent of all the directors present at the Board meeting. A whole time key managerial personnel holding such positions at the commencement of the 2013 Act will be required to choose one company for their appointment within 6 months.
Every listed company shall have at least one-third of the total strength of the board as independent directors. As per the Draft Rules, all public companies having minimum paid up share capital or net worth of INR 100 Crore; or public companies having aggregate outstanding loans/ borrowings/debentures /deposits exceeding INR 200 Crore shall also be required to have a minimum of one-third of its directors as independent director. A company may appoint an independent director from the data bank maintained by authorised agencies. It shall also be necessary for a private company to have independent director where it is required to constitute a CSR committee or to call its Board meeting at a notice shorter than 7 days. Currently, the listing agreement provides that if the same person is the Chairman and Managing Director or the chairman is a promoter, at least half of the Board should comprise independent directors.
Returns and Records
Common Form: The provisions governing preparation of annual returns is now same for all classes of companies. Under the 1956 Act there were separate provisions for preparation of annual returns by companies with and without share capital.
Additional details: A company shall be now required to furnish additional details, as on the close of the FY, regarding its holding, subsidiary and associate companies; promoters, directors, key managerial personnel (with changes in the preceding FY); meetings of members or classes of members and various committees and attendance; remuneration of directors and key managerial personnel; its members and debenture-holders along with changes therein since the close of the previous FY; any penalties imposed on the company or its directors or officers and matters relating to certification of compliances, disclosures made, meetings held, etc. as may be prescribed.
Books of Accounts and Financial Statements
Electronic mode: Books of accounts can now be maintained in electronic mode.
Branch accounts: Books of accounts even of branch offices have to be kept at the registered office of the company. With respect to branch offices outside India periodical returns have to be sent to India.
Financial Year: Under the 1956 Act, a “financial year” meant period for which accounts were placed before the AGM whether such period was a year or not. The 2013 Act has introduced the concept of a uniform “financial year”i.e. period ending on the 31st day of March every year, and where a company is incorporated on or after the 1st day of January of a year, 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. However, on an application made by a company or its foreign holding company or its foreign subsidiary, which is required to follow a different financial year for consolidation of its accounts outside India, the Tribunal may allow change in the financial year of the company. Existing companies shall be required to align its financial year as per this requirement within a period of 2 years from the notification of this definition.
Corporate Social Responsibility
Requirement: The 2013 Act has introduced a new concept of Corporate Social Responsibility (CSR). Companies which are required to comply with the CSR are companies having net worth of INR 500 Crore or more, or companies having turnover of INR 1000 Crore or more, or companies having net profit of INR 5 Crore or more.
CSR Committee: A CSR committee has to be formed comprising of minimum 3 directors, at least one of whom shall be independent. This requirement is applicable uniformly to public as well as private companies.
CSR Expenditure: The Board has to ensure that at least 2% of the average net profits of the last 3 financial years is utilized towards CSR initiatives. In case of failure to do so, the Board’s report shall disclose the reasons for the same. The CSR Committee will be responsible for formulation of a CSR Policy and recommendation of the same to the Board; recommending the amount of expenditure to be incurred on such activities; and monitoring the CSR Policy of the company.
New definition includes agent and e-commerce
“Foreign company” has been re-defined so as to include within its ambit any company or body corporate incorporated outside India which— (a) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and (b) conducts any business activity in India in any other manner.
Foreign companies owned by Indians
Further, where not less than 50% of the paid-up share capital (equity or preference) of a foreign company is held by citizens or companies or bodies corporate of India, such foreign company shall comply with the provisions of Chapter XXII and other prescribed provisions of the 2013 Act, with regard to the business carried on by it in India as if it were a company incorporated in India. Consequently, foreign companies operating in India through agents or through electronic mode or foreign companies of which 50% shares are held by Indians (citizens or bodies corporate) shall also have to register in India and file its annual accounts with the ROC.
Mergers and Acquisitions
Merger with foreign companies
The 2013 Act now allows mergers of Indian companies with such foreign companies that are domiciled in the jurisdictions notified by the Government. The approval of the RBI shall be a pre-requisite.
Fast track mergers
The 2013 Act also provides for fast-track mergers of small companies and mergers of holding companies and their wholly owned subsidiaries, which may be effected without approaching the Tribunal. However it is mandated that such mergers be approved by 90% of each class of shareholders and creditors instead of the requirement of 75% majority as in the case of companies other than the ones covered in this category. Further, the directors are required to file ‘Declaration of Solvency’ with the Registrar of Companies. Also required is an advance notice to ROC and Official Liquidators (OL), who may give their comments on the scheme within 30 days. The comments and concerns of ROC & OL should be addressed by companies before seeking approvals from shareholders and creditors for the scheme.
Notice to statutory authorities
One major incorporation in the 2013 Act is that notice of meeting to approve a merger/amalgamation has to be sent to the Central Government, Income Tax Department, SEBI, RBI, ROC, CCI, Official Liquidator, respective Stock Exchanges and such other regulators as may be prescribed for seeking their representations, if any, within 30 days from the date of receipt of such notice. There is a general concern that this requirement may delay approvals for mergers when there is a dispute between the company and any statutory authority.
Meeting of creditors
The meeting of creditors can be dispensed with if creditors holding 90% or more value of total debt of the company approve the scheme by way of an affidavit. Dissenting shareholders: The 2013 Act provides that only persons holding 10% or more of the shareholding; or having 5% or more of the total outstanding debt can object to a merger/amalgamation.
Acquisition of minority:
The 2013 Act also empowers the transferee company to compulsorily acquire shares of the dissenting shareholders where the scheme has been approved by 90% (in value) of shareholders whose transfer is involved. The 2013 Act also enables the acquirer of shares to notify the company of its intention to acquire minority stake, in the event of such acquirer becoming holder of 90% of the issued share capital of the transferee company. The Act provides for acquisition of shares of minority shareholders without their consent when an acquirer owns 90% of the voting strength of a company; likewise there is an obligation on the acquirer to make an offer at the highest negotiated price to acquire the shares of the balance shareholders once it acquires at least 90% of the shareholding.
Class Action Suits
The 2013 Act empowers the members, depositors or any class of them (a prescribed minimum) to file an application with the Tribunal for adequate remedy if they are of the opinion that the management or affairs of any company are being conducted in a manner prejudicial to the interests of the company, its members or depositors.
As per the Draft Rules and the 2013 Act, the requisite number of minimum members for this purpose shall be as follows: (a) 100 or more for companies having share capital or 10% or more of the total members, whichever is less; or members holding 10% or more of the issued share capital; (b) one-fifth or more of total members in case of company not having share capital. The minimum number of depositors is 100 or 10% of total number of depositors, whichever is less.
[This write-up is an abridged version containing extracts from the paper published in the monthly e-newsletter Corporate Amicus - September, 2013]