India Tax & Regulatory For private circulation only

Regulatory Alert

Tracking Change

Volume: RA/8/2014 11 April 2014

In this issue:

Background

Key highlights

Conclusion

Contacts

Government of India notifies Rules for implementing the

Companies Act, 2013

Background

Companies Act, 2013 (2013 Act) is to replace the Companies Act, 1956 (1956 Act). Under the 2013 Act, the

Government of India (GOI) has the powers to decide a date from which a particular provision of the 2013 Act can be

made effective. GOI has made effective several sections of the 2013 Act.

The 2013 Act is a delegated legislation which delinks the procedural aspects from the substantive law. The procedural

aspects are to be elaborated through the Rules which are to be issued by GOI. The GOI had issued Draft Rules in 6

phases to solicit views of stakeholders. Having considered the views and suggestions received from the stakeholders,

the GOI has now issued final Rules. The final Rules are available on the website of the Ministry of Corporate Affiars

(MCA) viz. www.mca.gov.in

This Alert summarises some of the significant provisions of the Rules. The list of Rules announced by MCA are given

at Annexure. To be enforceable under 2013 Act, the Rules are required to be notified in the Official Gazette. Till 10

April 2014, the GOI has notified 3 Rules.

It is therefore necessary that the stakeholders consider provisions of the 2013 Act in conjunction with the notified

Rules. The Rules announced provides the thinking of GOI but one has to await the notified Rules for taking steps to be

compliant.

Key highlights of the Rules announced

Definitions and incorporation

For the purposes of definitions of associate company and subsidiary, total share capital would mean aggregate of

- paid-up equity share capital; and

- convertible preference share capital

Amounts received as share application money by a company will not be available for use until shares are allotted

Only a natural person who is an Indian citizen and resident in India can incorporate a One Person Company

(OPC). An individual cannot incorporate more than 1 OPC or become nominee in more than 1 OPC

Acceptance of Deposits

From members

- Detailed elaborate procedure to be followed by a company for accepting deposits from its members including

acceptance of deposits from members by a private company.

- A company cannot accept or renew any deposit from its members, if the amount of deposits together with the

amount of other deposits outstanding as on the date of acceptance or renewal of such deposits exceeds 25%

of the aggregate of the paid-up share capital and free reserves of the company

Share application money not used for allotment of shares within 60 days or not refunded within 15 days after

completion of 60 days will be treated as deposit. Refund must be actual and not by way of any adjustment for any

other purpose

Non-interest bearing security deposit from employee exceeding annual salary will be treated as deposit

Public companies meeting the following criteria are eligible to accept deposits from public:

- net worth of not less than ` 1 billion or

- turnover of not less than ` 5 billion

Share capital and Debentures

Company to make private placement of securities with prior approval of shareholders by a special resolution

Additional matters and report to be disclosed in prospectus such as sources of promoters contribution, details of

acts of material frauds committed against the company in the last 5 years, if any, and if so, the action taken by the

company etc.

Provisions relating to issue of shares with differential rights (SDR) is also applicable to private companies. An SDR

issue cannot exceed 26% of the total post-issue paid up equity share capital of a company

Preferential allotment provisions are applicable to issue of equity shares, fully convertible debentures, partly

convertible debentures or any other securities, which are convertible / exchanged with equity shares

Specific provisions for Employee Stock Option Scheme laid down for unlisted public companies

Issue of preference shares will have to be authorized by a special resolution. The issuer company should not have

any subsisting default in the redemption of preference shares or in payment of dividend due on any preference

shares

A company engaged in the setting up and dealing with infrastructural projects may issue preference shares for a

period not exceeding 30 years

Any instrument evidencing debt is debenture. Hence, it will include commercial papers, inter-company loans,

financial loans, exempt deposits etc.

Term of secured Debentures not to exceed 10 years or when issued by infrastructure companies, 30 years

Debenture Redemption Reserve (DRR) to be created out of profits @ 50% of Debentures raised before redemption

commences

Minimum 15% of the debentures maturing during the FY to be deposited / invested in specified securities on or

before 30th April of that FY

Audit and auditors

Mandatory audit rotation applicable for following companies:

- Every listed company

- Unlisted public companies having paid up share capital of ` 100 million or more

- Private limited companies having paid up share capital of ` 200 million or more

- Companies having public borrowings from financial institutions, banks or public deposits of ` 500 million or

more

Commercial transactions of the auditor with the company which are in the ordinary course of business of the

company and at arms length price will not be considered as business relationship and accordingly a person will

not be disqualified from acting as auditor

Internal audit

Following companies are required to appoint an internal auditor who shall be CA or cost accountant or such other

professional as may be decided by the BOD:

Listed company

Unlisted public company having:

paid-up share capital of ` 500 million or more during the preceding FY; or

turnover of ` 2 billion or more during the preceding FY; or

outstanding loans or borrowings from banks or public financial institutions exceeding ` 1 billion or

more at any point of time during the preceding FY; or

outstanding deposits of ` 250 million or more at any point of time during the preceding FY

Private company having:

turnover of ` 2 billion or more during the preceding FY; or

outstanding loans or borrowings from banks or public financial institutions exceeding ` 1 billion or

more at any point of time during the preceding FY

Transitory provision - Existing companies fulfilling any of the above criteria need to appoint an internal auditor

within 6 months from 1 April 2014

Management, administration and corporate governance

Directors and KMP

Every listed company and every public company having paid-up share capital of ` 100 million or more to appoint

whole-time KMP

Executive Director to be regarded as a whole-time director

The following class of companies to have at least 1 woman director:

- Listed companies

- Public companies with a paid up capital of ` 1 billion or more

- Public companies with a turnover of ` 3 billion or more

Transitory provisions

Existing companies fulfilling any of the above criteria need to appoint women director within 1 year from 1

April 2014.

Companies incorporated under the 2013 Act are required to comply with the above, if applicable, within 6

months of incorporation.

In addition to listed companies, which are required to have at least 1/3rd of its total number of directors as

independent directors. Public companies meeting the following criteria are required to have at least 2 independent

directors:

- paid up share capital of ` 100 million or more

- turnover of ` 1 billion or more

- aggregate, outstanding loans, debentures and deposits exceeding ` 500 million

In case of companies covered under the above and required to appoint a higher number of IDs due to composition

of their audit committee, such higher number of independent directors will be applicable to it

Board and Committees

Meetings of the Board through video conferencing or other audio visual means not recognized for certain matters

like approval of the annual financial statements, Boards report, prospectus etc.

Certain powers are to be mandatorily exercised by the Board of Directors at its meeting list prescribed which

include appointing internal auditors, appointing KMP etc.

Maximum sitting fees that can be paid to a director of a company is ` 100,000 per meeting of the Board or

Committee. Independent directors and woman directors cannot be paid sitting fees less than what is paid to other

directors

Following companies to constitute Audit committee and Nomination and Remuneration Committee

- Listed companies

- Public companies with:

i. Paid up capital of ` 100 million or more

ii. Turnover of ` 1 billion or more

iii. aggregate, outstanding loans or borrowings or debentures or deposits of ` 500 million or more

Following companies to establish of vigil mechanism:

Listed companies

Companies which accept deposits from public

Companies which have borrowed money from banks or public financial institutions exceeding ` 500 million

General Meetings

EGM to be held in India only

List of items to be compulsorily passed through postal ballot of members for companies other than OPC or

companies with less than 200 members prescribed. The prescribed list includes buy-back of shares, issue of

SDRs, variation of rights attached to any class of shares or debentures or other securities, etc.

Mandatory e-voting facility for listed companies and companies with 1,000 or more shareholders

Any member of a company entitled to attend and vote at a meeting of the company may appoint another person as

a proxy to attend and vote at the meeting on his behalf provided that such person is also a member of the company

Listed Company to file change in shareholding (either increase or decrease by 2% or more in shareholding) of the

each of the promoters or each of the top 10 shareholders of the Company with ROC, within 15 days of such

change

Unlisted companies other than subsidiaries of listed company can pay remuneration to its managerial personnel in

the event of no profit or inadequacy of profit subject to certain conditions

Secretarial audit mandatory for following companies:

- Listed companies

- public companies having a paid-up share capital of ` 500 million or more; or

- public companies having a turnover of ` 2.5 billion or more

Loan to Directors

Following loan / guarantee given by the holding company to its subsidiary should not attract restrictions of Section

185 of the 2013 Act. The exemption is subject to the condition that loans are utilised by the subsidiary company for

its principle business activities. Accordingly, restrictions of Section 185 is also not applicable in case of the

following:

- Loan made by a holding company to its wholly owned subsidiary company or guarantee given or security

provided by the holding company in respect of any loan made to its wholly owned subsidiary company; and

- Guarantee given or security provided by the holding company in respect of loan made by any bank or financial

institution to a subsidiary company

Inter corporate loans / investments

The following exemptions from provisions of Section 186 of 2013 Act which deals with loan and investment by a

company have been provided:

- Loan given or guarantee or security provided by a company to its wholly owned subsidiary or a joint venture

company

- Acquisition of shares / securities of its wholly owned subsidiary made by a holding company

Related Party transactions

The term related party shall be deemed to include a director or KMP of the holding company or his relative with

reference to a company

Related party transactions by a company having paid-up capital of ` 100 million or exceeding value of transaction

as mentioned in the following table, will require prior approval of members by special resolution if such transaction:

(i) is in the ordinary course of business but not on an arms length basis; or

(ii) is not in the ordinary course of business

Nature of transaction Transaction value

Sale, purchase or supply of any goods or materials directly

or through appointment of agents Exceeding 25% of annual turnover

Buying, selling or disposing of property of any kind directly

or through appointment of agents Exceeding 10% of net worth

Leasing of any kind of property Exceeding 10% of net worth or 10% of

turnover

Availing or rendering of any services directly or through

appointment of agents Exceeding 10% of net worth

Appointment to any office or place of profit in the

company, its subsidiary company or associate company

Monthly remuneration exceeding `

250,000

Remuneration for underwriting the subscription of any

securities in or derivatives thereof Exceeding 10% of net worth

Related party who is a member of the company cannot vote on such special resolution. However, in case of wholly

owned subsidiary, the special resolution passed by the holding company will suffice for the purpose of entering into

the transactions between wholly owned subsidiary and holding company

Conclusion

With the Rules being issued by GOI for various sections stakeholders would need to assess the impact and take

effective measures to implement the 2013 Act.

Source:

Rules issued by MCA from 27 March 2014 to 31 March 2014 and as notified in Official Gazette upto 10 April 2014.

Annexure

Sr. No.

Chapter of the 2013 Act

Rule Date of becoming effective

Status of Notification in the Official Gazette

1. Chapter I The Companies (Specification of

definitions details) Rules, 2014

1 April 2014 Notified

2. Chapter II The Companies (Incorporation)

Rules, 2014

1 April 2014 Not notified

3. Chapter III The Companies (Prospectus and

Allotment of Securities) Rules, 2014

1 April 2014 Not notified

4. Chapter III Companies (Issue of Global

Depository Receipts) Rules, 2014

1 April 2014 Not notified

5. Chapter IV The Companies (Share Capital and

Debentures) Rules, 2014

Date of publication in the

Official Gazette

Not notified

6. Chapter V The Companies (Acceptance of

Deposits) Rules, 2014

1 April 2014 Not notified

7. Chapter VI The Companies (Registration of

Charges) Rules, 2014

Date of publication in the

Official Gazette

Not notified

8. Chapter VII The Companies (Management and

Administration) Rules, 2014

Date of publication in the

Official Gazette

Not notified

9. Chapter VIII The Companies (Declaration and

Payment of Dividend) Rules, 2014

1 April 2014 Notified

10. Chapter IX The Companies (Accounts) Rules,

2014

1 April 2014 Not notified

11. Chapter IX The Companies (Corporate Social

Responsibility Policy) Rules, 2014

1 April 2014 Notified

12. Chapter X The Companies (Audit and Auditors)

Rules, 2014

1 April 2014 Not notified

13. Chapte XI

The Companies (Appointment and

Qualification of Directors) Rules,

2014.

1 April 2014 Not notified

14. Chapter XII The Companies (Meetings of Board

and its Powers) Rules, 2014

Date of publication in the

Official Gazette

Not notified

15. Chapter XIII

The Companies (Appointment and

Remuneration of Managerial

Personnel) Rules, 2014

1 April 2014 Not notified

16. Chapter XIV The Companies (Inspection, 1 April 2014 Notified

Investigation and Inquiry) Rules,

2014

17. Chapter XXI The Companies (Authorised to

Registered) Rules, 2014

1 April 2014 Not notified

18. Chapter XXII The Companies (Registration of

Foreign Companies) Rules, 2014

Date of publication in the

Official Gazette

Not notified

19. Chapter XXIV The Companies (Registration Offices

and Fees) Rules, 2014

1 April 2014 Not notified

20. Chapter XXVI Nidhi Rules, 2014 Date of publication in the

Official Gazette

Not notified

21. Chapter

XXVIII

National Company Law Tribunal

(Salary, Allowances and other Terms

and Conditions of Service of

President and other Members)

Rules, 2013

Date of publication in the

Official Gazette

Not notified

22. Chapter

XXVIII

National Company Law Appellate

Tribunal (Salaries, Allowances and

other terms and conditions of service

of the Chairperson and other

Members) Rules, 2014

Date of publication in the

Official Gazette

Not notified

23. Chapter XXIX The Companies (Adjudication of

Penalties) Rules, 2014

Date of publication in the

Official Gazette

Not notified

24. Chapter XXIX The Companies (Miscellaneous)

Rules, 2014

Date of publication in the

Official Gazette

Not notified

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