Auditing 2013

Chapter 1
Key Definitions & 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 & RESPONSIBILITY
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:
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• 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),
149(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
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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
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• 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.Companies Act, 2013
7. Mergers and Acquisition
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
values.
8. Corporate social responsibility
The 2013 Act makes an effort to introduce the culture of corporate social
responsibility (CSR) in Indian corporate by requiring companies to formulate a
corporate social responsibility policy and at least incur a given minimum
expenditure on social activities.
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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:
1 A Hindu undivided family carrying on any business
2 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]
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Chapter 2
SETTING OF A COMPANY
The 2013 Act introduces a new from of entity ‘One- person company’ and
incorporates certain new provisions in respect of memorandum & articles of
association. For instance, the concept of including entrenchment provisions in the
article of association has been introduced
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Incorporation of a company
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 ‘one-
person company’ (OPC). An OPC means a company with only one person as its member
[section 3(1) of 2013 Act].The draft rules state that only a natural person who is an Indian
citizen and resident in India can incorporate an OPC or be a nominee for the sole member of
an OPC. *
2. Memorandum of association
Content: The 2013 Act specifies the mandatory content for the memorandum of association
which is similar to the existing provisions of the 1956 Act and refers inter-alia to the
following:
1 Name of the company with last word as limited or private limited as the case may be
2 State in which registered office of the company will be situated
3 Liability of the members of the company
However, as against the existing requirement of the 1956 Act, the 2013 Act does not require
the objects clause in the memorandum to be classified as the following:
(i) The main object of the company
(ii) Objects incidental or ancillary to the attainment of the main object
(iii) Other objects of the company [section 4(1) of 2013 Act]
The basic purpose in the 1956 Act for such a classification as set out in section 149 of the
1956 Act, is to restrict a company from commencing any business to pursue ‘other objects of
the company’ not incidental or ancillary to the main objects except on satisfaction of certain
requirements as prescribed in the 1956 Act like passing a special resolution, filing of
declaration with the ROC to the effect of resolution.
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Reservation of name: The 2013 Act incorporates the procedural aspects for applying for the
availability of a name for a new company or an existing company in sections 4(4) and 4(5) of
2013 Act.
3. Articles of association
The 2013 Act introduces the entrenchment provisions in respect of the articles of association
of a company. An entrenchment provision enables a company to follow a more restrictive
procedure than passing a special resolution for altering a specific clause of articles of
association. A private company can include entrenchment provisions only if agreed by all its
members or, in case of a public company, if a special resolution is passed[section 5 of 2013
Act].
4. Incorporation of company
The 2013 Act mandates inclusion of declaration to the effect that all provisions of the 1956
Act have been complied with, which is in line with the existing requirement of 1956 Act.
Additionally, an affidavit from the subscribers to the memorandum and from the first
directors has to be filed with the ROC, to the effect that they are not convicted of any offence
in connection with promoting, forming or managing a company or have not been found guilty
of any fraud or misfeasance, etc., under the 2013 Act during the last five years along with the
complete details of name, address of the company, particulars of every subscriber and the
persons named as first directors.
The 2013 Act further prescribes that if a person furnishes false information, he or she, along
with the company will be subject to penal provisions as applicable in respect of fraud i.e.
section 447 of 2013 Act [section 7(4) of 2013 Act; Also refer the chapter on other areas]
5. Formation of a company with charitable objects
An OPC with charitable objects may be incorporated in accordance with the provisions of the
2013 Act. New objects like environment protection, education, research, social welfare etc.,
have been added to the existing object for which a charitable company could be incorporated.
As against the existing provisions under which a company’s licence could be revoked, the
2013 Act provides that the licence can be revoked not only where the company contravenes
any of the requirements of the section but also where the affairs of the company are
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conducted fraudulently or in a manner violative of the objects of the company or prejudicial
to public interest. The 2013 Act thus provides for more stringent provisions for companies
incorporated with charitable objects[section 8 of 2013 Act].
The 2013 Act introduces a new form of entity ‘one-person company’ and incorporates certain
new provisions in respect of memorandum and articles of association. For instance, the
concept of including entrenchment provisions in the articles of association has been
introduced.
6. Commencement of Business, etc
The existing provisions of the 1956 Act as set out in section 149 which provide for
requirement with respect to the commencement of business for public companies that have a
share capital would now be applicable to all companies.
The 2013 Act empowers the ROC to initiate action for removal of the name of a company in
case the company’s directors have not filed the declaration related to the payment of the
value of shares agreed to be taken by the subscribers to the memorandum and that the paid-up
share capital of the company is not less than the prescribed limits as per the 2013 Act, within
180 days of its incorporation and if the ROC has reasonable cause to believe that the
company is not carrying on business or operations [section 11 of 2013 Act].
7. Registered office of company
Where a company has changed its name in the last two years, the company is required to
paint, affix or print its former names along with the new name of the company on business
letters, bill heads, etc. However, the 2013 Act is silent on the time limit for which the former
name needs to be kept [section 12 of 2013 Act].
8. Alteration of memorandum
The 2013 Act imposes additional restriction on the alteration of the object clause of the
memorandum for a company which had raised money from the public for one or more objects
mentioned in the prospectus and has any unutilised money. The 2013 Act specifies that along
with obtaining an approval by way of a special resolution, a company would be required to
ensure following if it intends to alter its object clause:
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1 Publishing the notice of the aforesaid resolution stating the justification of variation in
two newspapers.
2
3 Exit option can be given to dissenting shareholders by the promoters and shareholders
having control in accordance with the regulations to be specified by the Securities and
Exchange Board of India (SEBI) [section 13 of 2013 Act].
9. Subsidiary company not to hold shares in its holding company
The existing provision of section 42 of the 1956 Act which prohibits a subsidiary company to
hold shares in its holding company continues to get acknowledged in the 2013 Act. Thus, the
earlier concern that if a subsidiary is a body corporate, it may hold shares in another body
corporate which is the subsidiary’s holding company continues to apply[section 19 of 2013
Act].
Prospectus and public offer
The 2013 Act has introduced a new section [section 23] to explicitly provide the ways in
which a public company or private company may issue securities. This section explains that a
public company may issue securities in any of the following manners:
1 To public through prospectus
2 Through private placement
3 Through rights issue or a bonus issue.
For private companies, this section provides that it may issue securities through private
placement, by way of rights issue or bonus issue.
Section 23 also provides that compliance with provisions of part I of chapter III is required
for the issue of securities to public through prospectus. For private placement compliance,
with the provisions of part II of chapter III are required.
The 2013 Act also introduces certain changes with respect to prospectus and public offers
aimed at enhancing disclosure requirements as well as streamlining the process of issuance of
securities.
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1. Issue of prospectus
Currently, the matters and reports to be included in the prospectus are specified in parts I and
II of Schedule II of the 1956 Act. In the 2013 Act, the information to be included in the
prospectus is specified in section 26 of 2013 Act. The 2013 Act mandates certain additional
disclosures:
1 Any litigation or legal action pending or taken by a government department or a
statutory body during the last five years immediately preceding the year of the issue of
prospectus against the promoter of the company
Companies Act, 2013
0 Sources of promoter’s contribution The 2013 Act has also relaxed the disclosure
requirements in some areas. Examples of certain disclosures not included in the 2013 Act are
as follows. Particulars regarding the company and other listed companies under the same
management, which made any capital issues during the last three years Export possibilities
and export obligations
1 Details regarding collaboration.
The 2013 Act states that the report by the auditors on the assets and liabilities of business
shall not be earlier than 180 days before the issue of the prospectus [section 26 (1) (b)(iii) of
2013 Act]. The 1956 Act currently requires that the report will not be earlier than 120 days
before the issue of the prospectus.
1. Variation in terms of contract or objects
The 2013 Act states that a special resolution is required to vary the terms of a contract
referred to in the prospectus or objects for which the prospectus was issued [section 27 (1) of
2013 Act]. The 1956 Act currently requires approval in a general meeting by way of an
ordinary resolution. The 2013 Act also requires that dissenting shareholders shall be given an
exit offer by promoters or controlling shareholders [section 27 (2) of 2013 Act].
2. Offer of sale of shares by certain members of the company
The 2013 Act includes a new section under which members of a company, in consultation
with the board of directors, may offer a part of their holding of shares to the public. The
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document by which the offer of sale to the public is made will be treated as the prospectus
issued by the company. The members shall reimburse the company all expenses incurred by
it [section 28 of 2013 Act].
3. Shelf prospectus
The 2013 Act extends the facility of shelf prospectus by enabling SEBI to prescribe the
classes of companies that may file a shelf prospectus. The 1956 Act currently limits the
facility of shelf prospectus to public financial institutions, public sector banks or scheduled
banks [section 31 (1) of 2013 Act].
4. Global depository receipts (GDRs)
The 2013 Act includes a new section to enable the issue of depository receipts in any foreign
country subject to prescribed conditions [section 41 of 2013 Act]. Currently, the provisions of
section 81 of the 1956 Act relating to further issue of shares are being used in conjunction
with the requirements mandated by SEBI for the issuance of depository receipts. In several
aspects across the 2013 Act, it appears that the 2013 Act supplements the powers of SEBI by
incorporating requirements already mandated by SEBI.
5. Private placement
The 2013 Act requires that certain specified conditions are complied with in order to make an
offer or invitation of offer by way of private placement or through the issue of a prospectus.
1 The offer of securities or invitation to subscribe securities in a financial year shall be
made to such number of persons not exceeding 50 or such higher number as may be
prescribed {excluding qualified institutional buyers, and employees of the company being
offered securities under a scheme of employees stock option in a financial year and on such
conditions (including the form and manner of private placement) as may be prescribed}. This
provision of the 2013 Act is in line with the existing provision of the 1956 Act.
2 The allotments with respect to any earlier offer or invitation may have been
completed.
3 All the money payable towards the subscription of securities shall be paid through
cheque, demand draft or any other banking channels but not by cash.
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4 The offers shall be made only to such persons whose names are recorded by the
company prior to the invitation to subscribe, and that such persons shall receive the offer by
name.
5 The company offering securities shall not release any advertisements or utilise any
media, marketing or distribution channels or agents to inform the public at large about such
an offer [section 42 of 2013 Act].
Share Capital and Debentures
The chapter on share capital and debentures introduces some key changes in the 2013 Act. To
illustrate, the 2013 Act does not give any cognisance to the existing requirement of section 90
of the 1956 Act that provided some saving grace to private companies. Therefore, the
applicability of following sections of the 2013 Act is no longer restricted to public companies
and private companies which are subsidiaries of a public company and are now applicable to
private companies also.
1 Two kinds of shares capital
2 New issue of shares capital to be only of two kinds
3 Voting rights
1. Voting rights
The provisions of 2013 Act regarding voting rights are similar to the existing section 87 of
the 1956 Act. The only change noted in the 2013 Act is the removal of distinction provided
by the 1956 Act with respect to the entitlement to vote in case the company fails to pay
dividend to its cumulative and non-cumulative preference share holders [section 47 of 2013
Act]
The provisions regarding private placement and additional disclosures in prospectus will also
help to strengthen the capital markets.
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The 2013 Act proposes to re-instate the existing concept of shares with differential voting
rights. Pursuant to this section the company may face hardship with regards to computation
of proportionate voting rights.
2. Variation of shareholder’s rights
Similar to the other provisions of the 1956 Act, the 2013 Act acknowledges the requirements
of section 106 of the 1956 Act with an additional requirement in respect of those classes of
share holders whose rights are affected pursuant to any variation. The proviso to section
48(1) of 2013 Act states that if the variation by one class of shareholders affects the rights of
any other class of shareholders, the consent of three-fourths of such other class of
shareholders shall also be obtained and the provisions of this section shall apply to such
variation.
3. Application of premiums received on issue of shares
The 2013 Act lays down a similar requirement in section 52 as that of the section 78 of the
1956 Act in respect of application of premiums received on issue of shares; however, the
section of 2013 Act has a non-obstante provision in respect of certain class of companies
which would be prescribed at a later date. The 2013 Act states that these classes of companies
would not be able to apply the securities premium towards the below specified purposes,
unless the financial statements are in compliance with the accounting standards issued under
section 133 of 2013 Act:
1 Paying up unissued equity shares of the company as fully paid bonus shares
2 Writing off the expenses of or the commission paid or discount allowed on any issue
of equity shares of the company
3 Purchase of its own shares or other securities
4 The 2013 Act restricts the application of securities premium for a certain class of
companies if they fail to comply with the accounting standards. The 2013 Act continues to
state that securities premium amount can be utilised for purpose of writing off preliminary
expenses. However, in view of the requirements of accounting standard 26, intangible asset,
the requirement of this sub-section appears to be superfluous.
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5 4. Prohibition on issue of shares at a discount
6 Companies would no longer be permitted to issue shares at a discount. The only
shares that could be issued at a discount are sweat equity wherein shares are issued to
employees in lieu of their services[section 53 and Section 54 of 2013 Act].
7 Further, explanations I and II to the existing section 79A of the 1956 Act that
prescribe the provisions in respect of sweat equity have not been included in the 2013 Act.
Explanation I defined company for the purpose of this section and explanation II defined
sweat equity.
8 5. Issue and redemption of preference shares
The existing requirement of sections 80 and 80A of the 1956 Act with respect to the issue and
redemption of preference shares continues to be acknowledged by the 2013 Act. The 2013
Act reiterates the existing requirement that a company cannot issue preference shares with a
redemption date of beyond 20 years. However, it gives an exemption for cases where
preference shares Companies Act, 2013 have been issued in respect of infrastructure projects.
Infrastructure projects have been defined in Schedule VI of the 2013 Act and these shares
would be subject to redemption at such percentage as prescribed on an annual basis at the
option of such preference shareholders.
Further, the 2013 Act adds another administrative requirement of obtaining special resolution
with respect to the preference shares which could not be redeemed by a company. The 2013
Act states that where a company is not in a position to redeem any preference shares or to pay
dividend, if any, on such shares in accordance with the terms of issue, it may, with the
consent of the holders of three-fourths in value of such preference shares and with the
approval of the Tribunal issue further redeemable preference shares equal to the amount due,
including the dividend thereon, with respect to the unredeemed preference shares. On the
issue of such further redeemable preference shares, the unredeemed preference shares shall
be deemed to have been redeemed.
The 2013 Act does not envisage any penalty in respect of non-compliance with the provision
of this section, as was prescribed in sub-section (6) and (3) of section 80 and 80A of the 1956
Act respectively [section 55 of 2013 Act].
6. Refusal of registration and appeal against registration
The provision relating to refusal of registration of transfer or transmission of securities by
private and public companies has been separately clarified in the 2013 Act. The private and
public companies are required to send notice of refusal within 30 days of the receipt of
instrument of transfer, and aggrieved party may appeal to the Tribunal against the refusal
within the specified number of days [section 58(2) of 2013 Act].
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7. Further issue of share capital
The existing requirement of section 81 of the 1956 Act in regard to further issue of capital
would no longer be restricted to public companies and would be applicable to private
companies also, since sub-section 3 of section 81 of the 1956 Act has not been acknowledged
in the 2013 Act.
Further, the 2013 Act provides that a rights issue can also be made to the employees of the
company who are under a scheme of employees’ stock option, subject to a special resolution
and subject to conditions as prescribed. Further, the price of such shares should be
determined using the valuation report of a registered value, which would be subject to
conditions as prescribed [section 62 of 2013 Act].
8. Issue of bonus shares
The existing 1956 Act does not have any specific provision dealing with issue of bonus
shares although it has referred to the concept of bonus shares at many places. The 2013 Act
includes a new section that provides for issue of fully paid-up bonus shares out of its free
reserves or the securities premium account or the capital redemption reserve account, subject
to the compliance with certain conditions such as authorisation by the articles, approval in the
general meeting and so on [section 63 of 2013 Act].
9. Unlimited company to provide for reserve share capital on conversion into limited company
This section corresponds to section 32 of the 1956 Act and seeks to provide that an unlimited
company having a share capital may be re-registered as a limited company by increasing the
nominal amount of each share, subject to the condition that no part of the increased capital
shall be capable of being called up, except in the event and for the purposes of the company
being wound up. The 2013 Act further provides that a specified portion of its uncalled share
capital shall not be capable of being called up except in the event and for the purposes of the
company being wound up[section 65 of 2013 Act].
10. Reduction of share capital
The 2013 Act gives cognisance to one of the amendments made in the listing agreement by
SEBI. A new clause 24(i) was inserted to the listing agreement which provided that a scheme
of amalgamation or merger or reconstruction, should comply with the requirements of section
211(3C) of the 1956 Act. A similar requirement has been introduced in section 66 of 2013
Act, which states that no an application for reduction of share capital shall be sanctioned by
the Tribunal unless the accounting treatment, proposed by the company for such a reduction
is in conformity with the accounting standards specified in section 133 or any other provision
of the 2013 Act and a certificate to that effect by the company’s auditor has been filed with
the Tribunal.
11. Power of the company to purchase its own securities
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The existing provision of section 77A of the 1956 Act has been acknowledged by the 2013
Act. The only difference is that the option available to company for a buy-back from odd lots
is no longer available [section 68].
The 2013 Act provides flexibility in management and administration by recognising the
electronic mode for notices and voting, which is in line with the MCA’s efforts to give
cognisance to use of electronic media as evident from a number of green initiatives’
introduced recently, maintenance of registers and returns at a place other than the registered
office.
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Chapter 3
MANAGEMENT & ADMINISTRATION
The 2013 Act also intends to improve corporate governance by requiring disclosure of nature
of concern or interest of every director, manager, any other key managerial personnel and
relatives of such a director, manager or any other key managerial personnel & reduction in
threshold of disclosure from 20% to 20%. The term ‘key managerial personnel’ has now been
defined in the 2013 Act & means the chief executive officer, managing director, manager,
company secretary, whole-time director, chief financial officer and any such other officer as
may be prescribed.
1.Annual return
The 2013 Act states that requirement of certification by a company secretary in practice of
annual return will be extended to companies having paid up capital of five crore INR or more
and turnover of 25 crore INR or more* (section 92(2) of 2013 Act and the 1956 Act requires
certification only for listed companies).
The information that needs to be included in the annual return has been increased. The
additional information required, includes particulars of holding, subsidiary and associate
companies, remuneration of directors and key managerial personnel, penalty or punishment
imposed on the company, its directors or officers [section 92(1) of 2013 Act].
2. Place of keeping registers and returns
The 2013 Act allows registers of members, debenture-holders, any other security holders or
copies of return, to be kept at any other place in India in which more than one-tenth of
members reside [section 94(1) of 2013 Act]. The flexibility in the 1956 Act is limited to a
place within the city, town or village in which the registered office is situated.
3. General meetings
The 2013 Act states that the first annual general meeting should be held within nine months
from the date of closing of the first financial year of the company [section 96(1) of 2013 Act],
whereas the 1956 Act requires the first annual general meeting to be held within 18 months
from the date of incorporation.
Currently, the 1956 Act does not define business hours, which the 2013 Act now defines as
between 9 am and 6 pm. The 2013 Act states that annual general meeting cannot be held on a
national holiday whereas the annual general meeting cannot be held on a public holiday as
per the existing provisions of section 166(2) of the 1956 Act [section 96(2) of 2013 Act].
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Chapter 3
In order to call an annual general meeting at shorter notice, the 2013 Act requires consent of
95% of the members as against the current requirement in the 1956 Act which requires
consent of all the members [section 101(1) of 2013 Act].
The 2013 Act states that besides director and manager, the nature of concern or interest of
every director, manager, any other key managerial personnel and relatives of such director,
manager or any other key managerial personnel in each item of special business will also
need to be mentioned in the notice of the meeting [section 102 (1) of 2013 Act]. Also, the
threshold of disclosure of share holding interest in the company to which the business relates
of every promoter, director, manager and key managerial personnel has been reduced from
20% to 2% [section 102 (2) of 2013 Act].
The 2013 Act states that in case of a public company, the quorum will depend on number of
members as on the date of meeting. The required quorum is as follows:
• Five members if number of members is not more than one thousand
• Fifteen members if number of members is more than one thousand but up to five
thousand
• Thirty members if number of members is more than five thousand [section 103 (1) of
2013 Act]
A limit has been introduced on the number of members which a proxy can represent. The
2013 Act has introduced a dual limit in terms of number of members, which is prescribed as
50 members and also sets a limit in terms of number of shares holding in the aggregate not
more than 10 % of the total share capital of the company carrying voting rights* [section 105
(1) of 2013 Act].
Further, it is relevant to note that private companies cannot impose restrictions on voting
rights of members other than due to unpaid calls or sums or lien [section 106 (1) of 2013
Act].
Listed companies will be required to file with the ROC a report in the manner prescribed in
the rules on each annual general meeting including a confirmation that the meeting was
convened, held and conducted as per the provisions of the 2013 Act and the relevant rules
[section 121 of 2013 Act].
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Chapter 3
4. Other matters
Listed companies will be required to file a return with the ROC with respect to the change in
the number of shares held by promoters and top ten shareholders within 15 days of such a
change[section 93 of 2013 Act]. This requirement again demonstrates the effort made
towards synchronising the requirements under the 2013 Act and the requirements under
SEBI. Additionally, on an annual basis, companies are also currently required to make the
disclosures with respect to top shareholders under the Revised Schedule VI the 1956 Act.
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 cognisance under the 1956 Act.
Additionally, it is also pertinent to note that these standards do not have a mandatory status
for the practicing company secretaries.
The 2013 Act also intends to improve corporate governance by requiring disclosure of nature
of concern or interest of every director, manager, any other key managerial personnel and
relatives of such a director, manager or any other key managerial personnel and reduction in
threshold of disclosure from 20% to 2%. The term ‘key managerial personnel’ has now been
defined in the 2013 Act and means the chief executive officer, managing director, manager,
company secretary, whole-time director, chief financial officer and any such other officer as
may be prescribed.
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General
1. Woman director
The category of companies which need to comply with the requirement of having at least of
one woman director are as follows: * [section 149(1) of 2013 Act]
(i) Every listed company, within one year from the commencement of second proviso to sub-
section (1) of section 149
(ii) Every other public company that has paid–up share capital of one hundred crore rupees or
more, or a turnover of three hundred crore rupees or more within three years from the
commencement of second proviso to sub-section (1) of section 149
2. Number of directorship
The 2013 Act increases the limit for number of directorships that can be held by an individual
from 12 to 15 [section 149(1) of 2013 Act].3. One director to be resident in India
A new requirement with respect to directors is that at least one director to have stayed in
India for at least 182 days in the previous calendar year [section 149(3) of 2013 Act].
4. Independent directors
One of the significant aspects of the 2013 Act is the effort made towards incorporating some
of the salient requirements mandated by the SEBI in clause 49 of the listing agreement in the
2013 Act itself. To this effect, the 2013 Act requires every listed public company to have at
least one-third of the total number of directors as independent directors. Further, the central
government in the draft rules has prescribed the minimum number of independent directors in
case of the following classes of public companies* [section 149(4) of 2013 Act].
(i) Public companies having paid up share capital of 100 crore INR or more; or
(ii) Public companies having turnover of 300 crore INR or more
(iii) Public companies which have, in aggregate, outstanding loans or borrowings or
debentures or deposits, exceeding 200 crore INR.
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Chapter 4
DIRECTORS
The 2013 Act also states that companies will have a period of one year to ensure compliance
with the 2013 Act and the Rules that are framed.
5. Appointment of Additional Director
It is pertinent to note that, in order to discourage inappropriate practices, the 2013 Act states
that any person who fails to get elected as a director in the general meeting can no longer be
appointed as an additional director by the board of directors [section 161 of 2013 Act]
6. Additional compliance requirements for private companies
There are certain increased compliance requirements mandated for private companies which,
till now, were mandated only for public companies and private companies which are
subsidiaries of public companies. These include the following:
1 Appointment of director to be voted individually
2 Option to adopt principle of proportional representation for appointment of directors
Ineligibility on account of non-compliance with section 274(1)) (g) now extended for
appointment or reappointment as a director in a private limited company also.
Meetings of the board and its powers
There have been significant inroads made by the MCA in the recent past with respect to
giving cognisance to use of electronic media in day-to-day operations of corporates. The
2013 Act takes this further by allowing use of electronic mode for sending notice of meetings
[section 173(3) of 2013 Act], passing of resolution by circulation [section 175 of 2013 Act]
and other areas. Some of the other significant changes in relation to the board and its
functioning include:
1. Audit committee
The requirements relating to audit committees was first introduced by the Companies
(Amendment) Act, 2000. Audit committees are a measure of ensuring self discipline,
constituted with the object to strengthen and oversee management in public companies and to
ensure that the board of directors discharge their functions effectively. The 2013 Act
acknowledges the importance of an audit committee and entrusts it with additional roles and
responsibilities [section 177 of 2013 Act].
However, the fact that the 2013 Act is not entirely in harmony with the requirements of
clause 49 of the equity listing agreement, cannot be ignored. While most of the requirements
including establishment of a ‘vigil mechanism’ for directors and employees to report genuine
concerns, that are similar to the requirements of clause49 of the equity listing agreement have
been incorporated in the 2013 Act, the differences are as follows:
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Chapter 4
DIRECTORS
1
2 As per the 2013 Act, the audit committee should have majority of independent
directors.
3 Chairman of the audit committee need not be an independent director.
4 A majority of the members of the audit committee should be financially literate, i,e.
should have the ability to read and understand the financial statements.
5 Every listed company and the following class (es) of companies as prescribed in the
draft rules should establish a vigil mechanism for directors and employees to report genuine
concerns such as :
- Companies which accept deposits from the public
- Companies which have borrowed money from banks and public financial institutions in
excess of fifty crore rupees
2. Nomination and remuneration committee and stakeholders relationship committee
The 2013 Act includes this new section requiring constituting the nomination and
remuneration committee by every listed company and the following classes of companies as
prescribed in the draft rules:*
(A) Every listed company
(B) Every other public company that has a paid-up capital of 100 crore INR or more or which
has, in aggregate, outstanding loans or borrowings or debentures or deposits exceeding
200 crore INR.
The Nomination and Remuneration Committee is required to formulate and recommend to
the Board of Directors, the company’s policies, relating to the remuneration for the directors,
key managerial personnel and other employees, criteria for determining qualifications,
positive attributes and independence of a director [section 178(1) of 2013 Act].
Further, a board of a company that has more than 1000 shareholders, debenture-holders,
deposit-holders and any other security holders at any time during a financial year is required
to constitute a Stakeholders Relationship Committee [section 178(5) of 2013 Act].
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Chapter 4
DIRECTORS
3. Contributions to charitable funds and political parties
As per the 2013 Act the power of making contribution to ‘bona fide’ charitable and other
funds is proposed to be available to the board subject to certain limits [section 181 of 2013
Act].As per the existing requirement of section 293 of the 1956 Act, such power could only
be exercised in the general meeting in case of public companies and subsidiaries of public
companies as per the 1956 Act.
Further, the limits of contribution to political parties is proposed to be increased to 7.5% of
the average net profits during the three immediately preceding financial years [section 182 of
2013 Act] from the existing limit of 5% under the 1956 Act.
4. Disclosure of interest by director
The 2013 Act prescribes similar requirements with respect to the disclosure of interest by the
director as contained in the existing section 299 of the 1956 Act. The only change that could
be identified is where a contract or arrangement entered into by the company without
disclosure of interest by director or with participation by a director who is concerned or
interested in any way, directly or indirectly, in the contract or arrangement, shall be voidable
at the option of the company [section 184 of 2013 Act].
5. Loans and investments by a company
The 2013 Act states that companies can make investments only through two layers of
investment companies subject to exceptions which includes company incorporated outside
India [section 186 of 2013 Act]. There are no such restrictions which are currently imposed
under the 1956 Act.
Further, the exemption available from the provisions of section 372A of the 1956 Act to
private companies as well as loans or investment given or made by a holding company to its
subsidiary company are no longer available under the 2013 Act.
6. Related party transactions
Most of the provisions under Section 188 of 2013 Act are quite similar to the requirements
under sections 297 and 314 of the 1956 Act. Some of key changes envisaged in the 2013 Act
include the following:
Need for central government approval has been done away with.
1 The 2013 Act has widened the ambit of transactions such as leasing of property of any
kind, appointment of any agent for purchase and sale of goods, material, services or property.
2 Cash at prevailing market price has now been substituted with ‘arm’s length
transaction’ which has been defined in the section.
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Chapter 4
DIRECTORS
3
4 Transactions entered into with related parties now to be included in the board’s report
along with justification for entering into such contracts and arrangements.
5 Penalty for contravention of the provisions of section 297 was covered in general
provisions in the 1956 Act. However, this is now covered specifically in the section itself
which now extends to imprisonment.
Central government may prescribe additional conditions.
1. Appointment of managing director, whole time director or manager [section 196 of
2013 Act].
1 The re-appointment of a managerial person cannot be made earlier than one year
before the expiry of the term instead of two years as per the existing provision of section 317
of the 1956 Act, however, the term for which managerial personnel can be appointed remains
as five years.
2 The eligibility criteria for the age limit has been revised to 21 years as against the
existing requirement of 25 years. Further, the 2013 Act lifts the upper bar for age limit and
thus an individual above the age of 70 years can be appointed as key managerial personnel by
passing a special resolution.
3 Provisions in respect of appointment of the managerial personnel have been specified
in section 196 and Schedule V to the 2013 Act. Companies Act, 2013.
2. Overall maximum managerial remuneration and managerial remuneration in case of absence
or inadequacy of profits [section 197 of 2013 Act]
As against the existing requirement of section 198 of the 1956 Act, which specifically
provides that the provisions of managerial remuneration would be applicable to both public
companies and private companies which are subsidiaries of public companies; the 2013 Act
states that such provisions would be applicable only to public limited companies.
Listed companies have been mandated to disclose in their board report, the ratio of
remuneration of each director to median employee’s remuneration and such other details
which are quite extensive as proposed in the draft rules
The existing 1956 Act under section 309 provides that a managing director or a whole time
director of a subsidiary company who is in receipt of commission from the holding company
cannot receive any commission or remuneration from the subsidiary company. The said
restriction has been removed by the 2013 Act, however, such receipt has to be disclosed in
the Board’s report [section 197(14) of 2013 Act]
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Chapter 4
DIRECTORS
The provisions of existing Schedule XIII of the 1956 Act have been incorporated in Schedule
V of the 2013 Act and the requirements have been structured around the same rules, with
revised remuneration limits and certain additional requirements, for example, the managerial
personnel should not have been convicted of an offence under the Prevention of Money
Laundering Act, 2002.
The 2013 Act has liberalised the administrative procedures by relaxing the requirement of
obtaining the central government approval provided the company complies with certain
requirements including seeking approval by way of special resolution for payment of
managerial remuneration. Similar relaxation norms as envisaged in the 2013 Act had been
incorporated in Schedule XIII of the 1956 Act by virtue of the recent circulars issued by
MCA.
Definition of remuneration has undergone few changes in the 2013 Act. The 2013 Act in
section 2(78), defines remuneration as any money or its equivalent given or passed to any
person for services rendered by him and includes perquisites as defined under the income-tax
Act, 1961. The remuneration thus defined includes reimbursement of any direct taxes to
managerial personnel. The 1956 Act defined remuneration under section 198 by way of an
explanation and provided for the certain specific inclusions that would be construed as
remuneration. Section 200 of the 1956 Act specifically prohibited tax free payments. The
2013 Act has indirectly incorporated the same requirement by clarifying that the term
remuneration includes any reimbursement of direct taxes.
The 2013 Act clarifies that premium paid by a company for any insurance taken by a
company on behalf of its managing director, whole time director, manager, chief executive
officer, chief financial officer or company secretary for indemnifying any of them against any
liability in respect of any negligence, default, misfeasance, breach of duty or breach of trust
for which they may be guilty in relation to the company would not be treated as part of
remuneration except for the cases where person is proved to be guilty. The provisions cited
above are similar to that of the existing provisions of section 201 of the 1956 Act.
3. Calculation of profits [section 198 of 2013 Act]
The 2013 Act sets out in detail about the allowances and deductions that a company should
include while computing the profits for the purpose of determining the managerial
remuneration. To illustrate, the 2013 Act states that while computing its profits, credit should
not be given for any change in the carrying amount of an asset or of a liability recognised in
equity reserves including surplus in profit and loss account on measurement of the asset or
the liability at fair value.
4. Recovery of remuneration in certain cases [section 199 of 2013 Act]
The 2013 Act contains stringent provisions in case the company is required to restate its
financial statements pursuant to fraud or non-compliance with any requirement under the
27

Chapter 4
DIRECTORS
2013 Act and the Rules made there under. As against the existing requirement of section 309
of the 1956 Act which only refers to the fact that excess remuneration paid to managerial
personnel cannot be waived except with the previous approval of the central government, the
2013 Act moves a step forward and enables the company to recover the excess remuneration
paid (including stock options) from any past or present managing director or whole time
director or manager or chief executive officer who, during the period for which the financial
statements have been restated, has acted in such capacity.
5. Appointment of key managerial personnel [section 203]
The 2013 Act provides for mandatory appointment of following whole time key managerial
personnel for every listed company and every other company having a paid-up share capital
of five crore INR or more
(i) Managing director, or chief executive officer or manager and in their absence, a whole-
time director
(ii) Company secretary
(iii) Chief financial officer
Further, the 2013 Act also states that an individual cannot be appointed or reappointed as the
chairperson of the company, as well as the managing director or chief executive officer of the
company at the same time except where the articles of such a company provide otherwise or
the company does not carry multiple businesses.
28

Chapter 5
ACCOUNTS AND AUDIT
The 2013 Act features extensive changes within the area of audit and auditors with a view to
enhance audit effectiveness and accountability of the auditors. These changes undoubtedly,
have a considerable impact on the audit profession. However, it needs to be noted that these
changes will also have a considerable impact on the company in terms of time, efforts and
expectations involved. Apart from introducing new concepts such as rotation of audit firms
and class action suits, the 2013 Act also increases the auditor’s liability substantially in
comparison with the 1956 Act.
1. Appointment of auditors
The auditor will now be appointed for a period of five years, with a requirement to ratify such
an appointment at each annual general meeting [section 139(1) of 2013 Act].
Further, the 2013 Act provides that in respect of appointment of a firm as the auditor of a
company, the firm shall include a limited liability partnership incorporated under the Limited
Liability Partnership Act, 2008 [Explanation to section 139(4) of 2013 Act].
2. Mandatory firm rotation
Mandatory to rotate auditors every five years in case of the appointment of an individual as
an auditor and every 10 years in case of the appointment of an audit firm with a uniform
cooling off period of five years in both the cases.
Currently, while the 1956 Act does not have any requirements relating to the auditor or audit
firm rotation, the Code of Ethics issued by the ICAI has a requirement to rotate audit
partners, in case of listed companies, after every seven years with a cooling-off period of two
years.
3. Non-audit services to audit clients
The 2013 Act states that any service to be rendered by the auditor needs to be approved by
the board of directors or the audit committee. Additionally, the auditor is restricted from
providing specific services, which include the following:
1 Accounting and book keeping services
2 Internal audit
3 Design and implementation of any financial information system
4 Actuarial services
5 Investment advisory services
6 Investment banking services
29

Chapter 5
ACCOUNTS AND AUDIT
7
8 Rendering of outsourced financial services
Management services, and any other service which may be prescribed (no other service has
been prescribed.
4. Joint Audits
The 2013 Act provides that members of the company may require the audit process to be
conducted by more than one auditor [section 139(3) of the 2013 Act].
5. Auditors liability
The scope and extent of the auditor’s liability, has been substantially enhanced under the
2013 Act. Now, the auditor is not only exposed to various new forms of liabilities, however,
these liabilities prescribed in the existing 1956 Act have been made more stringent. The
auditor is now subject to oversight by multiple regulators apart from the ICAI such as The
National Financial Reporting Authority (NFRA, and the body replacing the NACAS) is now
authorised to investigate matters involving professional or other misconduct of the auditors.
The penalty provisions and other repercussions that an auditor may now be subject to as per
the 2013 Act includes monetary penalties, imprisonment, debaring of the auditor and the
firm, and in case of frauds, can even be subject to class action suits.
6. Additional responsibilities of the auditor
The 2013 Act requires certain new aspects which need to be covered in an auditors’ report.
These include the following:
1 The observations or comments of the auditors on financial transactions or matters
which have any adverse effect on the functioning of the company [section 143(3)(f) of the
2013 Act]
2 Any qualification, reservation or adverse remark relating to the maintenance of
accounts and other matters connected therewith [section 143(3)(h) of the 2013 Act]
Whether the company has adequate internal financial controls system in place and the
operating effectiveness of such controls [section 143(3)(i) of the 2013 Act.
30

Chapter 6
COMPROMISES, ARRANGEMENTS & AMALGAMATIONS
The 2013 Act features some new provisions in the area of mergers and acquisitions, apart
from making certain changes from the existing provisions. While the changes are aimed at
simplifying and rationalising the procedures involved, the new provisions are also aimed at
ensuring higher accountability for the company and majority shareholders and increasing
flexibility for corporate.
The changes proposed would require companies to consider the scale and extent of
compliance requirements while formulating their restructuring plans once the 2013 Act
is enacted. These changes are quite constructive and could go a long way in streamlining
the manner in which mergers and other corporate scheme of arrangements are
structured and implemented in India.
1. Streamlining requirements
The section dealing with compromises and arrangements, deals comprehensively with all
forms of compromises as well as arrangements, and extends to the reduction of share capital,
buy-back, takeovers and corporate debt restructuring as well. Another positive inclusion
within this section is that objection to any compromise or arrangement can now be made only
by persons holding not less than 10% of share holding or having an outstanding debt
amounting to not less than 5% of the total outstanding debt as per the latest audited financial
statements. [section 230 of the 2013 Act] Further, currently, under the 1956 Act, an order
does not have any effect until the same is filed with the ROC. However, such requirement has
been done away with under the 2013 Act. The 2013 Act merely requires filing of the order
with the ROC.
2. Mergers or division of companies
There are certain additional documents mandated to be circulated for the meeting to be held
of creditors or a class of members (section 232 of the 2013 Act). These include the following:
1 Draft of the proposed terms of the scheme drawn-up and adopted by the directors of
the merging company
2 Confirmation that a copy of the draft scheme has been filed with the ROC
Report adopted by the directors of the merging companies explaining the effect of the
compromise.
3 Report of the expert with regard to valuation
Supplementary accounting statement if the last annual accounts of any of the merging
company relate to a financial year ending more than six months before the first meeting of the
company summoned for the purpose of approving the scheme.
31

Chapter 6
3. Certifying the accounting treatment
Currently, under the 1956 Act, , there is no mandate requiring companies to ensure
compliance with accounting standards or generally accepted accounting principles while
proposing the accounting treatment in a scheme. However, listed companies are required to
ensure such compliance as the Equity Listing Agreement mandates such companies to obtain
an auditor’s certificate regarding appropriateness of the accounting treatment proposed in the
scheme of arrangement. The 2013 Act requires all companies undertaking any compromise or
arrangement to obtain an auditor’s certificate (section 230 and 232 of the 2013 Act). This
requirement will help in streamlining the varied practices as well as ensuring appropriate
accounting treatment. However, another aspect that is yet to be addressed is that the
applicable notified accounting standards in India, currently, address only amalgamations and
not any other form of restructuring arrangements.
4. Simplifying procedures
The current procedural requirements in case of a merger and acquisition in any form are quite
cumbersome and complex. There are no exemptions even in the case of mergers between a
company and its wholly owned subsidiaries. The 2013 Act now introduces simplification of
procedures in two areas, firstly, for holding wholly owned subsidiaries and secondly, for
arrangements between small companies (section 233 of the 2013 Act). Small companies is a
new category of companies, introduced within the 2013 Act, with defined capital and
turnover thresholds, which has been given certain benefits, including simplified procedures.
One of the significant restrictions proposed in case of these situations is the restriction on the
transferee company to hold any shares either in its own name or in the name of a trust,
subsidiary or associate, since all shares will need to be cancelled or extinguished on merger
or amalgamation. This requirement will stem the practice followed by several companies
which have in the past followed this route. Further, in certain cases, it has also rationalised
the requirements, for example in the case of the reduction of the share capital, which is part
of compromise or arrangement, the company will need to comply with the provisions of this
section only, as against the existing requirement under the 1956 Act, where the company is
required to comply with the provision of section 108 in case of reduction of share capital as
well those relating compromise.
32

Chapter 6
5. Cross-border mergers
The 1956 Act, allows the merger of a foreign company with an Indian company, but does not
allow the reverse situation of merger of an Indian company with a foreign company. The
2013 Act now allows this flexibility, with a rider that any such mergers can be effected only
with respect to companies incorporated within specific countries, the names of which will be
notified by the central government. With prior approval of the central government, companies
are now allowed to pay the consideration for such mergers either in cash or in depository
receipts or partly in cash and partly in depository receipts as agreed upon in the scheme of
arrangement. (section 234 of the 2013 Act). These new provisions can be greatly beneficial to
Indian companies which have a global presence by providing them structuring options which
do not exist currently.
6. Squeeze out provisions
The 2013 Act has introduced new provisions for enabling the acquirer of a company (holding
90% or more shares) by way of amalgamation, share exchange, etc to acquire shares from the
minority holders subject to compliance with certain conditions. This has also introduced the
requirement for ‘registered valuers’, since the price to be offered by majority shareholder
needs to be determined on the basis of valuation by a registered valuer (section 236 of the 2013
Act.
33

Chapter 7
REVIVAL & REHABILITATION OF SICK COMPANIES
Chapter XIX of the 2013 Act lays down the provisions for the revival and rehabilitation of
sick companies. The chapter describes the circumstances which determine the declaration of
a company as a sick company, and also includes the rehabilitation process of the same.
Although it aims to provide comprehensive provisions for the revival and rehabilitation of
sick companies, the fact that several provisions such as particulars, documents as well as
content of the draft scheme in respect of application for revival and rehabilitation, etc. have
been left to substantive enactment, leaves scope for interpretation
The coverage of this chapter is no longer restricted to industrial companies, and the
determination of the net worth would not be relevant for assessing whether a company
is a sick company.
The coverage of Sick Industrial Companies Act, 1985 (SICA) is limited to only industrial
companies, while the 2013 Act covers the revival and rehabilitation of all companies,
irrespective of their sector.
The determination of whether a company is sick, would no longer be based on a situation
where accumulated losses exceed the net worth. Rather it would be determined on the basis
whether the company is able to pay its debts. In other words, the determining factor of a sick
company has now been shifted to the secured creditors or banks and financial institutions
with regard to the assessment of a company as a sick company.
The 2013 Act does not recognise the role of all stakeholders in the revival and rehabilitation
of a sick company, and provisions predominantly revolve around secured creditors. The fact
that the 2013 Act recognises the presence of unsecured creditors, is felt only at the time of the
approval of the scheme of revival and rehabilitation. In accordance with the requirement of
section 253 of the 2013 Act, a company is assessed to be sick on a demand by the secured
creditors of a company representing 50% or more of its outstanding amount of debt under the
following circumstances:
• The company has failed to pay the debt within a period of 30 days of the service of
the notice of demand
• The company has failed to secure or compound the debt to the reasonable satisfaction
of the creditors.
To speed up the revival and rehabilitation process, the 2013 Act provides a one year time
period for the finalisation of the rehabilitation plan.
34

Chapter 7
Overview of the process
• In response to the application made by either the secured creditor or by the company
itself, if the Tribunal is satisfied that a company has become a sick company, it shall
give time to the company to settle its outstanding debts if Tribunal believes that it is
practical for the company to make the repayment of its debts within a reasonable
period of time.
• Once a company is assessed to be a sick company , an application could be made to
the Tribunal under section 254 of the 2013 Act for the determination of the measures
that may be adopted with respect to the revival and rehabilitation of the identified sick
company either by a secured creditor of that company or by the company itself. The
application thus made must be accompanied by audited financial statements of the
company relating to the immediately preceding financial year, a draft scheme of
revival and rehabilitation of the company, and with such other document as may be
prescribed. Subsequent to the receipt of the application, for the purpose of revival and
rehabilitation, the Tribunal, not later than seven would be required to fix a date for
hearing and would be appointing an interim administrator under Section 256 of 2013
Act to convene a meeting of creditors of the company in accordance with the
provisions of section 257 of the 2013 Act. In certain circumstances, the Tribunal may
appoint an interim administrator as the company administrator to perform such
functions as the Tribunal may direct.
o The administrator thus appointed would be required to prepare a report specifying
the measures for revival and rehabilitation of the identified sick industry. The
measures that have been identified under the section 261 of the 2013 Act for the
purpose of revival and rehabilitation of a sick company provides for the following
options: Financial reconstruction.
o Change in or takeover of the management.
o Amalgamation of the sick company with any other company, or another
company’s amalgamation with the sick company.
35

Chapter 7
o The scheme thus prepared, will need to be approved by the secured and unsecured
creditors representing three-fourth and one-fourth of the total representation in
amounts outstanding respectively, before submission to the Tribunal for
sanctioning the scheme pursuant to the requirement of section 262 of the 2013
Act. The Tribunal, after examining the scheme will give its approval with or
without any modification. The scheme, thus approved will be communicated to
the sick company and the company administrator, and in the case of
amalgamation, also to any other company concerned.
o The sanction accorded by the Tribunal will be construed as conclusive evidence
that all the requirements of the scheme relating to the reconstruction or
amalgamation or any other measure specified therein have been complied with. A
copy of the sanctioned scheme will be filed with the ROC by the sick company
within a period of 30 days from the date of its receipt.
o However, if the scheme is not approved by the creditors, the company
administrator shall submit a report to the Tribunal within 15 days, and the
Tribunal shall order for the winding up of the sick company. On passing of an
order, the Tribunal shall conduct the proceedings for winding up of the sick
company in accordance with the provisions of Chapter XX.
36

Chapter 8
IMPLICATIONS ON PRIVATE COMPANIES
The main change in the definition of a private company is in the increase in the limit of the
number of members from 50 to 200 . Secondly, the definition does not state that a company
inviting or accepting deposits from persons other than its members, directors or their relatives
cannot be a private company. (section 2(68) of the 2013 Act).
Certain requirements which were till now applicable to public companies or subsidiaries of
public companies have now been also extended to private companies . Some such
requirements include the following:
• Section 90 of the 1956 Act, which was a saving section for private companies, has not
been incorporated in the 2013 Act, thus making the provisions relating to the various
kind of share capital and voting rights applicable to private companies. Also refer
Chapter: Setting up of a Company (share capital and debentures)
o Provisions for the appointment of managerial personnel, in section 196 of the
2013 Act, are also applicable to private companies. Therefore, the following
requirements are now applicable to private companies: The re-appointment of
a managerial person cannot be made earlier than one year before the expiry of
the term. However, the term for which the managerial personnel can be
appointed is five years
o The eligibility criteria for the age limit has been set between 21 to 70 years.
An individual above the age of 70 years can also be appointed as the key
managerial personnel by passing a special resolution.
o In addition, private companies have the option to adopt principle of
proportional representation for appointment of directors (section 163 of the
2013 Act).
o The 2013 Act restricts certain powers of the board of private companies,
which can be exercised only with the company’s consent by a special
resolution. Some powers thus restricted are as follows : To sell, lease or
otherwise dispose of the whole or substantially the whole of the company’s
undertaking
o To borrow money in excess of the aggregate of its paid-up share capital and
free reserves
37

Chapter 8
IMPLICATIONS ON PRIVATE COMPANIES
o The requirements relating to corporate social responsibilities are also
applicable to private companies since the criteria is based on specified levels
of the net worth, turnover and net profit. However, it is of relevance to note,
that while private companies are not required to appoint independent directors
as per section 149 of the 2013 Act, the section on CSR, requires companies
within the specified thresholds to constitute a corporate social responsibility
committee consisting of three or more directors, out of which at least one
director must be an independent director. This requirement appears to be
contradictory to the extent that the section applies to private companies. Also
refer Chapter: Corporate Social Responsibilities
o Private companies would now be required to comply with the requirements for
inter-corporate loans as well as investments, which were hitherto not
applicable. Also refer Chapter : Directors (Meetings of the Board and its
Powers - Loans and investments by a company)
o The provisions relating to the appointment of the managing director, whole-
time director or manager are also applicable to private companies. Refer
Chapter : Directors (Appointment and remuneration of managerial personnel -
Introduction)
o For certain other compliance requirements, refer to Chapter: Directors
(General - Additional compliance requirements for private companies)
There is a marked increase in the compliance requirements mandated for private
companies under the 2013 Act. While some of these will go a long way in increasing
the accountability of private companies, there are also concerns as to the need for
increasing the complexities in private companies in which the public at large is not
interested.
38

Auditing 2013

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