companies act, 2013 analysis and...
TRANSCRIPT
Companies Act, 2013
Analysis and Implications
Contents
3
04 | Foreword
06 | In a nutshell
08 | Governance
26 | Accounts, Audit and Auditors
39 | Mergers and Restructuring
45 | Valuations
51 | About ASSOCHAM
52 | About Grant Thornton
Foreword
D. S. Rawat
Secretary General
ASSOCHAM
4
The Indian corporate sector is passing through
an interesting phase primarily driven by two key
developments. Recently, a newly elected
government has assumed office, paving the way
for fresh optimism in the Indian corporate
sector. The enactment of the Companies Act
2013 is another key event for Indian corporates.
The current economic and regulatory
environment in India is on the threshold of a
major recast. Constant efforts are being made
to amend and adapt the laws to suit the
demands of modern times. The pivotal focus of
all major reforms is directed towards
simplification of the legal system to ensure that
it is easy to understand, implement and enables
business.
Companies Act 2013 is now effective from 1
April 2014. The MCA has already notified 282
sections out of 470 sections and rules relevant
for some of these sections. That means that
several significant key requirements of the new
Companies Act have now become effective.
While it is indeed a positive step forward by the
MCA in implementing the reformative new
company law, it also requires more compliance
and creates some complications for the
professionals and corporates to adopt the new
requirements.
Consequent to the enactment of the Companies
Act, 2013, the SEBI Board has in February
2014, approved the proposals to amend the
corporate governance norms for listed
companies in India. The amendments shall be
applicable to all listed companies with effect
from 1 October 2014.
To provide the holistic outlook regarding
Compliance & Complications under Companies
Act 2013, ASSOCHAM, in partnership with
Grant Thornton, has come out with a study
paper on “Companies Act, 2013 - Analysis and
Implications”
I am sure this study will give a rich insight and
adequate knowledge to all the stakeholders.
We also wish to acknowledge the contribution
made by the expert research team of Grant
Thornton India LLP for their untiring efforts in
preparing an extensive in-depth comprehensive
study.
With best wishes,
Foreword
Vishesh C Chandiok
National Managing Partner
Grant Thornton India LLP
5
The Companies Act, 2013 (‘2013 Act’) was
enacted on 29 August 2013 on accord of
Hon’ble President’s assent, and has the
potential to be a historic milestone as it aims to
improve corporate governance, simplify
regulations, enhance the interests of minority
investors, and for the first time legislates the
role of whistle-blowers. The new law replaces
the nearly 60-year-old Companies Act, 1956
(‘1956 Act’).
The 2013 Act provides an opportunity to catch
up and make our corporate regulations more
contemporary, as also potentially to make our
corporate regulatory framework a model to
emulate for other economies with similar
characteristics. The 2013 Act is more of a rule-
based legislation containing only 470 Sections,
which means that the substantial part of the
legislation will be in the form of Rules. There
are over 180 Sections in the 2013 Act where
rules have been prescribed.
To facilitate the ease of implementation, a
phased approach is being followed by the
Ministry of Corporate Affairs (‘MCA’).
Accordingly, 282 sections have been notified
and are in force as of 01 April 2014. Final Rules
for 19 chapters have also been released by the
MCA, which are applicable with effect from 01
April 2014. The Rules for the remaining
chapters are in draft stage.
Obviously, the intent is towards simplification,
which is critical for India to become more
competitive on the ease of doing business.
Whether this objective is finally delivered will
depend on two things - the rules that
supplement the Act and what they look like,
and the change in attitude towards
enforcement.
6
Governance • At least one woman director
• At least one India resident director
• Independent director (ID) legislated;
roles and responsibilities defined
• Database of IDs to be maintained;
may select IDs from this database
• One-person company permitted
unlike the minimum two before
• Maximum number of directors
increased to 15; any additional
directors only through Special
Resolution
• Maximum 20 directorships per
person; maximum 10 public
companies
• Consolidated financial
statements mandatory for all
Groups, including Unlisted/
Private companies, with more
than one entity; includes
associates or joint ventures;
• Mandatory rotation of audit firm
for listed companies post 10
years
• Financial year for all companies
to be March 31 (exception for
subsidiaries of foreign entities)
• Re-casting and re-statement of
financial statements can be
ordered; Voluntary revision of
financial statements for previous
periods now permitted
• Increased restrictions on non-
audit services provided by
Auditors
Accounts, Audit and Auditors
Independent
director legislated;
roles and
responsibilities
defined
• Auditor to also report on
adequacy of internal financial
controls system and the
operating effectiveness of such
controls
• Auditor to be a whistle-blower
to Central Government, if
becomes aware of any fraud
• The maximum limit of 20
companies per Partner in an
Audit firm
• Prescribed companies to
appoint internal auditor;
manner, period and reporting
to be prescribed by Central
Government
• Significant enhancement of
penalties for auditors
Mandatory rotation
of audit firm for
listed companies
post 10 years
• Stakeholders Relationship
Committee introduced
• Mandatory appointment of
Key Management Personnel
(KMP)
• Directors responsible for
design and operating
effectiveness of internal
financial controls
• Significantly enhanced
penalties for directors
In a nutshell
7
• 2% of the average net profit of
preceding three financial years
to be spent annually on
Corporate Social Responsibility
(CSR) or explain why not;
applicable for companies with
net worth of Rs 500 crore or
more, turnover of Rs 1,000
crore or more, or net profit
more than Rs 5 crore
• Valuations of any property,
stocks, shares, goodwill or any
other assets, net worth of a
company etc. must be
performed by a registered
valuer
• Class action suits introduced as
a remedy for small investors
against wrongful acts
Mergers without
Tribunal approval,
permitted between
two small companies,
or between a holding
company and its
wholly-owned
subsidiary
Large companies
to spend 2% of
average net profit of
preceding three
financial years on
CSR activities or
explain why not
spent
Other provisions
• Establishment of a
National Financial
Reporting Authority
(NFRA), with the objective
of monitoring and
enforcing compliance of
auditing and accounting
standards
• Establishment of vigil
mechanism (whistle-
blowing) in the prescribed
manner by every listed
company
• Deposit accepted (including
interest due) to be repaid
within 1 year from
enactment or from due date
of such payments,
whichever is earlier
Mergers and Restructuring • No more than two layers of
investment companies (certain
exemptions to foreign
acquisitions/ to comply with the
law)
• Mergers without Tribunal approval
permitted between two small
companies or between holding
company and its wholly-owned
subsidiary
• Merger into foreign companies
introduced
• Valuation report mandatory along
with notice to concerned parties in
case of proposed mergers
• Scheme of compromise or
arrangement must be in
line with accounting
standards; auditors'
certificate attesting the
same needed
• 'Reverse merger' of listed
company into unlisted
company now possible;
exit option to be provided
to listed company
shareholders
• Holding of treasury shares
directly or through a Trust,
prohibited
In a nutshell
Governance
9
Key changes and requirements Analysis and implications
Appointment of directors
The 1956 Act provided that the limit for maximum
number of directors be based on its articles or
twelve whichever is lower. The 2013 Act provides
that the company shall have a maximum of fifteen
directors on the Board of Directors (‘Board’) and
appointing more than fifteen directors would
require approval of shareholders through a special
resolution.
The 1956 Act did not prescribe any academic or
professional qualifications for directors. The 2013
Act provides that majority of members of Audit
Committee including its Chairperson shall be
persons with ability to read and understand the
financial statements.
The 2013 Act provides for appointment of at least
one woman director on the Board for such class or
classes of companies as may be prescribed. A
transitional period of one year has been prescribed
to companies for compliance with this provision.
The 2013 Act provides that a company should have
at least one director who has stayed in India for a
total period of not less than 182 days in the
previous calendar year.
The 1956 Act required that a public company can
have one director elected by small shareholders;
however, as per the 2013 Act, this provision is
applicable for listed companies only.
The 2013 Act required prescribed class of
companies to have whole-time KMP, including MD,
CEO, CS and CFO. This was not required under the
1956 Act.
The 2013 Act introduces a new category of a
company, One Person Company (“OPC”), which
should have at least one director.
For the first time, duties of the directors are defined
under the 2013 Act.
• Increasing the maximum limit of directors
would bring in more flexibility and enable
companies to get more experienced and
competent personnel at the Board level.
• Providing for the qualification of the audit
committee members would enable the company
to have quality people on the board to make the
board's functioning more effective.
• The prescribed minimum women representation
on company board, is a step towards making the
top deck more gender sensitive. Companies
must also bear in mind that whilst women
directors can be executive they do not need to
be independent.
• The 182 days limit is consistent with the Income
Tax (“IT”) Act for determining the residential
status of a person.
• Now, the unlisted public companies would not
be required to get a director appointed by small
shareholders.
• The OPC provision enables removing
nominee/ representative directors which were
appointed to meet the minimum director limit
and as such did not provide any benefit to the
company’s structure.
• Similar requirements for woman directors have
been introduced under revised listing
agreement.
Composition of the Board
10
Key changes and requirements Analysis and implications
Appointment of directors (Continued)
As per final Rules:
• Listed companies and other public companies
having paid-up capital of Rs 100 crore or more
or turnover of Rs 300 crore or more within six
months from the date of incorporation under
the Act have to appoint a woman director
• Listed company and every other public company
having a paid-up share capital of Rs 10 crore or
more to have whole-time KMP
Disqualification of directors
The 2013 Act includes the following additional
grounds of disqualification:
• A person who has been convicted of an offence
dealing with related party transactions at any
time during the past five years
• Similar to the public companies under the 1956
Act, the directorship in private companies has
also been brought under the ambit of
disqualification on ground for non-filing of
annual financial statements or annual returns for
any continuous period of three years, or failure
to repay deposits (or interest thereon) or redeem
debentures (or interest thereon) or pay declared
dividend and such failure continues for more
than one year.
• Director to vacate office if he remains absent
from all the board meetings held during 12
months
The 2013 Act makes directors’ disqualification
more stringent, including more scrutiny around
related party transactions.
The 2013 Act brings in more stringent provisions
to include such disqualification for the private
companies as well, thereby bringing more
discipline in the Board for private companies.
Action steps
Appointment of Directors
• Companies must put in place a mechanism to assess and periodically monitor foreign travel of its
directors so as to ensure that at least one director meets the 182 days criterion for being considered
as a resident in India.
• Companies should actively start looking for a woman director considering they have only a short
period to comply with this requirements of the 2013 Act.
Disqualification of Directors
• Private companies to review the director's disqualification and ensure compliance for their existing
directors.
• Private companies to consider including disqualification of directors as a part of its articles of
association.
Composition of the Board
11
Key changes and requirements Analysis and implications
Independent directors (‘ID’)
Under 1956 Act, there was no requirement to have
IDs. However, under the Listing Agreement, the
Board of listed entities having non-executive
chairman and executive chairman should comprise
of at least one-third and one-half of the Board as
ID respectively. The 2013 Act proposes that the
Board of listed entities should comprise at least
one-third of the Board as ID.
Transitional Period
The 2013 Act also provides one year period from
the enactment to comply with this requirement.
Other provisions with respect to IDs are discussed
in detail in the following paragraphs.
This provision brings in the ID requirements and
monitoring under the 2013 Act.
Composition of the Board
12
Board functioning
Key changes and requirements Analysis and implications
Notice of Board meeting
The 1956 Act provided that notice of every Board
meeting should be given in writing. However, it did
not specify the period of notice. The 2013 Act
provides that a minimum of seven days notice to
the Board is required to call a Board meeting.
The company may give a shorter notice to transact
urgent businesses, provided at least one ID is
present at the meeting. In case of absence of ID
from such a meeting, decisions taken at the meeting
to be circulated to all the directors and to be made
final only on ratification by at least one ID.
The 2013 Act intends to provide the Board
sufficient time to prepare for the meeting.
Frequency of Board meetings
The 1956 Act required at least one Board meeting
to be conducted in every three calendar months and
four such meetings in a financial year. Further,
Listing Agreement requires at least four meetings in
a year with a maximum time gap of four months
between two meetings.
The 2013 Act, consistent with the Listing
Agreement requirement, provides that the company
should have at least four meetings in a year with a
maximum time gap of 120 days between two
meetings.
The 2013 Act also requires that the first Board
meeting of the company be held within thirty days
of incorporation of the company.
The provision makes the requirements for
frequency of Board meeting similar for public and
listed companies.
Action steps
Companies may need to frame a policy as to what would qualify as an urgent business and related time
window for transacting such urgent business in order to comply with the seven-day notice period
requirement. For example, the items could include – completion of statutory audits and reports thereon.
13
Board functioning
Key changes and requirements Analysis and implications
Conduct of the Board meeting
Participation in the Board meeting through
prescribed video conferencing or other audio visual
means is recognised, provided such participation is
recorded and recognised. However, the Central
Government (‘CG’) may prescribe matters to be
discussed at a physically convened Board meeting.
As per final Rules:
MCA has prescribed following items to be
discussed at a physically convened Board meeting
only:
• the approval of the annual financial statements;
• the approval of the Board’s report;
• the approval of the prospectus;
• the Audit Committee Meetings for consideration
of accounts; and
• the approval of the matter relating to
amalgamation, merger, demerger, acquisition and
takeover.
The provision of conducting the Board meetings
through electronic means would bring in more ease
to the Board's functioning.
Audit committee
The 1956 Act required public companies having
paid-up capital of more than Rs 5 crore to
constitute audit committee, consisting of minimum
three directors and two-third of total members to
be directors other than Managing Director (“MD”)
or Whole Time Director (“WTD”) of the company.
Further, similar to the 1956 Act, listed entities are
required to constitute audit committee with two-
third of the members to be IDs. Listing agreement
also states that all members of the audit committee
should be financially literate and at least one should
have accounting or financial management expertise.
As per the 2013 Act, audit committees made
mandatory for listed companies and other
prescribed classes of companies.
The 2013 Act provides that audit committee should
consist of minimum of three directors with IDs
forming majority. Further, the chairperson and the
majority of the members of the audit committee
should have the ability to read and understand the
financial statements (referred as “financially literate”
under the Listing Agreement).
The 2013 Act dispenses with the requirement of
constituting the audit committee of the Board in
case of certain unlisted public companies.
The roles and the activities of the audit committee
have been specifically provided under the 2013 Act.
Pre-approval of all RPTs by the Audit Committees
is a significant change in the current practice
While on most matters, the committee has a monitoring/oversight role, on valuation of undertakings / assets, the primary responsibility seems to be that of the Audit Committee
14
Board functioning
Key changes and requirements Analysis and implications
Audit committee
The role of the audit committee includes the
following activities as per the 2013 Act:
a) the recommendation for appointment,
remuneration and terms of appointment of
auditors of the company;
b) review and monitor the auditor’s independence
and performance, and effectiveness of audit
process;
c) examination of the financial statement and the
auditors’ report thereon;
d) approval or any subsequent modification of
transactions of the company with related parties;
e) scrutiny of inter-corporate loans and
investments;
f) valuation of undertakings or assets of the
company, wherever necessary;
g) evaluation of internal financial controls and risk
management systems;
h) monitoring the end use of funds raised through
public offers and related matters.
The revised Listing Agreement enlarges the role of
the audit committee to now additionally also
include:
a. review and monitor the auditor's independence
and performance, and effectiveness of audit
process;
b. approval of the appointment of the
CFO/equivalent review the functioning of the
Whistleblower policy.
The audit committee shall have the authority to
investigate into any matter in relation to the items
specified above or any such matter referred to it by
the Board.
As per final Rules, the threshold for constituting audit committee is as follows:
• Every other public company: - having paid up capital of Rs. 10 crore or more; or
- turnover of Rs. 100 crore or more; or
- outstanding loans or borrowings or debentures; or
- deposits exceeding Rs. 50 crore or more,
as on the date of last audited financial statement.
Action steps
• Unlisted public companies to revisit the need
to continue with an audit committee
requirement.
• Audit committees would need to devise a
mechanism to:
- form a policy for recommendation and
appointment of auditors of the company;
- review and monitor the auditor’s
independence related matters;
- approval and/ or modification of the
related party transactions;
- valuation of undertakings or assets of the
company;
- evaluation of internal financial controls
and risk management systems.
• Audit committee may seek external expert
support to assist them in complying with
their responsibilities
15
Board functioning
Key changes and requirements Analysis and implications
Nomination and Remuneration Committee
The 1956 Act did not provide for the constitution
of a Nomination and Remuneration Committee.
Under the revised Listing Agreement, listed entities
shall constitute a Nomination and Remuneration
Committee and such committee should consist of
minimum of three directors, all of whom should be
non-executive directors and at least half shall be
independent directors
The 2013 Act requires all listed companies and
other prescribed classes of companies to constitute
Nomination and Remuneration Committee that
formulates the criteria for selection of the directors,
a policy relating to the remuneration for the
directors, Key Managerial Personnel (“KMP”) and
other employees. Such committee should consist of
three or more non-executive directors and at least
one-half of the members should be IDs.
As per final Rules:
Threshold for nomination and remuneration
committee
• Every other public company (i) having paid up
capital of Rs. 10 crore or more; or (ii) turnover
of Rs. 100 crore or more; or (iii) outstanding
loans or borrowings or debentures or deposits
exceeding Rs. 50 crore or more, as on the date of
last audited financial statement.
This provision will result in mandatory
requirement to constitute Nomination and
Remuneration Committee for prescribed class of
companies. This may result in change in practice
for several companies.
The 2013 Act does not provide any transitional
period for compliance with the constitution of a
Nomination and Remuneration Committee.
Corporate Social Responsibility (CSR) Committee
The 1956 Act did not mandate a company to spend
on CSR activities and consequently, there is no
requirement to constitute a CSR Committee.
The 2013 Act provides that a company meeting
certain conditions, should constitute a CSR
Committee of the Board, consisting of minimum
of three directors.
The CSR Committee should consist of a minimum
of one ID.
The CSR committee should formulate and monitor
CSR policies and discuss the same in the Board’s
report.
This new committee will frame and monitor the
CSR policy of the company and matters incidental
thereto.
The CSR policy would specify the projects and
programs to be undertaken and also their
execution modalities and implementation
schedules.
16
Board functioning
Key changes and requirements Analysis and implications
Corporate Social Responsibility (CSR) Committee
As per final Rules:
Criteria for constituting CSR committee is as
follows:
• net worth of Rs 5000 crore or more, or
• turnover of Rs 1000 crore or more or
• net profit of Rs 5 crore or more during any
financial year
The 2013 Act intends to provide the Board
sufficient time to prepare for the meeting.
Stakeholders Relationship Committee
The 1956 Act did not require the constitution of
Stakeholders Relationship Committee. The revised
Listing Agreement requires constitution of the
Stakeholders Relationship Committee to consider
and resolve the grievances of the security holders
of the company.
The 2013 Act requires that a company with more
than 1000 shareholders, debenture holders, deposit
holders and other security holders at any time
during the financial year shall constitute a
Stakeholders Relationship Committee to resolve
their grievances.
The 2013 Act does not prescribe the number of
members of such committee consistent with the
Listing Agreement, however provides that a non-
executive director should be the chairman of such
committee.
The provisions are now same under the 2013 Act
and revised Listing Agreement for listed
companies.
This provision applies to non-listed entities also,
meeting certain prescribed conditions and hence
will be a significant change in practice.
Action steps
CSR Committee
All companies will need to determine the applicability of the CSR criteria and also the activities that may
constitute CSR activities under the 2013 Act, to ensure compliance.
Stakeholders Relationship Committee
A non-listed company with more than 1000 share/debenture or security holders to form stakeholders
relationship committee and include one non-executive director.
17
Board functioning
Key changes and requirements Analysis and implications
Board’s report and responsibility statement
The 2013 Act seeks to make the board's report
more informative with extensive additional
disclosures like:
• Extracts of the annual return in prescribed form;
• Recommendations of the audit committee that
are not accepted by the Board and reasons
therefore;
• A statement on declaration by the IDs on their
compliance being IDs;
• Policy developed and implemented by the
company on CSR;
• In case of a listed company, statement indicating
the manner in which annual evaluation has been
made by the Board of its performance, its
committee and individual directors;
• Development and implementation of risk
management policy;
• Policy on director’s appointment and
remuneration, ratio of remuneration to each
director to the median employee’s remuneration;
• Material changes and commitments, affecting
company’s financial position subsequent to the
year end; to which the financial statements relate
and the date of the reports;
• Related party transactions not in the ordinary
course of business and not at arm’s length basis;
The 2013 Act has included the following additional
matters in the Directors’ responsibility statement:
- in case of a listed company, the directors had
laid down internal financial controls to be
followed by the company and they are
adequate and operating effectively;
- the directors have devised proper systems to
ensure compliance with all applicable laws and
such systems are adequate and operating
effectively.
The provision increases the responsibilities and
improves transparency of the functioning of the
Board.
The disclosures may also contain information that
is commercially sensitive and accordingly
companies will need to develop the disclosures
carefully.
The requirements on internal financial controls:
- are similar to global requirements; and
- may require significant efforts and costs to
ensure compliance.
- to ensure orderly and efficient conduct of
business) appear to be onerous, and can be read
to cover:
• not just financial reporting aspects, but also
operational areas
• looks at efficiency of operations
• requires conformation of operating
effectiveness
18
Board functioning
Key changes and requirements Analysis and implications
Board’s report and responsibility statement (Continued)
As per the final Rules:
• Every listed Company and every other public
company having a paid up capital ≥ 25 crore at
the end of the preceding financial year shall
include a statement on the annual evaluation
• The Board report should contain the names of
Companies which have become or ceased to be
the subsidiaries, joint venture or associate
company
• The details relating to deposit accepted,
remained unpaid or where default in repayment.
• The details in respect to internal financial
controls with reference to financial statements
The final Rules have introduced the requirements
of reporting on internal financial controls with
reference to financial statements. The final Rules
do not indicate its applicability with respect to
listed companies only (governed by the 2103 Act
though); therefore, this requirement seems to be
applicable to unlisted companies only. Hence, the
scope of reporting seems to be narrower for
unlisted, as compared to listed companies.
Action steps
• Companies to obtain additional information on transactions to be reported to and approved by the
Board.
• The Board to devise a mechanism to evaluate its own annual evaluation and events occurring post
year end
• The "internal financial controls" and its monitoring by the board in the 2013 Act will require
companies to set up appropriate mechanism/ processes/ systems to be able to give such declarations
19
Related parties
Key changes and requirements Analysis and implications
Related party transactions
As against the term “relative” defined under the
1956 Act, the 2013 Act defines the term “related
party” for the first time. The term ''related party" as
defined under the revised Listing Agreement is
significantly broader than in the 2013 Act.
The 1956 Act does not mandate specific approval
of the related party transactions ('RPTs') by the
Board/ shareholders. However, revised Listing
Agreement requires that all material RPTs shall also
require approval of the shareholders through special
resolution.
The 2013 Act proposes that all RPTs which are not
in the ordinary course of business or not at arm’s
length basis should be approved by the Board.
The 2013 Act also proposes that for the companies
with the prescribed share capital, no contract or
arrangement or transactions exceeding prescribed
amount, shall be entered into with its related party,
unless, approved by the shareholders of the
company by way of a special resolution. However,
the related party shareholders are not permitted to
exercise their voting rights, in such special
resolution.
The 2013 Act and the revised listing agreement
further mandates that all related party transactions
shall require prior approval of the audit committee.
The 2013 Act also proposes that a company shall
not make investments through more than two layers
of investment companies, unless the investments
are in an overseas company and the company has
overseas subsidiaries and such layers are permitted
under the local law of the company being acquired
or under the law of the acquiring company.
Every contract or arrangement entered into with a
related party shall be referred to in the Board's
report along with the justification for entering into
such contract or arrangement.
In addition to the related parties identified under
the existing notified accounting standards, the 2013
Act proposes to include more related parties than
what has been considered for disclosures in the
financial statement.
Based on the size of capital or the size of
transactions, certain additional companies may
require prior approval of members for related
party transactions.
Company to demonstrate what's arm's length. This
would need to be in sync with domestic transfer
pricing requirements, as well.
For transactions involving promoter related parties,
only non-promoter shareholders can vote.
Ordinary course of business not defined.
No transition period has been provided by the
2013 Act for existing loans and investments
through more than two layers of subsidiaries.
However, interpretation is to apply this
requirement only prospectively.
20
Board functioning
Key changes and requirements Analysis and implications
Related party transactions
As per final Rules:
• The term 'relatives' include step relationships and
exclude second generation lineal ascendants and
descendants.
• Threshold for approval of RPTs by shareholders
through special resolution:
- Company having a paid-up share capital of Rs.
10 crore or more; or
- Transaction or transactions to be entered into: i. threshold amount determined as percentage of
turnover /net worth per last audited financial
statements, threshold varies depending on the
nature of related party transactions
ii. relates to appointment to any office or place of
profit at a monthly remuneration exceeding Rs.
2.5 lakh
iii. is for a remuneration for underwriting the
subscription of any securities or derivatives
thereof of the company exceeding 1% of the net
worth.
• Turnover or networth shall be on the basis of
the Audited Financial Statement of the previous
Financial Year
• In case of wholly-owned subsidiary, special
resolution passed by the holding company for
entering into transactions between wholly-owned
subsidiary & holding company would be
sufficient compliance of these provisions.
• Explanatory statement annexed to the notice of
General Meeting shall contain the particulars
regarding related party & transactions.
• Register for recording the contracts &
arrangements with related party in Form MBP 4,
shall be preserved permanently.
Action steps
• Companies to identify all related parties since the scope of such parties has been expanded.
• Companies need to identify whether the expanded list of related parties is consistent with the
application requirement of the accounting standard.
• Companies to assess whether they are covered in the expanded list as identified by the 2013 Act to
require member's approval.
• Resolutions requiring the approval of the members would not have the voting of the concerned
related party voting on such transaction
21
Board functioning
Key changes and requirements Analysis and implications
Qualification and composition of independent directors
The concept of ID has been introduced and
defined under the 2013 Act as a director other than
a managing director or a whole-time director or a
nominee director, who:
• is a person of integrity and possesses relevant
experience.
• is not a promoter/a relative of a promoter (or
director) of the company or its
holding/subsidiary/associate company and does
not have pecuniary relationship with the
company/its holding/subsidiary/associate
company / promoters/directors of the company
during the current financial year or during the
two immediately preceding financial years.
• whose relatives do/did not have pecuniary
relationship amounting to 2% or more of the
gross turnover or total income or Rs 50 lakh or
such higher as may be prescribed, whichever is
lower with the company/its
holding/subsidiary/associate company /
promoters/directors of the company in the
current financial year or during the two
immediately preceding years.
• is not a KMP or whose relative is not a KMP, of
the company or its holding/ subsidiary/associate
in the last three years.
• has not been an employee or partner in a firm of
auditors or company secretaries or cost auditors
of the company/its holding/subsidiary/associate
company or in a legal/consulting firm that has or
had any transaction with the company /its
holding /subsidiary/associate company
amounting to 10% or more of the gross turnover
of such firm.
• does not hold more than 2% (individually or with
his relatives) of the total voting power.
• is not Chief Executive Officer or director of
non-profit organization, receiving 25% percent
or more of its receipts from the company/its
promoters/directors/ its holding/subsidiary/
associate company or holds more than 2% of the
voting power.
The definition of the term "IDs" as given under
the 2013 Act is now same as that provided under
the revised Listing Agreement, except for
providing the age limit of more than 21 years as
mandated by the latter.
This difference may result in a director being
qualified as an ID under the 2013 Act, however
disqualified as per the Listing Agreement.
Wider relationships now covered in determining
independence of a director
Other measures are aimed at mitigating actual or
perceived threats to independence and objectivity
of directors
The fixed tenure is aimed at protecting the tenure
of IDs
The Act also provides much needed clarity on the
liability of IDs, which is very welcome
22
Board functioning
Key changes and requirements Analysis and implications
Qualification and composition of independent directors
Listed companies shall have at least one-third of the
total number of directors as IDs and the CG may
prescribe the minimum number of IDs for any class
of public companies.
This requirement is to be complied within 1 year:
• by existing listed companies from the date of
enactment of the 2013 Act ; and
• by the prescribed class of public companies from
the date Rules are notified.
As per Final Rules:
Threshold for public companies– (i) share capital of
Rs.10 crore or more or turnover of (ii) Rs100 crore
or more or (iii) aggregate, outstanding loans or
borrowings or debentures or deposits exceeding Rs
50 crore, as per the latest audited financial statement
Term of appointment and other requirements
The ID shall be appointed for a term of up to five
years and be eligible for re-appointment subject to
certain conditions for two such terms. Thereafter,
the ID shall be eligible for appointment after a
cooling off period of three years, subject to certain
conditions.
Alternate director of an ID can be appointed if
such an alternate director is also an ID.
IDs should provide declaration at the date of
appointment and at the first meeting of the Board
in every FY confirming that he meets the criteria of
independence unless there are changes in the
circumstances since last declaration. Currently,
under the Listing Agreement there is no such
requirement to provide any declaration.
In the 1956 Act, an ID may be remunerated by way
of grant of stock options in addition to fees/
commissions. The 2013 Act and the revised Listing
Agreement provide that the ID should not be
remunerated by grant of stock options.
The mandatory rotation period is a significant
change in practice and is aimed at improving
objectivity of the ID. The availability of qualified
personnel to act as ID could pose challenges in
implementation of these provisions.
It is also noted that there is no requirement for ID
rotation in other developed countries.
The provision is aimed at addressing objectivity of
the IDs. However, the 2013 Act does not specify
the implication of outstanding stock options
granted previously to IDs.
With the prohibition of granting stock options to
IDs under the revised Listing Agreement also, this
appears to be consistent now with the 2013 Act.
The 2013 Act provides a guide to professional
conduct for IDs which will provide confidence to
the investor community, particularly minority
shareholders, regulators and companies in the
institution of the independent directors.
23
Board functioning
Key changes and requirements Analysis and implications
Term of appointment and other requirements
The 1956 Act did not mandate laying down the
code of conduct. However, under the Listing
Agreement, listed companies are required to have a
code of conduct for all Board members and senior
management of the company, which further
mandates to include the duties of IDs as laid down
in the 2013 Act. The 2013 Act prescribes in a
separate schedule, on Code of conduct applicable
only for IDs.
The 2013 Act provides that CG is empowered to
notify any body or institute or association to
maintain a databank containing particulars of the
IDs such as name, address, qualification.
The provision will improve the efficiency and
effectiveness in selecting qualified personnel.
The time frame during which the data bank has to
be prepared has not been defined.
Action steps
• Potentially, additional public companies may be identified for the requirement of inducting IDs.
• Companies to obtain information from IDs pertaining to them and their relatives to conclude that
the independence criteria is met annually.
• Listed companies will need to assess how they would apply the stricter policy of independence as per
the 2013 Act and the requirements of the Listing Agreement.
• Determine the course of action for directors that may not qualify as independent under the 2013 Act
– such as nominee directors.
• Companies will need to identify outstanding stock options previously granted to IDs and determine
the appropriate course of action.
• The directors need to evaluate as to by when they need to get themselves registered with the data
bank.
24
Other provisions
Key changes and requirements Analysis and implications
Number of directorships
The 1956 Act provided for maximum directorship
of not more than fifteen companies. Private
companies, Unlimited companies, Associations not
carrying on business for profit or which prohibit
payment of dividend, Alternate directorships and
Foreign companies were not considered for this
purpose.
The 2013 Act provides that a person cannot have
directorships (including alternate directorships) in
more than twenty companies, including ten public
companies. For this purpose, directorship in private
companies that are either holding or subsidiary
company of a public company shall be regarded as
a public company.
The 2013 Act provides for one year period from the
enactment to comply with this requirement.
The provision increases the number of
directorships from 15 to 20. However, it may
result in many directors already exceeding the
prescribed limits as the directorship in more
companies (excluding foreign companies) and
alternate directorships are counted for this purpose
now.
Increasing the maximum limit of directors would
bring in more flexibility and enable the companies
to get more experience and competent personnel
at the Board level.
Revised Clause 49 is more restrictive on the limit
on number of directorships for IDs i.e. maximum
7 listed companies. Also, a whole time director in
any listed company can serve as an ID in
maximum of 3 listed companies.
Restriction on power of Board
As per the 2013 Act, restriction on power of Board
to exercise specified powers with general meeting
approval extended to private companies. In all cases,
approval of shareholders by a special resolution
made necessary. As per the 1956 Act, it was
applicable for the public companies and the private
companies being the subsidiary of the public
company and there was no mention for the type of
the resolution to be passed at the general meeting.
The Board can act on certain prescribed matters
only after obtaining the consent of the members
by a special resolution.
Private companies would also require to ensure and
enlist the matters that could be transacted by
passing a special resolution.
Resignation
Provisions with respect to resignation of a director
have been specifically provided under the 2013 Act.
It is also mandated for a director to forward a copy
of his resignation along with detailed reasons for
the same to the Registrar in the prescribed manner.
The shareholders and the regulatory bodies can use
this as a tool to assess the issues in governance by
monitoring the reasons for resignation as provided
by the directors.
Action steps
• Companies and their directors will be required to identify their directorships and transition out over
the year if they exceed the limit.
• Companies will also need to identify replacement directors – including IDs.
• The companies need to consider updating their charter documents for incorporating the provisions
with respect to duties and resignation of the directors.
25
Other provisions
Key changes and requirements Analysis and implications
Prohibition of insider trading
New clauses have been introduced with respect to
prohibition of insider trading of securities and the
definition of price sensitive information.
No person including any director or KMP of a
company shall enter into insider trading except any
communication required in the ordinary course of
business or profession or employment or under any
law.
While the 1956 Act was silent on insider trading, the
2013 Act on the other hand, lays down provisions
relating to prohibition of insider trading with
respect to all companies This is a step towards
harmonisation between the 2013 Act and the SEBI
Act; more specifically for listed companies;
Any person who violates the clause will be punished
with a cash fine or imprisonment or both.
Whistle Blower Mechanism
Every listed company and prescribed companies
need to establish a vigil mechanism for directors
and employees to report genuine concerns.
As per final Rules, the companies accepting public
deposits and with borrowed money from banks etc.
exceeding Rs 50 crore are covered for this purpose.
Whistleblower mechanism accompanied by anti-
abuse mechanisms would be a step towards better
corporate governance.
Penalties
The 2013 Act proposes significant penalties for
directors for defaults in discharging their duties. The
instances for levying penalties have increased
substantially too. Concept and penal provisions
relating to officer in default is also strengthened.
Penalties and fine provided under the 2013 Act are
upto 3 times of the amount involved and
imprisonment for a term upto 10 years.
This will help to make Company and it officers in
default more liable for their action.
Strengthening the provisions for officers in default
and further making the penal provisions more
rigorous are aimed at protecting the stakeholders’
interest.
Class Action (not yet notified)
Unlike the 1956 Act, the 2013 Act provides for class
action suits, allowing certain members/depositors
with common interest, to file an application in the
National Company Law Tribunal against the
company/its management/its auditors or a section
of its shareholders for damages or compensation if
they are of the opinion that the management or
conduct of the affairs of the company are being
conducted in a manner prejudicial to their interest.
Class Action suit provides empowerment to
minority stakeholders to come together and seek
action against the management, advisors and
auditors of the company for any oppression or
mismanagement. However, in the absence of
significant anti-abuse provisions in the
implementation rules, this can be misused. The new
risks and liabilities will enforce more responsibility
into the role of a director.
Action steps
• The companies need to develop a mechanism for insider trading and price sensitive information.
• The prescribed companies also need to establish and monitor the whistle blower mechanism.
• The companies need to prepare a strong mechanism to ensure adherence to the rules and regulations
as per the 2013 Act so as to avoid the rigorous penalties laid down under the 2013 Act.
Accounts, Audit and Auditors
27
Accounts
Key changes and requirements Analysis and implications
Consolidated financial statements and definition of significant influence
The 1956 Act does not require preparation of
consolidated financial statements (‘CFS’). However,
listed entities are required to prepare CFS (as per
SEBI regulations). The 2013 Act mandates
preparation of CFS for all companies which have
one or more subsidiaries. Further, the definition of
a subsidiary as per the 2013 Act includes associates
and joint ventures.
In addition, the 2013 Act:
• prescribes the format (similar to existing revised
schedule VI of the Act) for preparation of CFS
• requires minority interest to be presented
separately within equity on the balance sheet
The 2013 Act defines the term significant influence
as “control of at least 20% of total share capital or
of business decision under an agreement”. This
definition differs from the existing notified
accounting standards, which defines significant
influence as "the power to participate in financial
and/or operating policy decisions of the investee
but not control over those policies".
The final Rules also reiterate the fact that the
consolidated financial statements shall be made in
accordance with the provisions of Schedule III of
the 2013 Act.
The requirement to prepare CFS is largely
consistent with internationally accepted practices.
However, internationally, such requirements apply
only to listed companies; and unlisted intermediate
entities are generally exempted.
The existing Indian and international accounting
practices do not require preparation of CFS when
the company has investments only in associates and
joint ventures (no subsidiaries).
The requirement to present minority as part of
equity is currently not required under the existing
Indian accounting practices. However, the
international practices are consistent with the 2013
Act.
With regards the definition of significant influence,
we note that the standing committee recognised the
difference and concluded that in due course the
accounting standards will get aligned to the
definition in the 2013 Act. However, this change
could potentially result in divergence with
internationally accepted practices.
There will in an increase in efforts and costs, for
example in IT/ ERP systems, without providing
much benefits to privately held companies.
Financial Year
As per the 1956 Act, it is up to a company /body
corporate to choose its financial year. The 2013 Act
provides that the financial year for all companies
and body corporates should end on 31 March.
However, exemption may be granted at the specific
request of the reporting entities where the financial
statements of such entities are required for
consolidation outside India. A transition period of
two years has been provided for this change.
The 2013 Act eliminates the current flexibility in
having a financial year different than 31 March, as
well as in making amendments to the year-end to
suit requirements.
Action steps
• Immediate task is to assess the number of additional financial statements required specially as
consolidation is also required at intermediate levels.
• Identify subsidiaries, JVs and associates as per the revised definition of significant influence which may
be required to be consolidated in the financial statement.
28
Accounts
Key changes and requirements Analysis and implications
Restatement of financial statements (Not yet notified)
Under existing accounting practices, a company
cannot restate its previously issued financial
statements to correct for an error or misstatement.
These are corrected in the current period and
disclosed. The 2013 Act provides for the following:
• mandatory restatement: in case of fraud and on
passing an order by a Court/ Tribunal
• voluntary restatement: to comply with ASs
standards with the approval of the tribunal
The concept of restatement is new and is an
internationally required practice. Further, SEBI has
recently mandated that it may require companies to
restate financial statements in case of justified
audit qualifications. Accordingly, the provision
under the 2013 Act will enable the implementation
of the SEBI requirements.
Estimated useful life of assets
The 1956 Act provides for minimum useful lives of
fixed assets. For all companies, the 2013 Act
removes the minimum thresholds and provides
indicative useful lives and residual values under Part
C of Schedule II to the 2013 Act. Any variation
from the indicated life needs to be justified. These
changes need to be applied prospectively. On the
date of this Schedule coming into force, if no useful
life is left for an asset with carrying value, the same
shall be adjusted through opening reserves.
For intangible assets, the provisions of the ASs shall
be applicable, except in case of intangible assets
(Toll Roads) or any other form of public private
partnership route in road projects, where a revenue
based method for amortisation has been prescribed.
A similar method was available under 1956 Act for
Toll Roads (notified in April 2012 separately).
Componentisation of assets is mandatory now.
The 2013 Act has introduced separate category for
industries such as (a) civil construction, (b)
telecommunication, (c) exploration, production and
refining oil and gas, etc.
It appears that the 2013 Act permits companies to
have a useful life which is different from the
prescribed/ indicated life with a justification thereof
in the Financial Statements. This may lead to
different useful life for the same asset by similar
companies.
Mandating different depreciation on the different
components of a single asset will also be a
cumbersome activity for most of the companies
and may significantly impact their Financial
Statements in the initial years of implementation of
the revised policy.
We believe that such provisions are restrictive and
are indirectly pushing companies to follow the
useful life as indicated in the 2013 Act instead of
making an appropriate assessment of the useful life
of the asset.
Deviations from the prescribed lives are allowed but
would need to be justified.
Componentisation will require significant efforts,
since this is to be done from a retrospective effect
Action steps
• Companies need to carefully consider the implications of restatement provisions and its impact, e.g.
where there are audit qualifications, instances of fraud, prior period adjustments etc. • The useful lives of several tangible and intangible assets are significantly lower than the lives
prescribed under erstwhile Schedule XIV. Hence, management shall assess the useful lives based on
the prescribed indicative useful lives and disclosures.
• Companies need to evaluate the existing assets for component assessment and frame the revised
depreciation policy and evaluate the depreciation thereon.
29
Audit and Auditors
Key changes and requirements Analysis and implications
Eligibility
Under the 1956 Act, a Chartered Accountant ('CA')
holding a certificate of practice or a firm of CAs
(only) can be appointed as auditor(s) of a company.
The 2013 Act, in addition, proposes that a firm
wherein a majority of the partners practicing in
India are qualified for appointment, may be
appointed to be an auditor of a company. Where a
firm, including a Limited Liability Partnership
(‘LLP’), is appointed as an auditor of a company,
only partners, who are CAs are permitted to act and
sign on behalf of the firm.
The introduction of LLP as an auditor and ability
to work along with partners who are not CAs is a
welcome change and in line with international
practices. This will also pave the way for multi-
disciplinary partnership firms.
Auditor needs to submit eligibility certificate
before proposal of the appointment is taken up.
The company needs to file a form with the
government within 15 days of appointment of
auditors.
Disqualifications
Additional disqualification prescribed:
• Any person who has a 'business relationship' with
the company/ its subsidiary/associate/its holding
company/subsidiary or associate of its holding
company (business relationship disqualification);
• A person whose relative is a non-executive/
executive director or KMP of the company;
• A person who has been convicted by a court for
an offence involving fraud and a period of ten
years has not elapsed from such conviction;
• A person being full-time employee elsewhere;
• A person whose appointment will make him the
auditor of more than 20 companies;
• Any person whose subsidiary or associate or any
other form of entity is engaged in providing non-
audit services as on the date of appointment
• Any person who is holding interest greater than
Rs 1 lakh face value or indebted for greater than
Rs 5 lakh to the company.
As per final Rules, the term ‘business relationships’
is defined to construe any transaction entered into
for a commercial purpose except for:
• professional services permitted for auditors under
the Act and the CA Act
• in the ordinary course of business at arm's length
price
Some of the disqualifications seem to be quite
punitive and may be difficult to implement.
The term 'business relationship' defined through
Rules brings some clarity to the application of the
provisions. However, determination of 'ordinary
course of business' and 'arm's length price' would
also bring some challenges in evaluating and
establishing the same. Further, no cooling off/
transition period has been provided by the 2013
Act.
Further, it seems that the non-audit services may be
provided in the year of the appointment without
affecting eligibility, provided the engagement is
terminated prior to the date of the appointment.
Action steps
Existing auditor's relationships need to be re-evaluated considering the several disqualifications included.
30
Accounts
Key changes and requirements Analysis and implications
Tenure and re-appointment of auditors
Auditors appointed in an annual general meeting
(‘AGM’) shall hold office from the conclusion of
that meeting until the conclusion of the ensuing
sixth AGM (subject to ratification by members at
every AGM).
As per the 2013 Act, before the expiry of the term
of appointment, the company may remove the
auditors (subject to special resolution and prior
approval from Central Government ('CG')) and the
auditors, as well, have the right to resign.
Further, the Tribunal (not constituted as yet) either suo-
moto or on an application made to it by CG or by
any person concerned, if it is satisfied that the
auditor has acted in a fraudulent manner or abetted
or colluded in any fraud by the company or in
relation to the company/its directors/officers; may
direct the company to change its auditors. The
auditor, against whom such an order is issued, shall
not be eligible to be appointed as auditor of any
company for five years, together with other penal
actions.
An auditor/ audit firm is eligible for re-
appointment after expiry of five years since
completion of the previous tenure.
An audit firm having common partner (s) with
another firm which has completed its term is not
eligible for re-appointment for a period of five
years from the completion of the other firm’s term.
As per final Rules:
• Rotation requirements apply retrospectively i.e.
period prior to the commencement of the 2013
Act, included in computing 5/10 consecutive
years.
• Incoming auditor/audit firm disqualified for
appointment, if associated with the outgoing
auditor/audit firm under the same network of
audit firms or operating under the same trade
mark or brand.
The provision of five year appointment may result
in effectively protecting the tenure of the auditor
for five years by including stringent provisions on
removal of auditors. While rotation (as discussed
below) affects the long-term continuity of the
company-auditor relationship, the five-year
appointment, brings in stability for a limited
period.
However, the ratification provision results into
annual confirmation of the appointment and
effectively may not provide the tenure protection
in reality.
The Tribunal's authority to suo-moto change the
auditor and consequent ineligibility of such
auditor, to act as an auditor for any company is
quite punitive and could be disruptive to the audit
profession. This could result in disproportionate
punishment for a minor intentional / unintentional
act and could potentially shut down large
accounting firms overnight.
Action steps
Companies to make an assessment of the timing for change of existing auditors in line with the amendments
31
Audit and Auditors
Key changes and requirements Analysis and implications
Mandatory rotation
In case of listed companies (or a company
belonging to such class or classes of companies as
may be prescribed) the term of appointment of an
individual auditor/ an audit firm is restricted to a
period of five years/ ten years.
An auditor/ audit firm should mandatorily rotate at
the expiry of the term.
Shareholders, at their discretion, may determine that
an audit partner may rotate at such interval as may
be resolved by them, or that the audit may be
conducted by more than one auditor (joint audit).
There is a transition period of three years, from
date of enactment of the 2013 Act, to comply with
this requirement.
As per final Rules, auditor rotation is made
mandatory for the following class of companies,
excluding one person companies and small
companies:
• unlisted public companies with paid up share
capital of Rs. 10 crore or more;
• private companies with paid up share capital of
Rs. 20 crore or more;
• all companies with borrowings from bank/public
financials institution or public deposit of Rs. 50
crore or more.
Mandatory rotation is a new concept and is
expected to change the Indian audit market
structure significantly as several large companies
have retained their auditors for more than 10 years.
Mandatory rotation could possibly result in both
positive and negative influences on the quality of
the financial reporting processes and on overall
audit quality. Not many jurisdictions have
established mandatory auditor rotation
requirements, accordingly its feasibility and
practicability is debatable because the extent of
information about its potential impact is not
readily available. Further the international practice
so far is of mandatory partner rotation only. While
European Union has very recently issued
requirements for mandatory firm rotation, the
same are applicable to only very large companies
and the rotation period could be up to 20 years.
While the potential benefit of mandatory rotation
is enhanced auditor objectivity, it will also likely
have an effect on overall cost, conduct and timing.
A sudden introduction of such a requirement may
disrupt the audit market and the industry as a
whole. The implications could be far reaching and
cannot be commented at this point in time.
Action steps
Companies to involve audit committees up-front in developing an internal system for assessment of
eligible firms for appointment.
32
Non-audit services
Key changes and requirements Analysis and implications
Restricted services
Currently, whether non-audit services can be
rendered to an audit client is determined by
applying the Code of Ethics and the Guidance
Note on Independence of Auditors issued by the
ICAI. Unlike 1956 Act, the 2013 Act contains
specific provisions that prohibit auditors of a
company to render non-audit services to an audit
client (or its holding company or its subsidiary
company)
Prohibited non-audit services include:
• accounting and book keeping services;
• internal audit;
• design and implementation of any financial
information system;
• actuarial services;
• investment advisory services;
• investment banking services;
• rendering of outsourced financial services; and
• management services.
Other restricted services may be further prescribed.
Transition Period
One year from the date of enactment of the 2013
Act.
The list of prohibited services is quite wide and also
vaguely worded. This results in restricting the ability
of an audit firm to provide most non-audit services.
Whilst the provision of some non-audit services to
audit clients can pose a risk, the objectivity of
auditors is not compromised by providing non audit
services to audit clients or their holding companies
provided that auditors comply with independence
standards. Certain non-audit services, for example,
services that pose a risk of self-review do impair
independence; however there are several non-audit
services that do not affect independence. The list
provided under the 2013 Act is subject to wide
interpretation and may limit auditors in providing
valid non-audit services which do not pose any risk
of independence.
It should be noted that the list appears to be more
restrictive than international practices.
Such restrictions are generally applied to all
‘downward affiliates’ of the company, as those
entities could be considered as being subject to
audit (in the context of the parent company’s
financial statements); however, these restrictions
have been extended to the holding company as well.
The requirements appear to be quite onerous and
indeed would appear to prohibit an audit firm from
providing a wide range of services, even when those
are non-material.
The risks associated with the audits increases
significantly, and have a severe impact on the cost
of professional indemnity insurance and hence
costs of audits.
Action steps
• Companies may initiate the process to assess independence of external auditors, with regards to any
non-audit services provided, within the group
• Build and implement a framework for regular monitoring and oversight over all audit and non-audit
services and service providers
• Assess the need to empanel additional service providers; and
• Develop a transition plan to comply with the provisions.
33
Audit and Auditors
Key changes and requirements Analysis and implications
Restriction on number of audits
The 1956 Act and the Institute of Chartered
Accountants of India (‘ICAI’) restrict the number
of companies in which a person/ firm can be
appointed as auditor. An individual cannot be
appointed as auditor for more than 30 companies.
Further, an individual cannot be appointed as
auditor for more than 20 public companies and of
which not more than 10 companies should have a
paid up share capital of more than Rs 25 lakh. In
case of a firm, such ceiling is determined for every
partner of the firm.
The 2013 Act restricts the number of audits to 20
companies for an individual/ partner.
The 2013 Act does not provide any restrictions
based on nature/ size of the companies.
Now private companies will also be considered for
calculating the limit of 20 audits per partner.
Class action suits (Not notified)
Unlike the 1956 Act, the 2013 Act provides for class
action suits, which will allow a requisite number of
members or depositors with common interest, in a
matter, to file an application in the National
Company Law Tribunal (‘NCLT’) against the
company/its management/its auditors or a section
of its shareholders for damages or compensation if
they are of the opinion that the management or
conduct of the affairs of the company are being
conducted in a manner prejudicial to their interest.
As per draft Rules, any of the following can file
class action suits:
• 100 members or 10% of the total number of
members whichever is less or any member/(s)
holding ≥ 10% issued share capital; or
• 100 depositors or 10% of the total number of
depositors or any depositor(s) holding ≥10% of
outstanding value of deposits
Class action suit provides empowerment to
minority stakeholders to come together and seek
action against the experts, advisors and auditors of
the company for any oppression or
mismanagement. However, in the absence of
significant anti-abuse provisions in the
implementation rules, this can be misused.
The new risks and liabilities will infuse more
responsibility into the role of an auditor.
34
Audit and Auditors
Key changes and requirements Analysis and implications
Reporting requirements
In addition to the 1956 Act reporting requirements,
the 2013 Act includes the following matters for
auditor reporting:
• Adequacy of the internal financial controls system
and the operating effectiveness of such controls
[in a similar context with respect to directors
report, internal financial control has been defined
to mean the policies and procedures adopted by
the company for ensuring the orderly and
efficient conduct of its business, including
adherence to company’s policies, the safeguarding
of its assets, the prevention and detection of
frauds and errors, the accuracy and completeness
of the accounting records, and the timely
preparation of reliable financial information].
• Any qualification, reservation or adverse remark
relating to the maintenance of accounts and other
matters connected therewith.
As per final Rules, additional comments need to be
provided by the auditors in their report for:
• disclosure of the effect of pending litigations;
• provision for material foreseeable losses as
required under any law or accounting standards
on long-term contracts, including derivatives; and
• delay in depositing money into the Investor
Education and Protection Fund
The auditors are subjected to wider and onerous
responsibility of providing a comfort on internal
controls and on operational effectiveness of the
conduct of the business, in addition to the true and
fair opinion on financial statements.
There seems be a focus to bring in global best
practices in terms of reporting by auditors on the
effectiveness of internal control over financial
reporting and maintenance of accounting records.
However, the terms or language highlighted in
these requirements, are subjective and open to
wide interpretations. This may adversely affect the
scope of the audit and can pose significant
implementation challenges.
Further, for unlisted entities the requirements
related to reporting in internal financial controls
apply only to auditors and not to the directors
which is inconsistent with the company's /
director's primary responsibility for implementing
such controls.
Scope of audit inquiries/testing may no longer be
restricted to financial information and may include
more qualitative operational assessments as well.
There may be significant costs associated with
implementation of acceptable internal financial
reporting controls.
Action steps
• Companies to take measures to perform gap analysis of controls currently documented and
implemented vis-à-vis enhanced expectations pursuant to the above amendment.
• Companies to develop a comprehensive internal control framework in consultation with auditors and
audit committee; and
• Companies to develop training programs for effective implementation of internal financial controls,
including training and education of board members.
35
Audit and Auditors
Key changes and requirements Analysis and implications
Whistle Blower-Fraud Reporting
The 2013 Act provides that the auditor should
immediately inform the Central Government within
such time and in such manner as may be prescribed,
if he has reason to believe that an offence involving
fraud is being committed or has been committed
against the company by its officers or employees.
As per final Rules: • Auditors to report about the fraud to the Central
Government if sufficient evidence, within 60 days.
• Initial report to be given to Board/Audit Committee for their comments. Time limit for responses set at 45 days. Within 15 days of receipt of comments or expiry of 45 days (in case comments not received), report to be sent to the Central Government.
• Responsibility to report fraud applies equally to secretarial and cost auditors.
The term “Fraud”, as defined under the 2013 Act,
is very wide and perhaps encompasses every act of
omission or commission. It will be interesting to
understand how these requirements will work
considering that auditors are also the gatekeepers
of the accounting and internal controls of the
company. Further, there is no materiality limit set
under the 2013 Act for reporting to the Central
Government. The 2013 Act may require an auditor
to report even trivial matters, making it an
ineffective exercise.
The current language of the Act and the Rules
suggest covering all sorts of frauds which lays
excessive responsibility on the auditors.
The 2013 Act only requires reporting fraud by the
officers or employees on the company. However,
the fraud committed by others on the company
and frauds reported by the company on these or
others is currently not required to be reported.
The fraud reporting by the auditors irrespective of
the materiality and actions taken by the
management would result into confusion and
onerous obligation.
Action steps
Auditors would need to be vigilant to comply with the new requirements and companies should consider
their own whistle-blower policies and procedures and their processes of reporting frauds to the auditors.
36
Audit and Auditors
Key changes and requirements Analysis and implications
National Financial Reporting Authority (NFRA) (Not notified)
Under the 2013 Act, the National Financial
Reporting Authority (NFRA) (replaces existing
National Advisory Committee on Accounting
Standards) to make recommendations to the
Central Government on laying down auditing and
accounting standards applicable to companies.
Responsibilities of NFRA are to:
• monitor and enforce compliance with auditing
and accounting standards
• oversee the quality of service of the profession
• investigate matters of professional misconduct by
CAs or firms
The NFRA will have the power to make orders
imposing penalty for professional or other
misconduct by the auditors. No other body shall
initiate proceedings in matters where investigation
has been initiated by the NFRA. It will have the
powers vested in a civil court while trying a suit.
As per the draft National Financial Reporting
Authority Rules, 2013 released, the NFRA structure
to have Committees on Accounting Standards,
Auditing Standards and on Enforcement.
Further, as per the draft Rules, the NFRA shall
undertake investigation or conduct quality review
of audit of following class of companies:
• listed companies
• unlisted companies with net worth or paid up
capital of not less than Rs. 500 crores or annual
turnover not less than Rs.1,000 crores as on 31
March of immediately preceding financial year; or
• companies having securities listed outside India
The constitution of the NFRA and powers being
conferred upon the NFRA will bring in a
significant change to the current structure of
standard setting and monitoring mechanism.
37
Audit and Auditors
Key changes and requirements Analysis and implications
Penalties and prosecution
In case if the auditor has contravened any of his
duties, he shall be punishable as below:
• required to refund the remuneration
• pay damages to the company, statutory
bodies/authorities or any other person for losses
arising as a result of incorrect or misleading
statements in his audit report
• pay a fine which shall not be less than Rs 25,000
but which may extend to Rs 5 lakh
Further, if the above contravention is with an
intention to deceive the company/shareholders/
creditors/ tax authorities/other interested party,
then he is also punishable with an imprisonment of
a term up to one year and a minimum fine of Rs 1
lakh, which may extend to Rs 25 lakh.
In case of an audit firm, if it is proved that any
partner has acted in a fraudulent manner or
colluded in any fraud with others, the liability for
such act shall be of the partner and of the firm
jointly and severally and such partner shall also be
punishable in the following manner:
• imprisonment for a term between six months to
ten years. If the matter involves public interest,
the minimum term will be three years; and
• fine for an amount ranging from one to three
times the amount involved in the fraud
Similarly, where any person has subscribed for
securities of a company on any statement included
in the prospectus which is misleading and has
sustained loss or damage as a consequence, the
company and certain specified person (includes
director, promoter and experts) are liable to pay
compensation to that person. Experts may include
auditors.
Where it is proved that a prospectus has been issued
with intent to defraud the applicants for the
securities of a company or any other person, every
person referred to the above shall be personally
responsible, without any limitation of liability, for all
or any of the losses or damages to that applicant/
person.
The term "intention to deceive" or "any other
person concerned or interested in the company",
‘improper or misleading statement of particulars’,
‘any likely act', 'wrongful act or conduct’ are vague
and subject to wide interpretation which might
result in unnecessary litigations.
Potential unlimited liability on auditor may result in
adverse impact on auditing profession and may
give rise to long disputes and increase audit costs.
Also, there could be an unlimited liability to the
firm for an act of a partner. Firm should ideally
have been held liable only when there is systemic
failure in firm's process and hence this seems a
disproportionate punishment for an individual act.
Overall it seems that auditor’s or the audit firm’s
liabilities are significantly disproportionate to the
level of involvement and currently drafted in a
manner which may potentially lead to a litigious
environment.
This requirement results into auditor’s being held
liable to every person and the liability is not limited
to his involvement and work performed. This also
seems disproportionate.
Also, the reference by an expert or advisor or
consultant is very broad and vague and could result
in wide and unintended interpretations of the
intent of the clause.
38
Other Audits
Key changes and requirements Analysis and implications
Internal Audit
Internal audit has been mandated for listed and
prescribed classes of companies.
As per final Rule, Internal Audit is made mandatory
for
- listed companies,
- unlisted public companies with paid up share
capital of Rs 50 crore or more or turnover of Rs
200 crore or more or outstanding loans or
borrowings exceeding Rs 100 crore or
outstanding deposits of Rs 25 crore or more at
any point of time during the last financial year
- private companies with turnover of Rs 200 crore
or more or outstanding loans or borrowings
exceeding Rs 100 crore at any point of time
during the last financial year
Mandatory internal audit requirement will
strengthen the system of internal controls in the
wake of recent corporate frauds.
Cost Audit
Cost audit has been mandated for specified class
of companies.
As per the draft Rules, the companies required to
include cost records in their books of account in
accordance with specified draft Rule shall be
required to get such cost records audited by a cost
auditor.
Further strengthening the requirements of the cost
audit, covering more companies under its ambit
will further discipline manufacturing industries,
which in turn would expand its benefits to larger
groups of people.
Secretarial Audit
Secretarial audit has been mandated for listed and
prescribed classes of companies.
As per final Rules, secretarial audit is made
mandatory for every public company with a paid up
capital of Rs 50 crore or more or turnover of Rs
250 crore or more.
Mandatory secretarial audit report would be a good
measure to ensure compliance with legal
requirements as any adverse comment in the report
could have significant impact from a regulatory
perspective.
Action steps
Companies need to assess the need to have any of the abovementioned audits and start planning the
appointments of the respective auditors.
Mergers and Restructuring
40
Mergers and restructuring
Key changes and requirements Analysis and implications
Notice of meeting
The 2013 Act, requires that notice of meeting for
approval of the scheme of compromise or
arrangement along with other documents shall be
sent to various other regulatory authorities in
addition to Central Government such as:
Income Tax authorities
Reserve Bank of India
SEBI
the Registrar
the Stock Exchanges
the official liquidator
the Competition Commission of India, if
necessary
other sector regulators or authorities, which are
likely to be affected by the compromise or
arrangement
The draft Rules relating to Compromise,
Arrangement and Amalgamations provide the mode
of delivery of notice sanctioning scheme of
compromise or arrangement to the members
and/or creditors of the Company either by hand or
by registered or speed post or by such electronic or
other mode as prescribed in Section 20 of the 2013
Act.
Further, the draft Rules also provide for the
documents and information that has to be annexed
to the notice. The notice should be sent at least four
weeks before the date fixed for the meeting.
Further, the notice for the meeting shall also be
advertised as per the direction of the Tribunal, not
less than fourteen clear days before the date fixed
for the meeting
The existing simple procedure of submitting
documents with Court will become multi-party
with the inclusion of various regulatory authorities.
It will increase the paperwork and the process may
become more cumbersome with the direct
involvement of other regulatory authorities.
Action step
Process will slow down and more planning would be required with respect to time as well as strategy
for pre-scrutiny by various regulators.
41
Mergers and restructuring
Key changes and requirements Analysis and implications
Treasury shares
The 2013 Act specifically stipulates that any
intercompany investment would have to be
cancelled in a scheme and holding shares in the
name of transferee through a trust would not be
allowed.
The 2013 Act has abolished the practice of
companies to hold their own shares through a
trust, which could provide them liquidity in future,
while still allowing the promoters to retain a
controlling stake over the company.
Approval of scheme through postal ballot
Under the 1956 Act, scheme of compromise /
arrangement needs to be approved by majority
representing 3/4th in value of the creditors and
members or class thereof present and voting in
person or by proxy.
The 2013 Act additionally allows the approval of
the scheme by postal ballot.
This will involve wider participation of the
shareholders of the company in voting and will
protect shareholders interest.
Objection to compromise or arrangement
Under the 1956 Act, any shareholder, creditor or
other “interested person” can object to the scheme
of compromise or arrangement before a court if
such person’s interests are adversely affected.
The 2013 Act states that the objection to
compromise or arrangement can be made only by
persons:
• Holding not less than 10% of shareholding or; • Having debt amounting not less than 5% of the
total debt as per latest audited financial
statements
The new threshold limit for raising objections in
regard to scheme or arrangement will protect the
scheme from small shareholders’ and creditors’
frivolous litigation and objection.
Action steps
Treasury shares
The companies have to look for other options to retain control and to maintain liquidity as post-merger
all the intercompany investment will be cancelled and no further shares will be issued in lieu of the
intercompany investment.
Approval of scheme through postal ballot
Companies while approving scheme through postal ballot should ensure that all the regulations relating
to postal ballot are being complied with and the facility can be availed by all the parties whose interest is
likely to be affected by the proposed scheme.
42
Mergers and restructuring
Key changes and requirements Analysis and implications
Valuation certificate
The 1956 Act does not mandate disclosing the
valuation report to the shareholders. Though in
practice, valuation reports are included in
documents shared with the shareholders and also to
the Court as part of the appraisal process of the
scheme by the Courts.
The 2013 Act now mandatorily requires the scheme
to contain the valuation certificate. The valuation
report also needs to be annexed to the notice for
meetings for approval of the scheme.
In case of purchase of minority shareholder, the
draft Rules provides that the mode for determining
the price to be paid by the acquirer or person etc.
shall be as per the method specified in the said
Rules separately for listed and unlisted companies.
This will enable the shareholders to understand the
business rationale of the transaction and take an
informed decision.
The valuation report obtained by the company
should be robust as the same will now have to
stand scrutiny of various stakeholders.
Since the methodology has been specified under
the Rules for buying out the minority shareholding,
this gives a sense of protection to the minority
shareholders who were prejudiced by the price they
get in the absence of any such guidelines.
Compliance with accounting standards ('ASs')
The 2013 Act now provides that no scheme of
compromise /arrangement, whether for listed
company or unlisted company shall be sanctioned
unless the company’s auditor certifies that the
accounting treatment of the proposed scheme is in
conformity with the applicable ASs.
Further, the application with respect to reduction of
share capital has to be sent to the Tribunal along
with the auditor’s certificate stating that it is in
compliance with ASs.
The draft Rules clarifies that the accounting
treatment for demerger shall be as per the
conditions stipulated in Section 2(19AA) of the
Income-tax Act, 1961 till the ASs are prescribed for
the purpose of demerger.
The 2013 Act aligns the SEBI requirement which
existed for listed companies for all companies, to
ensure that the scheme aimed to use innovative
accounting treatments for financial re-modeling are
not sanctioned by the Courts.
As the scheme tends to have overriding effect with
respect to accounting treatment (specifically
mentioned in accounting standard 14 with respect
to treatment of reserves), the onus has been
shifted on the auditor to confirm that accounting
standards have been followed.
Action steps
Valuation certificate
Planning would be required for scrutiny of the valuation by all stakeholders.
Compliance with ASs
Auditor will have to be involved to ratify the accounting treatment of the scheme. The Company,
(listed or unlisted), has to obtain an auditor's certificate before proceeding with the filing of scheme
with the regulatory authorities.
43
Mergers and restructuring
Key changes and requirements Analysis and implications
Merger or amalgamation of company with foreign company
The 1956 Act does not contain provisions for
merger of Indian company into a foreign company
(transferee company has to be an Indian company).
The 2013 Act states that merger between Indian
companies and companies in notified foreign
jurisdiction shall also be governed by the same
provisions of the 2013 Act. Prior approval of
Reserve Bank of India would be required and the
consideration for the merger can be in the form of
cash and or of depository receipts or both.
The 2013 Act will provide an opportunity of
growth and expansion to Indian Company by
permitting amalgamation with foreign company or
vice versa. This will provide opportunity to form
corporate strategies on a global scale. It has to be
seen if the implementation mechanism is smooth
enough.
The 2013 Act suggests that all cross border merger
will now be governed by the said chapter.
Presently, its possible for a foreign company of any
jurisdiction to merge into an Indian company. This
may now be limited to only companies in notified
jurisdiction.
Merger of a listed company into unlisted company
The 2013 Act requires that in case of merger
between a listed transferor company and an unlisted
transferee company, transferee company would
continue to be unlisted until it becomes listed.
Further, the 2013 Act also proposes that transferee
company would have to provide an exit
opportunity.
Listing or delisting regulations, as applicable, under
securities laws would still have to be considered.
Further, it seems that exit opportunity may have to
be provided whether or not the transferor
company choses to list.
Action steps
Merger or amalgamation of company with foreign company
Companies can enter into various arrangements with its foreign related company to increase their
market share and efficiency. However, prior approval of RBI has to be sought.
Merger of a listed company into unlisted company
In a merger of a listed company into an unlisted company, the specific provisions under 2013 Act
would also have to be considered apart from the securities law regulations
44
Mergers and restructuring
Key changes and requirements Analysis and implications
Fast-track merger
Under the 1956 Act, all mergers and amalgamations
require court approval. The 2013 Act requires that
mergers and amalgamations between two or more
small companies or between holding companies and
its wholly-owned subsidiary (or between such
companies as may be prescribed) does not require
court approval. However, notice has to be issued to
ROC and official liquidator and objections /
suggestions has to be placed before the members.
The scheme needs to be approved by members
holding at least 90% of the total number of shares
or by creditors representing nine-tenths in value of
the creditors or class of creditors of respective
companies.
Once the scheme is approved, notice would have to
be given to the Central Government, ROC and
Official Liquidator.
This will reduce the time consumed in court
proceedings and will result in faster disposal of the
matter.
It will help remove the bureaucratic barriers
involved in court proceedings and in turn simplify
the process.
Presently, it seems that in such fast-track mergers,
there is also no requirement for sending notices to
RBI or income-tax or providing a valuation report
or providing auditor certificate for complying with
the accounting standard.
The 2013 Act does not specify transitional
provisions relating to restructuring in progress and
presently there is a lack of clarity in this regard.
Action steps
• The companies should start evaluating the items requiring mandatory
valuation as per the requirements of the Act and the draft Rules.
• This analysis should be discussed with the Audit Committees and/or BOD
for further action in advance before the final Rules are issued.
Valuations
46
Valuations
Key changes and requirements Analysis and implications
Definition of a Registered Valuer
• As per the 2013 Act, all valuations need to be
carried out by a Registered Valuer. For valuation
requirement of a company, the Registered Valuer
shall be appointed by the Audit Committee or in
its absence, by its Board of Directors ('BOD').
• The Draft Rules define "Registered Valuer" and
state that a person to be eligible to act as a valuer,
must register with the Central Government ('CG')
or institution or agency notified by the CG by
filing an application for registration as a valuer.
• Further, the Draft Rules also prescribe the
eligibility to apply for becoming a Registered
Valuer are as follows:
Financial valuation
– a Chartered Accountant, Company Secretary or
Cost Accountant who is in whole-time practice,
or retired member of Indian Corporate Law
Service or any person (Indian citizen only)
holding equivalent Indian or foreign
qualification as the MCA may recognise by an
order.
– a merchant banker registered with the Securities
and Exchange Board of India ('SEBI').
Technical valuation
– a member of the Institute of Engineers and
who is in whole-time practice.
– a member of the Institute of Architects and
who is in whole-time practice.
The persons referred above should have at least five
years of continuous experience post acquiring
membership of respective institutions.
Other persons
– a person or entity possessing necessary
competence and qualification as may be notified
by the CG from time to time.
• Professional opportunities likely to emerge with
the increase in the number of valuation
requirements as per the new concept of
Registered Valuer.
• The Appointment of the Valuer by the audit
committee or the BOD for all the requirements
could be time consuming and may delay the
valuation exercise. The management of the
company should also be empowered to appoint
valuers where the valuation requirement is for
annual updation of value or for internal
evaluation purpose or such other cases.
• In the residuary category of "other persons", the
MCA should consider incorporating finance
professionals such as person holding post-
graduate/ masters degree/ diploma in business
management (MBA) in Finance from India or
equivalent foreign qualification, Chartered
Financial Analyst (CFA) from India or equivalent
foreign qualification, and consulting firms
providing financial advisory services having at
least five years of continuous experience in
offering such services.
Action steps
• The companies should start evaluating the items requiring mandatory valuation as per the
requirements of the Act and the draft Rules.
• This analysis should be discussed with the Audit Committees and/or BOD for further action in
advance before the final Rules are issued.
47
Key changes and requirements Analysis and implications
Responsibilities of a Registered Valuer
As per the 2013 Act,
• A valuer is expected to assume the following
responsibilities while carrying out a valuation
engagement:
- must exercise due diligence and care
- must make an impartial, true and fair valuation of
assets that are being valued
- must make the valuation in accordance with the
prescribed rules
- not undertake valuation of assets in which he
has a direct or indirect interest or becomes
interested at any time during or after the
valuation of that asset
• A valuer violating the provisions of the
requirements shall be punishable with a fine of Rs
25,000, extending up to Rs 1 lakh. Additionally, the
valuer shall be liable to refund the remuneration
received from company and pay for damages to the
company or to any other person for loss arising
out of incorrect or misleading statements of
particulars made in the report.
• A valuer, sentenced to a term of imprisonment for
any offence or found guilty of misconduct in his
professional capacity shall be removed from the
register of valuer and he will cease to act as a
valuer.
• In case of intention to defraud the company or its
members, imprisonment, which may extend to one
year, has been additionally provided as a penal
provision.
The draft Rules provide for removal and restoration
of valuers from register maintained by the CG or
any authority, institution or agency notified by the
CG.
Also, as per the draft Rules, a valuer in case aggrieved
by an order of the CG, can file an appeal against the
order to the Tribunal.
The system of valuation will offer more
transparency and fairness which will in turn uplift
the shareholders' confidence.
The law states that the Valuer should exercise due
diligence while performing the valuation. “Due
Diligence” should be more specifically defined in
terms of what additional steps a valuer needs to
follow. Due diligence is a very broad term and
might imply various types of due diligences e.g. tax,
financial or commercial which need specific
expertise which might not be available with the
valuer.
Action steps
Registered Valuers need to be appointed for various valuation requirements; who in turn need to be
vigilant to comply with the provisions.
Valuations
48
Key changes and requirements Analysis and implications
Methods of Valuation, as per the Draft Rules
‘Valuation Date’ means the date on which the estimate
of value is applicable which may be different from
the date of the valuation report or the date on which
the investigations were undertaken or completed.
A valuer should keep the following considerations in
mind while providing valuation services:
• Nature of the business and the history of the
enterprise from its inception
• Economic outlook in general and outlook of the
specific industry in particular
• Book value of the stock and the financial
condition of the business
• Earning capacity of the company
• Dividend paying capacity of the company
• Goodwill or other intangible value
• Sales of the stock and the size of the block of
stock to be valued
• Market prices of stock of corporations engaged in
the same or a similar line of business
• Contingent liabilities or substantial legal issues,
within India or abroad, impacting the business
• Nature of instrument proposed to be issued, and
nature of transaction contemplated by the parties
A registered valuer shall decide the approach to
valuation based upon the purpose of the valuation in
accordance with applicable standards, if any and can
choose from Asset, Income and Market Approach.
One or more of the following prescribed methods
or any other method accepted or notified by the
Reserve Bank of India, SEBI or Income Tax
Authorities or that may deem fit to adopt by the
Valuer can be used and justified in the report: − Net Asset Value method
− Market Price method
− Yield method / Profit Earning Capacity Value
(PECV)
− Discounted Cash Flow method (DCF)
− Comparable Companies Multiples methodology
(CCM)
− Comparable Transaction Multiples method (CTM)
− Price of Recent Investment method (PORI)
− Sum of the Parts Valuation (SOTP)
− Liquidation Value
− Weighted Average method
The draft Rules cover most of the frequently used
and universally accepted methods of valuation as
well as permit valuers to apply other methods as
deemed appropriate and justified by the valuer.
Valuations
49
"Contents of the Valuation Report"
Valuation Report - Title [Pursuant to section 247(2)(c) and rule 17.7]
Contents Sub-Contents
1) Valuer Details
2) Description of Valuation Engagement
3) Description of Business/ Asset / Liability being
valued
4) Description of the Information underlying the
Valuation
5) Description of specific Valuation of Assets used
in the Business
6) Confirmation
7) Further it is certified that valuation has been
undertaken after taking into account relevant
conditions/regulations/rules/notifications, if any,
issued by the Central/State Government(s) from
time to time.
8) Valuation Statement :
Date Signature of Valuer
Place
a)Name of the Valuer
b)Address of the Valuer
c)Registration number of the Valuer
d)e-mail ID
a)Name of the client
b)Other intended users
c)Purpose for valuation
a)Nature of business or asset / liability
b)Legal background
c)Financial aspects
d)Tax matters
a)Analysis of past results
b)Budgets, with underlying assumptions
c)Availability and quality of underlying data
d)Review of budgets for plausibility
e)Statement of responsibility for information
received
a)Basis or bases of value
b)Valuation Date
c)Description of the procedures carried out
d)Principles used in the valuation
e)The valuation method used and reasoning
f) Nature, scope and quality of underlying data
g)The extent of estimates and assumptions
together with considerations underlying them
that the valuation has been undertaken in
accordance with these Rules
Valuations
50
Contents of the Valuation report (as per Form No. 17.3) as per the Draft Rules
Apart from this, some key/additional information to be included in the Valuation Report:
i. The valuation report must clearly state the significant assumptions upon which the value is based. When
reporting, there may be instances where there are confidential figures, these must be summarised in a
separate exhibit.
ii. In the valuation report, the Registered Valuer must set out a clear value or range of values along with
the reasoning.
iii. In case the Registered Valuer has been involved in valuing any part of the subject matter of valuation in
the past, the past valuation report(s) should be attached and referred to herein. In case a different basis
has been adopted for valuation (than adopted in the past), the Valuer should justify the reason for such
differences.
Valuations
Instances where valuation is mandated
Some instances where valuation is mandated under the 2013Act:
• Further issue of share capital
• Assets involved in arrangement of non-cash transactions involving directors
• Under scheme of compromise/arrangement or scheme of corporate debt restructuring
• Purchase of minority shareholding
• Shares and assets to arrive at the reserve price for company administrator
• Assets for submission of report by company liquidator
• Interest of any dissenting member under power of company liquidator to accept shares etc., as
consideration for sale of property of company
51
The Associated Chambers of Commerce and Industry of India (ASSOCHAM), India's premier apex
chamber, covers a membership of over 4 lakh companies and professionals across the country.
ASSOCHAM, which started in 1920, is one of the oldest Chambers of Commerce. ASSOCHAM is
known as the “knowledge chamber” for its ability to gather and disseminate knowledge. Its vision is to
empower the industry with knowledge so that they become strong and powerful global competitors with
world-class management, technology and quality standards.
ASSOCHAM is also a “pillar of democracy” as it reflects diverse views and sometimes opposing ideas in
industry group. This important facet puts us ahead of countries like China and will strengthen our
foundations of a democratic debate and better solution for the future. ASSOCHAM is also the “voice
of industry” – it reflects the “pain” of industry as well as its “success” to the government. The Chamber
is a “change agent” that helps to create the environment for positive and constructive policy changes and
solutions by the government for the progress of India.
As an apex industry body, ASSOCHAM represents the interests of industry and trade, interfaces with
Government on policy issues and interacts with counterpart international organisations to promote
bilateral economic issues. ASSOCHAM is represented on all national and local bodies and is, thus, able to
proactively convey industry viewpoints, and also communicate and debate issues relating to public-private
partnerships for economic development.
The road is long. It has many hills and valleys – yet the vision before us of a new resurgent India is
strong and powerful. The light of knowledge and banishment of ignorance and poverty beckons us,
calling each member of the Chamber to serve the nation and make a difference.
The Associated Chambers of Commerce and Industry of India (ASSOCHAM)
5 Sardar Patel Marg, Chankyapuri, New Delhi – 110021
T: +91 11 4655 0555 (Hunting Line); F: +91 11 2301 7008/ 9; W: www.assocham.org
Southern Regional Office
D-13, D-14, D Block, Brigade MM,
1st Floor, 7th Block, Jayanagar,
K R Road, Bangalore - 560070
T: 080 4094 3251-53
F: +91 80 4125 6629
ASSOCHAM Western Regional Office
4th Floor, Heritage Tower,
Bh. Visnagar Bank, Ashram Road,
Usmanpura, Ahmedabad - 380 014
T: + 91 79 2754 1728/ 29, 2754 1867
F: + 91 79 300 06352
Eastern Regional Office
F 4, "Maurya Centre" 48,
Gariahat Road,
Kolkata - 700019
T: +91 33 4005 3845/41
F: +91 33 4000 1149
ASSOCHAM Regional Office - Ranchi
503/D, Mandir Marg-C
Ashok Nagar
Ranchi - 834 002
M: +91 9835 040255
About ASSOCHAM
52
Grant Thornton India LLP is a member firm within Grant Thornton International Ltd. It is a leading
professional services firm providing assurance, tax and advisory services to dynamic Indian businesses.
With a partner led approach and sound technical expertise the Firm has extensive experience across
many industries and businesses of various sizes. Moreover, with our robust compliance solutions and
ability to navigate complexities we help dynamic organisations unlock their potential for growth through
global expansion, global capital or global acquisitions.
Today, the Firm is recognised as one of the largest accountancy and advisory firms in India with nearly
2,000 professional staff in New Delhi, Bengaluru, Chandigarh, Chennai, Gurgaon, Hyderabad, Kolkata,
Mumbai, Noida and Pune, and affiliate arrangements in most of the major towns and cities across the
country.
As a member firm within Grant Thornton International Ltd, the Firm has access to member and
correspondent firms in over 120 countries, offering our clients specialist knowledge supported by
international expertise and methodologies
NEW DELHI National Office
Outer Circle
L 41 Connaught Circus New Delhi 110 001
T +91 11 4278 7070
CHENNAI Arihant Nitco Park, 6th floor
No.90, Dr. Radhakrishnan Salai
Mylapore Chennai 600 004
T +91 44 4294 0000
KOLKATA 10C Hungerford Street
5th floor
Kolkata 700 017 T +91 33 4050 8000
CHANDIGARH SCO 17
2nd floor
Sector 17 E Chandigarh 160 017
T +91 172 4338 000
GURGAON 21st floor, DLF Square
Jacaranda Marg
DLF Phase II Gurgaon 122 002
T +91 124 462 8000
HYDERABAD 7th floor, Block III
White House
Kundan Bagh, Begumpet Hyderabad 500 016
T +91 40 6630 8200
MUMBAI 16th floor, Tower II
Indiabulls Finance Centre
SB Marg, Elphinstone (W) Mumbai 400 013
T +91 22 6626 2600
PUNE 401 Century Arcade
Narangi Baug Road
Off Boat Club Road Pune 411 001
T +91 20 4105 7000
BENGALURU “Wings”, 1st floor
16/1 Cambridge Road
Ulsoor Bengaluru 560 008
T +91 80 4243 0700
NOIDA Plot No. 19A, 7th Floor,
Sector 16-A,
Noida 201301. T +91 120 7109001
Our offices
© Grant Thornton India LLP. All rights reserved.
About Grant Thornton India LLP
For more information on the Companies Act 2013, visit
http://www.grantthornton.in/companiesact2013 or write to us at