The Companies Act 2013

With the growing demands in the corporate structure and overall economy development, the new legislation was passed, totally revamping the existing Company laws in the state. It has considered the revolutionary changes in the structure and functioning of the corporate bodies and gave them enough procedural competence and governance. The companies were more accountable and transparent by the introduction of the new enactment. The Companies Act 2013 passed by the Parliament received the assent of the President of India on 29th August 2013. There are more than 450 plus sections, 7 schedules and 29 chapters.

The most important changes in the Companies Act 2013 may be briefly explained below:

A} Introduction of One Person Company. (OPC)

It is a company with only one member and one Managing Director. This concept has been accepted in Europe, USA, China, Singapore and in several countries in the Gulf region. This has been introduced in India to allow small entrepreneurs and artisans to do a small business but to have a corporate advantage. There’s no minimum paid-up capital required for incorporation of an OPC and there is no compulsion to hold the Annual General Meetings like other private companies.

B} Small company.

This is a company which has a paid up capital of Rs fifty lakhs, and such other higher sums not exceeding five crore rupees. The turnover of the company shall not exceed Rs two crores and as approved not more than twenty crore rupees. The Companies Act 2013 provides exemptions to Small Companies primarily from certain requirements relating to board meetings, presentation of cash flow statements and certain merger processes.

C} The minimum number of members.

The minimum number of members in a Private company has been increased from the existing 50 to 200 under the new Companies Act 2013.

D} Changes in requirements as to the company’s official Stationery.

The letterhead, bills or invoices, quotations, emails, publications & notifications, letters or other official communications, should bear the full name of contact person, address of the company’s registered office, Corporate Identity Number ( CIN No. which is a 21 digit number allotted by Government), Telephone number, fax number, Email id, contact website (if any).

The basic documents required to get filed before the Registrar of companies remain the same as in the earlier Companies Act of 1956. The Memorandum of association and the Articles of the association shall be the backbone of any new company.

E} Commencement of business

All the companies (public/private companies) registered under the Companies Act, 2013 needs to file the following with the Registrar of Companies (ROC) to commence their business –

  1. A declaration by the director in the prescribed form stating that the subscribers/ promoters to the memorandum have paid the value of shares agreed to be taken by them
  2. A confirmation that the company has filed a verification of its registered office with the Registrar of companies (ROC)

In the case of a company requiring registration from any sectoral regulators such as RBI, SEBI etc., approval from such regulator shall be required before starting the business.

F} Financial Year

The Companies Act 1956 Act provided companies to elect financial year. The Companies Act 2013 Act eliminates the existing flexibility in having a financial year different from 31 March. The 2013 Act provides that the financial year for all companies should end on 31 March, with certain exceptions approved by the National Company Law Tribunal. Companies should align the financial year to 31 March within two years from 01 April 2014.

G} Eligibility

Eligibility to become a Managing Director or Whole-time Director has been reduced from 25 years to 21 years, giving the younger entrepreneurs a fillip to be the company’s Directory. Also, the maximum number of directors in a company has been pegged at 15 from the earlier 12 numbers. It also provides that a director who was a resident of India for more than 182 days should be there.

The new Companies Act of 2013 also provides a Corporate Social Responsibility Committee as follows:

Section 135 of the Companies Act 2013. Corporate Social Responsibility (CSR)

The company has to constitute a CSR committee of the Board, and 2% of the average net profits of the last three financial years are to be mandatorily spent on CSR activities by an Indian company if any of the following criteria is met:

  1. Net worth of Rs.500 crores or
  2. Turnover of Rs. 1000 crores or more or
  3. Net profit of Rs. 5 crores or more

Contributing to Incubators, which the Government has notified of India, is eligible for spending under CSR. This is a prosperous time for incubators and entrepreneurs and can change the entrepreneurial ecosystem in India.

Section 139 of the Companies Act 2013 speaks about the appointment of auditors for conducting the audit of the company’s business.

The provision goes like this:

139. (1) Subject to the provisions of this Chapter, every company shall, at the first annual general meeting, appoint an individual or a firm as an auditor who shall hold office from the conclusion of that meeting till the conclusion of its sixth annual general meeting and thereafter till the conclusion of every sixth meeting and the manner and procedure of selection of auditors by the members of the company at such meeting shall be such as may be prescribed:

Section 139(2) No listed company or a company belonging to such class or classes of companies as may be prescribed shall appoint or re-appoint

(a) an individual as auditor for more than one term of five consecutive years; and

(b) an audit firm as auditor for more than two terms of five consecutive years

Provided (i) an individual auditor who has completed his term under clause (a) shall not be eligible for re-appointment as auditor in the same company for five years from completing his time.

(ii) an audit firm that has completed its term under clause (b) above shall not be eligible for re-appointment as auditor in the same company for five years from the completion of such time.

Provided further that as on the date of appointment, no audit firm having a joint partner or partners to the other audit firm, whose tenure has expired in a company immediately preceding the financial year, shall be appointed as auditor of the same company for five years:

[Provided also that every company, existing on or before the commencement of this Act which is required to comply with the provisions of this subsection, shall comply with requirements of this subsection within a period which shall not be later than the date of the first annual general meeting of the company held, within the period specified under sub-section (1) of section 96, after three years from the date of commencement of this Act.]

Provided also that, nothing contained in this subsection shall prejudice the right of the company to remove an auditor or the right of the auditor to resign from such office of the company.]

This section has been provided to safeguard the company’s interests as long term association of an auditor or auditor firm may develop undue influence on the company’s business.

Another essential section dealt, here is Section 185 of the Companies Act 2013 .

The section deals with granting loans to the Directors of the company and restriction thereon to provide transparency in the conduct of the company’s business. The original Section 185 prohibited the companies from advancing any loan and/or giving any security or guarantee concerning the loan taken by the company’s Directors or any other person in whom the Director is interested. If found guilty of non-compliance, penalties were allowed only to companies or to any recipient to whom such a loan, security, or a guarantee is provided.

The above Section 185 was further amended in the year 2017. The amended sections reads:

Section 185 (as amended by the Companies (Amendment) Act, 2017):

a)Limits the prohibition on loans, advances, etc. to Directors of the company or its holding company or any partner of such Director or any partner of such Director or any firm in which such Director or relative is a partner

b)Allows the company to give a loan or guarantee or provide security in connection with any loan to any person/entity in whom any of the Directors are interested, subject to Passing of Special Resolution by the company in a General Meeting (Approval of at least 75% of the members is required). The utilisation of loans by the borrowing company shall be solely for its principal business activities

c)The penalty provisions as set out under Section 185 (4) of the Act, in addition to the Company, now extends to an officer in default of the company (which includes any Director, Manager or KMP or any person per whose directions BOD’s are accustomed to act)

Thus it becomes clear that a special resolution shall be necessary to enable a company to grant loans to a person or company where the directors of the lender company are interested or related in that matter.

It is to curb favouritism between sister concerns or independent entities where the directors mutually benefited as a company cannot afford to have such commitments being based on such relationships, which may hamper the financial integrity of the lender company.

Section 186 of the Companies Act 2013 provides as follows:

Section 186 of the Companies Act, 2013 also states that a company cannot directly or indirectly: Give loan to any person or body person, Give any security or provide a guarantee in connection with a loan to any other person or body corporate, of its free reserves and securities premium account, whichever is more as read below:

  1. Give loan to any person or body person,
  2. Give any security or provide a guarantee in connection with a loan to any other person or body corporate,
  3. and acquire by way of purchase, subscription or otherwise, the securities of any other body corporate
  4. Exceeding 60% of its paid-up share capital, free reserves and securities premium account or one hundred per cent of its free reserves and securities premium account, whichever is more.

Section 188 of the Companies Act 2013

(1) Except with the consent of the Board of Directors given by a resolution at a meeting of the Board and subject to such conditions as may be prescribed, no company shall enter into any contract or arrangement with a related party concerning—

(a) sale, purchase or supply of any goods or materials;

(b) selling or otherwise disposing of, or buying, property of any kind;

(c) leasing of property of any kind;

(d) availing or rendering of any services;

(e) appointment of any agent for purchase or sale of goods, materials, services or property;

(f) such related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company; and

(g) underwriting the subscription of any securities or derivatives thereof, of the company:

This section restricts the entering into contracts by the company with any party related to it. This brings in transparency in the business of the company and no one should be able to take undue advantage by the position of being a company. It prohibits, as otherwise provided herein, any such transaction involving properties including the sale, lease or otherwise disposing off.

However, this Section 188 of the Companies Act 2013 does not apply to Private companies.

Schedule III of the Companies Act 2013:

The Ministry of Corporate Affairs (MCA) has amended Schedule III of the Companies Act 2013 on October 11, 2018. Schedule III of the Companies Act 2013 provides companies’ financial statements complying with Accounting Standards (AS) and Indian AS under its Division I and Division II, respectively. Now Schedule III will apply to NBFC’s covered under Indian AS.

MCA has also modified Division I (Indian GAAP) and Division II (Indian AS).

Indian AS Schedule III changes require additional disclosures from the companies preparing Indian AS financial statements. The other disclosures that get notified relate to trade receivables, loans receivables, and trade payables and satisfy the disclosure requirements under the Micro, Small and Medium Enterprises Development Act, 2006.

The noteworthy modification is the insertion of Division III, which prescribes the format for preparing financial statements for Non-Banking Financial Company (NBFCs) to whom Indian AS is applicable.

Depreciation under the Companies Act 2013

Depreciation as per new companies act is allowed on the basis of useful life of assets and residual value. Depreciation rates are not given under the new companies act.

A table below shows depreciation rates apply if the asset gets purchased on or after 01st April, 2014 and valuable life is considered as given in companies act,2013 and residual value as 5%.

a) Depreciation is calculated by considering the useful life of an asset, cost and residual value.

b) Any method WDV or SLM can be used.

c)Schedule – II contains a list of useful life according to a class of assets and the residual value shall not be more than five per cent of the original cost of the asset.

However, companies are free to adopt a useful life different from what is specified in Schedule II and a residual value of more than 5%. The financial statements shall disclose such differences and provide justification on this behalf duly supported by technical advice.

d)If there is any addition to the asset or asset is sold, discarded, demolished or destroyed then the calculation is made according to the date of such event. In other words, if any asset is purchased or sold then the calculation will be made according to the date of purchase or sold i.e. date wise calculation is made.

How depreciation should be recorded in the books of the company.

  1. Depreciation method is to be shown in accounts
  2. useful life of assets is to be disclosed only when it is taken different from Schedule – II
  3. For assets in which NESD (No Extra Shift Depreciation) is mentioned in Schedule – II, the depreciation remains the same irrespective of the no. of work shifts.
  4. For other assets, if the asset is used for double shifts during any time of the year then the depreciation shall be increased by 50% for that period. Similarly if an asset is used for triple shifts then depreciation shall be increased by 100% for that period.
  5. Each Part of an item of an asset with a cost significant in relation to the total cost of the item shall be depreciated separately. Where cost of the part of the asset and useful life of that part is different from the useful life of the remaining asset, useful life of that significant part should be determined separately.
  6. As per the amendment dated August 29, 2014 notified by the MCA, the said requirement shall be voluntary in respect for the financial year commencing on or after April 1, 2104 and mandatory for financial statements in respect of financial years commencing on or after April 1, 2015.
  7. Component accounting is required to be done for the entire block of assets as at 1 April 2014 if a company opts to follow it voluntarily and as at 1 April, 2015 mandatorily. It cannot be restricted to only new assets acquired after 1 April 2014 or 1 April, 2015 as the case may be.

Role of Corporate governance in the Companies Act 2013

“Corporate Governance is the application of best Management Practices, Compliance of Laws in true letter and spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders.

The Companies Act 2013 provides that every listed company has to appoint at least one woman director. Appointment of women directors was hitherto voluntary but making it mandatory in the Companies Act would draw have more talented women on the boards of their companies

Key provisions related to corporate governance include the composition of the board, functioning of independent directors, enhancing board responsibilities on financial reporting, related party transactions, compliance with the laws of the land and corporate social responsibility.

Subsidiary companies under the Companies Act 2013.

Under Section 2(87) of the Companies Act 2013, A subsidiary company is a company whose control lies with another company. The company that holds the control is termed as a Parent Company or Holding Company. The Holding company owns a majority of the shares of the subsidiary company, and hence it can exercise control as the major shareholder.

Share warrants under the Companies Act 2013:

According to Section 2(81) of the companies Act, 2013 says “securities” means the securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956.

Hence, to understand the definition of securities, we need to refer to the Securities Contract (Regulation) Act, 1956 for the same:

According to Section 2(h) of the Securities Contract (Regulation) Act, 1956, Securities include –

securities” means the securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956);

“securities” include— (i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;

(i.a) derivative;

(i.b) units or any other instrument issued by any collective investment scheme to the investors in such schemes;

(i.c) security receipt as defined in clause (g) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;

(i.d) units or any other such instrument issued to the investors under any mutual fund scheme;

(ii) Government securities;

(ii.a) such other instruments as may be declared by the Central Government to be securities; and

(iii) rights or interest in securities

A Share warrant represents the right to purchase a company’s stock at a specific price and at a specific date. A Share warrant is issued directly by a company to an investor. Share options are purchased when it is believed the price of a share will go up or down. A Share warrant represents future capital for a company.

The Companies Act, 2013 does not “directly” prescribe any law related to Share Warrant. This explanation makes it clear that a share warrant if to be issued, shall be issued as an issue for a preferential basis as applicable to shares.

Penalties under the Companies Act 2013:

Sec 88 – Failure to maintain a register of members/debenture-holders/security holders Company Every officer in default Min: INR 50 thousand Max: INR 3 Lakhs Continuing failure- INR 1 thousand for every day of default

Sec 89 – Failure to make a declaration in respect of a beneficial interest in any share. Failure to file return pertaining to the declaration with the registrar. Person Company and Every officer in default. Max: INR 50 thousand Continuing failure- INR 1 thousand for every day of default Min: INR 500 Max: INR 1 thousand Continuing failure- INR 1 thousand for every day of default.

Sec 91– Closure of register of members or debenture holders or other security holders without notice/shorter notice/ in excess of limits prescribed. Company and every officer in default.INR 5 thousand for every day of default Max: INR 1 Lakh

Sec 92 – Failure to file an annual return. Company Every officer in default. Min: INR 50 thousand Max: INR 5 Lakhs Min: INR 50 thousand Max: INR 5 Lakhs Max: 6 months OR Both

Sec 94 – Refusal of Inspection or making a copy/extract. Company and every officer in default.INR 1 thousand for every day of default Max: INR 1 Lakhs

Sec 99– Default in complying with Sec 96 – AGM Sec 97 – Power of the tribunal to call AGM.

Sec 98 – Power of a tribunal to call meetings of members OR Orders of Tribunal. Company and every officer in default Max: INR 1 Lakh Further INR 5 thousand for every day of default

Sec 102 – Failure to comply with provisions related to statement to be annexed to notice calling a meeting every promoter/director/manager/KMP in default INR 50 thousand or 5 times the benefit accruing to the persons mentioned in column (3) or any of their relatives Whichever is higher

Sec 105 – Failure to mention members eligibility to appoint a proxy. Willfully/knowingly issues the invitation to appoint a proxy. Every officer in default Every officer in default Max: INR 5 thousand Max: INR 1 Lakh

Sec 111 – Failure to circulate members’ resolution Company and every officer in default INR 25 thousand

Sec 117– Failure to file the resolution and agreement. Company Every officer in default(including liquidator)Min: INR 5 Lakhs Max: INR 25 Lakhs Min: INR 1 lakh Max: INR 5 Lakhs

Sec 118 – Failure to maintain the minutes of proceedings of the general meeting, meeting of Board of Directors and other meetings and resolutions passed by postal ballot. Guilty of tampering with the minutes of the proceedings of the meeting. Company Every officer in default Person INR 25 thousand INR 5 thousand Min: INR 25 thousand Max: INR 1 Lakh & Max: 2 years

Sec 119 – Refusal to inspect or copies not furnished within the specified time. Company Every officer in default INR 25 thousand INR 5 thousand

Sec 121 – Failure to file the report on AGM before the expiry of a specific period. Company Every officer in default Min: INR 1 lakh Max: INR 5 Lakhs Min: INR 25 thousand Max: INR 1 Lakh

Sec 124 – Default in complying with provisions related to Unpaid Dividend Account Company Every officer in default Min: INR 5 lakhs Max: INR 25 Lakhs Min: INR 1 Lakh Max: INR 5 Lakhs

Sec 127– Punishment for failure to distribute dividends. Every director in default Company INR 1 thousand for every day of default & Simple Interest @ 18% p.a during the period for default continues Max: 2 years

Sec 128 – Failure to comply with the provision relating to maintenance of books of accounts etc by the company.-Managing director -Whole-time director in charge of finance -Chief Financial Officer or such other person Min: INR 50 thousand Max: INR 5 Lakh OR Max: 1 year OR Both

Sec 129 – Failure to comply with provisions relating to proper disclosure of financial statements-Managing director -Whole-time director in charge of finance -Chief Financial Officer or such other person in charge(as appointed by the board In the absence of any of the officers mentioned all the directors.Min: INR 50 thousand Max: INR 5 Lakh OR Max: 1 year OR Both

Sec 134 – Contravention of the provisions relating to Financial Statements, Boards Report Etc Company Every officer in default Min: INR 50 thousand Max: INR 25 Lakhs Min: INR 50 thousand Max: INR 5 Lakh OR Max: 3 years OR Both

Sec 136 – Denial of the right of the member to inspect copies of the audited financial statements.Company Every officer in default INR 25 thousand INR 5 thousand

Sec 137– Failure to file a copy of financial statements with the registrar. Company Managing Director and Chief Financial officer In their absence any director charged by the board with the responsibility In the absence of such director all directors INR 1 thousand for every day of default Max: INR 10 Lakhs Min: INR 1 Lakh Max: INR 5 Lakh OR Max: 6 Months OR Both

Sec 140– Failure of the auditor to file the notice on resignation, with the company and registrar & also the C&AG in case of government companies. The right of representation abused/auditor has acted in a fraudulent manner Auditor Auditor Min: INR 50 thousand Max: INR 5 Lakhs Min: Amount involved in the fraud Max:3 times the amount involved: Min: 6 Months Max: 10 Years *Fraud involving public interest: Min: 3 years

Sec 143 – Failure of the auditor to report fraud by employees against the company Auditor Cost Accountant Company SecretaryMin: INR 1 Lakh Max: INR 25 Lakhs

Sec 147 – Contravention of Sec 139 to 146(aspects related to audit and auditors) Contravention of Sec 139/143/144/145 Contravention of provisions knowingly/willfully with the intention to deceive the company or its shareholders or creditors or tax authorities Company Every officer in default Auditor Auditor Min: INR 25 thousand Max: INR 5 Lakhs Min: INR 10 thousand Max: INR 1 Lakh OR Min: INR 25 thousand Max: INR 5 Lakhs Min: INR 1 lakh Max: INR 25 Lakhs & Max: 1 year OR Both Max: 1 year

Sec 148 – Default in complying with the orders of the Central Government pertaining to cost audit Company Every officer in default Cost AuditorMin: INR 25 thousand Max: INR 5 Lakhs Min: INR 10 thousand Max: INR 1 Lakh OR Min: INR 25 thousand Max: INR 5 LakhsMax: 1 year OR Both

Sec 157 – Failure by the company to inform DIN to Registrar.Company Every officer in default Min: INR 25 thousand Max: INR 1 Lakh Min: INR 25 thousand Max: INR 1 Lakh

Sec 159– Contravention of Sec 152- appointment of directors, Sec 155-Prohibition to obtain more than one DIN and Sec 156-Director to intimate DINIndividual/DirectorINR 50 thousand OR Further, a fine of INR 500 for every day of default.Max: 6 months

Sec 165 – Contravention of maximum no. of directorships person accepting appointment as director Min: INR 5 thousand Max: INR 25 thousand for every day during which the contravention continues

Sec 166 – Contravention of duties of directors.DirectorMin: INR 1 Lakh Max: INR 5 Lakhs

Sec 167 – Functioning as director after attaining disqualification.DirectorMin: INR 1 Lakh Max: INR 5 Lakhs OR Max: 1 year OR Both

Sec 172 – No specific punishment under chapter XICompany & every officer in defaultMin: INR 50 thousand Max: INR 5 Lakhs

Sec 178 – Contravention of provisions of Sec 177 related to Audit committee and nomination and remuneration committee and stakeholders relationship committeeCompany Every officer in defaultMin: INR 1 lakh Max: INR 5 Lakhs Min: INR 25 thousand Max: INR 1 Lakh OR Max: 1 year OR Both

Sec 182– Political contribution made in excess of the limit company Every officer in default 5 times the amount contributed 5 times the amount contributed & Max: 6 months

Sec 184 – Failure to disclose interest held by directors in any company/contract/arrangement Director Min: INR 50 thousand Max: INR 1 Lakh OR Max: 1 year OR Both

Sec 185 – Loan to directors/any other person in whom the director is interested/give a guarantee in connection with the loan taken by the director or such other person in contravention of the provisions of this section Company Director/any other person Min: INR 5 Lakh Max: INR 25 Lakh Min: INR 5 Lakh Max: INR 25 Lakh OR Max: 6 months OR Both

Sec 186-Contravention of provisions pertaining to loan and investment by the company.Company Every officer in default Min: INR 25 thousand Max: INR 5 Lakhs Min: INR 25 thousand Max: INR 1 Lakh & Max: 2 years

Sec 187– Contravention by the company regarding investments of the company to be held in its own name. Company Every officer in default Min: INR 25 thousand Max: INR 25 Lakhs Min: INR 25 thousand Max: INR 1 Lakh OR Max: 6 months OR Both

Sec 188 Contract entered into/ authorised in contravention with the provisions outlined under the section-Related party transactions. Listed Company: Violation by Director/any other person Other Company: Violation by Director/any other personMin: INR 25 thousand Max: INR 5 Lakhs OR Min: INR 25 thousand Max: INR 5 LakhMax:1 year OR Both

Sec 189 – Failure to disclose the interest of the director in any contract/arrangementDirectorINR 25 thousand

Sec 190 – Failure to maintain a copy of the contract of employment with managing director or whole-time director/written memorandum in absence of a written contract & also failure to keep it open for inspection without fee Company Every officer in default INR 25 thousand INR 5 thousand for each default

The Companies Act 2013 is an exhaustive Act covering the present-day requirements for corporate discipline and transparency.

Conclusion

Any registered association denoted as an artificial legal person is said to be ‘Company’. The companies act of 2013 was passed by the Indian Parliament that governs the formation, operation and liquidation of companies in India. The Indian Companies Act of 1956 got replaced with the Companies Act 2013. This act establishes broad guidelines for all the listed and unlisted companies. This act keeps shareholders in power and further emphasises the need for corporate governance. Overall, The Companies Act 2013 is an exhaustive Act covering the present-day corporate discipline and transparency requirements.

FAQs on The Companies Act 2013

Does a shelf prospectus need a separate prospectus for each offering?

No, shelf prospectus does not need a separate prospectus for each offering.

Which section talks about the Red Herring prospectus?

It gets mentioned under section 32 of the act.

Under which section global depository receipt is mentioned?

It gets mentioned under section 41 of the act.

How many types of share capitals exist, according to section 43 of the act?

There are two types of share capitals according to section 43 of the act, i.e., equity share capital and preference share capital.

Which section of the act mentions the voting rights of the members?

Section 47 mentions the voting rights of the act.

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