co law secs caro 2016

Applicable to every Company including Foreign CompanyI

• Insurance company registered under Insurance Act 1938

B• Banking company

registered under Banking Regulation Act 1949

C• Company registered

under section-8 (NPO or NGO)

O • One Person Company u/s 2(62)

P • Private Limited Company

Exceptions

Matters to be Included• 1. Fixed Assets• 2. Inventory• 3. Loans to related parties sec 2(76)• 4. Loans, Investments & guarantees Sec 185

& 186 compliances• 5. Compliance with Deposit Rules Sec 73 to 76• 6.Details if any Default in Repayment of Dues

to NBFC/Bank/Deb holders • 7. Maintenance of Cost Records Sec 148 (1) • 8. Statutory Dues • 9. Utilization of IPO proceeds

– (including debt instruments) / Application of term loans• 10. Compliance with Sec 197 for Managerial

Remuneration• 11. Reporting on Fraud by/against CO• 12. Compliance with Nidhi Rules • 13. Compliance with Sec 177 & 188 on

Related Party Transactions• 14. Preferential Allotment _ Sec 42 compliance• 15 . Non Cash Transactions with Directors/

persons connected with him Sec 192 • 16. Whether Co registered under RBI Act

Granted any Loans to Cos / firms / other parties covered u/s 2 (76) of Co Act 2013.

Whether terms & conditions of loans are not prejudicial to Co’s Interest

Whether receipt of principal

amount & interest are

regular. If not further details to be provided

If overdue amount is more

than 5L, whether

reasonable steps have

been taken by Co for recovery of principle &

interest.

Reporting Requirements

Sec 2(76) Related Party - RELAP

• 1. Director/ his relative• 2. Key Managerial Person/ his relative• 3. Firm in which director, manager or his relative is a partner• 4. Pvt Co in which director or manager or his relative is a member or director• 5. Public Co in which director/manager is a director and hold along with his relatives, more than 2% of its paid up S/C• 6. Body corporate whose BOD, MD or manager is accustomed to act in accordance with advice, directions of instructions of director or manager. • 7. Any person on whose advice, directions or instructions a director or manager is accustomed to Act.

– Patanjanli runs on directions of Ramdev Baba• 8. Note : Nothing in sub-clauses 6 & 7 shall apply to advice, instructions given in a professional capacity.• 9. Any Co which is-

– Holding, subsidiary or an associate co of such Co – Subsidiary of holding Co to which it is also subsidiary.

• 10. Such other person as may be prescribed About to propose : The relative to Key managerial person, persons accustomed to act on directors, associate co are new provisions to be inserted to plug the loopholes.

Loans to directors or other entities in which director is interested• Transactions which are prohibited, directly

or indirectly:– Advancing any loan, including any loan

representing book debt, and – Giving any guarantee or providing any

security in connection with any loanDirector Interested Parties (DIP)

• Any director of the lending co, or of a Co which is its holding co or partner or relative of such director

• Firm in which director or related party is a partner

• Any Pvt co of which any such director is director or member

• Any body corporate @ GM of which not less than 25% of total voting power controlled by such director or two or more directors together

Section 185

Loan - sum given to person to be returned with/ without interest

• Advance is not covered under loan as it is kind of prepayment – Ex Co gives advance to person against

purchase of materials• Co cannot give any guarantee or

provide security collateral to loan taken by him/such other person

• Guarantee vs. Letter of Comfort to subsidiaries for availing bank funding & loans.

• Co cannot give loan to directors or DIP accounting as Book Debt – I.e.., Director /DIP becomes Debtor from

whom Co has to receive money is prohibited

• Exceptions:– Wholly owned subsidiary

companies– Giving loan to MD or WTD.

As a part of conditions of services extended by Co to all its employees or

Pursuant to any scheme approved by members on special resolution.

– A Co which in ordinary course to its business provides loans or guarantees or securities for due repayment of any loan and in such loan interest should not be less than bank rate declared by RBI .

Restriction on loan, guarantee, investment

• Company cannot make investment beyond 2 layers of investment Cos

• Exceptions:– Company acquiring foreign co which has beyond 2 layers of

investments– Subsidiary Co from having any investment subsidiaries for

purpose of meeting requirements under any rule or regulation framed under any law for time being in force

• No Co shall give loan/guarantee/ provide security to any person or body corporate or acquire by way of subscription, purchase securities of any body corporate – Exceeding 60% of PUC+FR+SP

– Or --– 100% of FR /SP

• whichever is higher

Section 186

Where given loan or guarantee or providing security or acquisition exceeds limits specified, prior approval by means of special resolution passed is required.The Co shall disclose to the members in FS the full particulars of loans given or security provided & purpose for which loan is utilized by recipient of loan.No Investment shall be made or loan or guarantee given by Co unless resolution sanctioning it is passed at meeting & prior approval of Public Fin Inst concerned where term loan is subsisting, is obtained.No Co, which is registered u/s 12 of SEBI Act 1992 shall take inter-corporate loans/deposits exceeding the prescribed limit 7 such Co shall furnish in its FS, details of loans or deposits.

No loan shall give under this section @ rate less than prevailing yield..

No Co which is in repayment of deposits accepted before/after commencement of act shall give loan/ guarantee/ security or make acquisition till such default is subsisting

Acceptance of Deposits

• A private Co & un-eligible public Co cannot accept loans or deposits from any person. For accepting any loan from person other than Directors the Co will have to comply with all conditions like Maintenance of DORR a/c, deposit Insurance, credit rating.

• Share application money neither allotted nor refunded within 60 days will be treated as deposit.

• Any money received as advance in ordinary course of business shall be treated as deposit if goods or services not provided within 365 days of receipt.

Section : 73-76

Section 76

• Eligible Company A public company having either of followingNet-worth not less than 100cr or turnover not less than 500cr

• It has obtained prior consent of Co in GM by means of special resolution

• It has filed the above resolution with RoC before making any invitation to public for accepting deposits.

Conditions for Acceptance of deposits

• No company shall accept or renew deposit whether secured/unsecured, which is repayable on demand or upon receiving of notice within period not less than 6 months or more than 36 months from date of acceptance of deposits.

• Deposit may be accepted with joint names not exceeding 3.

• A non eligible co can accept deposit only to extent of 25% of PUC+FR

• Pvt Co & uneligible public co shall have to file return of deposits on 30th june if they have any deposit received from person other than director.

• As of now if Pvt Co have received any loan from any person other than director then they have to file FORM DPT 4 within 3 months.

Exceptions

Banking CompanyNBFC registered with RBIHousing Finance Company registered

with National Housing BankAny other Co which CG may specify.Note : A Co may for purpose of meeting its short

term requirements or renew deposits whose repayment is within 6 months provided that they do not exceed 10% of aggregate PUC+FR & they are not repayable before 3 months from date of deposits

Case Study Will any of the following transactions treated as

Deposits• 5 Cr from Govt Agency, FI, Banks by commercial paper (No)• 50L by way of share application money

(Yes - If not allotted within 15 days Deposit)• 50L from Director by way of loan

(No - Declaration required stating such amount is not borrowed money)

• 50L from issue of bonds & debentures (No– If amount secured by charge /CCDS)

• 50L from Inter Corporate Deposits. (No– It comes under finance)• 25L from employees• 50L as business advance from customer.

( Yes– If such advance not adjusted within 365 days)• 50L advance against property

(Yes – Such advance to be adjusted against property only)• 25L as security deposit

(Yes - Even security deposit out of ambit of definition it is treated as deposit)

• 50L from promoter/ relative ( Yes specific conditions to be fulfilled)

• 50L from share holder ( No - Co cannot raise an amount from shareholders)

Maintenance of Cost records

Regulatory Sectors Non Regulatory Sectors

Telecommunication Services Turbo jets & turbo propellers

Generation, Transmission & distribution of electricity

Machinery used in defense, space & atomic energy

Petroleum products regulated by Petroleum & Natural Gas Regulatory Board.

Production, Import & supply or trading of medical devices such as heart valves, orthopedic implants, pacemaker, etc.

Drugs & pharmaceutical Steel, Cement

Sugar & industrial alcohol Tyres & tubes

As per sec 148 (1) of Co Act, 2013 following companies required to maintain cost records including foreign company but excluding small company & micro enterprises.

Related Party TransactIons• “(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 with respect to:

– Sale, purchase or supply of any goods or materials

– Selling or otherwise disposing of, or buying, property of any kind

– Leasing of property of any kind

– Availing or rendering of any services

– Appointment of any agent for purchase or sale of goods, materials, services or property

– Such related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company, and

– Underwriting the subscription of any securities or derivatives thereof, of the company

Note: Provided further that no member of the company shall vote on such special resolution, to approve any contract or arrangement which may be entered into by the company, if such member is a related party.

Section 188(1)

• Where any contract or arrangement is entered into by a director or any other employee, without obtaining the consent of the Board or approval by a special resolution in the general meeting under sub-section (1) and if it is not ratified by the Board or, as the case may be, by the shareholders at a meeting within 3 months from the date on which such contract or arrangement was entered into, such contract or arrangement shall be voidable at the option of the Board and if the contract or arrangement is with a related party to any director, or is authorized by any other director, the directors concerned shall indemnify the company against any loss incurred by it.

• Lalit Modi Money laundering scam, (IPL)commissioner is accused of bid rigging, awarding contracts to his friends, accepting kickbacks on a broadcast deal, selling franchises to members of his family, betting and money laundering.

Section 188

Managerial Remuneration 7/17 sub sec’s amended

• Total Managerial remuneration payable by Public Co, to its directors including MD, WTD & its manager in respect of any FY shall not exceed 11% of net profits (excluding above remuneration).– Central Govt approval is not req’d for

payment of remuneration exceeding 11% of net profits.

1 Remuneration Payable to MD/WTD or Manager shall not exceed 5% of net profits of Co & if there is more than 1 such director, Remuneration shall not exceed 10% of net profits to all such Directors & Managers taken together

2 The remuneration payable to Directors who are neither MD or WTD shall not exceed 1 1% of net profits of CO, If there is

MD/WTD/MGR 2 3% of net profits in any other case.

• In case remuneration exceeds above mentioned limits Requirement of ordinary resolution will be enhanced to special resolution

Note – Above limits are exclusive of any fees payable to Director u/s 197 (5)

Section 197

Managerial remuneration

• Requirement of Lenders ApprovalWhere term loan of any bank or FI is subsisting or Co has defaulted in payment of dues to NCD /secured creditors, the prior approval of the bank/ PFI concerned / NCD-holders /secured creditors as the case may be shall be obtained by Co before obtaining approval in GM .

EX _Suppose , a Co has taken secured loan from NBFC & has defaulted payment then prior approval from NBFC is reqd before taking approval from members @ GM before passing SR

So, In case Co wants to pay an amount of remuneration that exceeds 11% of net profits of Co. The consent is not just from 1 lender but from each of them. Fact every lender usually say NO

Note – No need to take Lender’s Consent in case of Pvt Co even if such Pvt Co is running default with its Lenders

Case: KingFisher UB

Section 197

• Sec 197 (3)Prior approval of CG is not required.– For remuneration payable to Director in the FY,

Co has no profits / inadequate profits • Sec 197(9) If director draws/ receives, directly or

indirectly by way of remuneration any such sums in excess of limit prescribed by sec or without approval req’d, he shall refund such excess amount to Co within 2 years/ lesser period allowed by CO & until such sum is refunded hold it in trust for Co.

Case : Citi Group Vikram pandit paying excess package to CFOs & CEOs sued by shareholders

• Sec 197 (10) Co shall not waive recovery of any sum refundable u/s 9 unless

permitted by CG._ Special resolution within 2 years from amount refunded

replaced the CG Approval Proviso Inserted Where term loan under any bank/PFI is subsisting or Co ha

defaulted in payment of dues to NCD holders /secured creditor, as the case may be shall be obtained by Co before obtaining approval of such waiver

Sec 197(11) CG Approval is not req’d Schedule V applicable on grounds of no profit, any prov relating to remuneration of director which purports or has provision be contained in Cos MOA/articles/agreement unless such increase is in accordance with conditions specified in Schedule if non compliance of the same Resolution is enough ( before need fro CG approval)

• Sec 197(16) Newly Inserted • Auditor of CO shall in his report under Sec 143, make a

statement as to whether remuneration paid to directors is in accordance with provisions of this section, whether remuneration paid to any director is in excess of limit give the details as may be prescribed

Non Cash Transactions• No Company shall enter into agreement by which

– A director of its holding, subsidiary or associate company or person connected with him acquires or is to acquire assets for consideration other than cash, from the company or

– The co acquires or is to acquire assets for consideration other than cash, from such director or connected person is director of its holding company.

Unless prior approval of such arrangement is accorded by resolution of Co in GM & if such director or connected person is director of its holding co, approval shall also be required by passing resolution in GM of holding co

• Notice for approval of resolution by co or holding co in GM include particulars of arrangement with value of assets involved in arrangement duly calculated by Registered Valuer

Section 192

Contravention of Provisions • Any agreement entered into by co

or its holding co in contravention of provisions of this section shall be voidable at instance of Co unless-– The restitution of money or other

consideration which is subject matter of arrangement is no longer possible & Co has been indeminified by any other person for any loss or damage caused to it.

– Any rights are acquired bonafide for value & without notice of contravention of prov of this section by any other person.

Section 192

Preferential allotment• The Co should make pvt placement through issue of

Pvt pacement offer letter

• The offer or invitation to offer to subscribe securities shall not exceed 50. (excluding qualified institutional buyers & employees of Co being offered securities under ESOPS)

• If the Co makes an offer to allot or invites subscription, allots or enters an agreement to allot,securities more than prescribed number of persons the same shall be deemed to be an offer for public

• No fresh offer or invitation shall be made unless allotments with respect to earlier offers are completed, or that offer is withdrawn or abondoned by Co.

• Any offer not in compliance with provisions shall be treated as public offer & all provisos of Seurities Act & SEBI shall be reqd to complied with.

Section 42

• No Co offering securities shall under this section release any pubic advt or utilize any media, distribution channels or agents to inform the public @large

• Whenever Co makes allotment of securities , It shall file with RoC – Return of allotment

• Auditor shall compare such information provided by Company in PAS 4 with actual utilization of monies

• In case no specific purpose is not recorded, If not provide details thereof

• In case of any contraventions , the promoters & directors shall be liable for penalty upto 2 Cr or amount involved in offer WEH & Co shall also refund all monies to subscribers within period of 30 days of imposing penalty.

• Case Sahara Group

Section 42

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co law secs caro 2016

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