The Game Changer!

Companies Act, 2013

- Anand BathiyaB.Com., A.C.A., LL.B., D.I.S.A.

CMII - ICAI – 27th April, 2014

Coverage

• Key Points for discussionET: 15 mins

• Provisions pertaining to Internal AuditET: 15 mins

• Provisions pertaining to Related Party TransactionsET: 30 mins

• Q&AET: 5 mins

Key Principles of Companies Act

• Proactive vs. Reactive

• Shareholder vs. Stakeholder

• Majority vs. Minority

• Third Party Regulation

• Transparency and Good Corporate Governance

• Hub and Spoke Model

Companies Act, 2013

Internal Audit

Position under the Act

Section 138 - Internal Auditor shall either be:a. a chartered accountant or b. a cost accountant, or c. such other professional as may be decided by the

Board

Section 144 - Statutory Auditor cannot be an Internal auditor of the auditee, its holding company or its subsidiaries.

Internal Audit

Position under the Act

Section 177: Audit committee shall recommend appointment of Internal Auditor

Audit committee may call for comments, reports and discuss issues with Internal Auditor

Internal Audit

Position under the Companies (Accounts) Rules, 2014Rule 13:

Existing companies to have a 6-months transition period.

Applicability of Internal Audit

Following class of companies: a. All Listed Companies

b. Unlisted Public Companies – PUC > INR 50crores Turnover > INR 200crores Loans > 100 crores Deposits > 25 crores

c. Private Limited Companies – Turnover > INR 200crores Loans > 100 crores

Internal Audit

Position under the Companies (Accounts) Rules, 2014

Rule 13: The Internal Auditor may or may not be an employee of the Company.

The term Chartered Accountant shall mean a Chartered Accountant whether engaged in practice or not.

The Audit committee shall formulate the:a. Scopeb. Functioningc. Periodicityd. Methodology

Related Party Transactions- Companies Act, 2013

- AS – 18

- Clause 49

Related Party Transactions

Companies Act – Approval Mechanism

Section 2(76) of the Act defines ‘Related Party’Section 2(77) of the Act defines ‘Relatives’Section 188 covers provisions pertaining to Related Parties. (297 and 314)Rule 15 of Companies (Meeting of Board and its powers) Rules, 2014

a. Board resolution required for certain related party transactionsb. Certain transactions to require special resolutionc. Special resolutions to be by majority-of-minority ruled. Board consent only in a meeting

Related Party Transactions

Relatives CA 2013 Relatives AS 18

Members of a HUF -

Spouse Spouse

Father* Father

Mother* Mother

Son* Son

Son’s Wife -

Daughter Daughter

Daughters Husband -

Brother* Brother

Sister* Sister

* - includes Step relatives as well

* - Revised Clause 49 uses the same definition as CA 2013

Related Party Transactions

Related Party CA 2013 Related Party AS 18

Director, KMP or their relatives Enterprises control, controlled or under common control

A firm, private company in which Director or Manager is a Partners or a Director or a Member

Associates and Joint Ventures

Public company in which a director or manager owns more than 2%

Individuals and their relatives who exercise significant influence on the entity

Any body corporate whose board\MD is accustomed to act on instructions of director\MD

KMP and their relatives

Any person who is accustomed to act on instructions of director\MD

Enterprises where individuals or KMP can exercise significant influence

Holding, subsidiary, fellow subsidiary or associate company

A director or KMP of the holding company or his relative

Related Party Transactions

Related Party CA 2013 Revised Clause 49

Director, KMP or their relatives Inclusive definition based on control or significant influence

A firm, private company in which Director or Manager is a Partners or a Director or a Member.

All related parties as per CA Act, 2013

Public company in which a director or manager owns more than 2%

Has control. Joint control or significant control over the entity

Any body corporate whose board\MD is accustomed to act on instructions of director\MD

The entity is the member of the same group

Any person who is accustomed to act on instructions of director\MD

Both entitles are joint venture\associates with a third party

Holding, subsidiary, fellow subsidiary or associate company

Post-employment benefit plans

A director or KMP of the holding company or his relative

Two entities are under common control

Related Party Transactions

All transactions by a company having Paid-Up Share Capital of more than INR 10 crores shall mandatorily require majority of minority special resolution!

Board Resolution Special Resolution

a. Sale, purchase or supply of any goods or materials

Incase transaction value more than 25% of annual turnover

b. Selling or otherwise disposing of, or buying, property of any kind

Incase of transaction value more than 10% of net-worth

c. Leasing of property of any kind Incase of transaction value more than 10% of annual turnover or net-worth

d. Availing or rendering of any services Incase of transaction value more than 10% of net-worth

e. Appointment of any agent Incase transaction value more than 25% of annual turnover

f. Appointment to any office or place of profit

Monthly remuneration exceeding INR 2,50,000\-

g. Underwriting the subscription Incase of transaction value more than 1% of net-worth

Related Party Transactions

AS-18 RPT is ‘anytime during the year’ as against ‘on the date’ for CA 2013.

AS-18 RPT is ‘transaction based’ as against CA 2013 which is ‘contract based’.

AS – 18 requires name disclosure only if transaction value more than 20%.

AS-18 requires previous year disclosures as well.

AS-18 requires name of related parties irrespective of transactions.

AS -18 consolidated RPT will not include holding-subsidiary transactions.

Related Party TransactionsCompanies Act – DisclosuresThe agenda of the Board meeting shall disclose-

1. the name of the related party and nature of relationship;2. The nature and duration of the contract;3. the material terms of the contract; 4. any advance paid or received;5. the manner of determining the pricing;6. whether all factors relevant to the contract have been considered, if not, the details

of factors not considered; and 7. any other information relevant or important

Notice and Explanatory statement for members to include:8. Name of the related party and nature of relationship; 9. name of the director or key managerial personnel who is related;10. nature, material terms, monetary value and particulars of the contract or

arrangement;11. Other important terms

Related Party Transactions

Companies Act – Other provisions

• The interested director should not be present when the matter is being discussed.

• All such matters shall be referred\disclosed to in the Board’s report along with the justification

• Transactions with wholly-owned subsidiaries also covered.

• If a person enters in a RPT which is violation of Section 186, then he is disqualified for reappointment.

• Schedule IV – Code of Independent Directors includes responsibility on Independent Directors to ensure RPT compliance

• Violation would result to i) Indemnification ii) Imprisonment and\or iii) Fine

• Every director to disclose his interested entities at:• 1st meeting from his appointment• Every first meeting in the financial year• Whenever there is a change

Related Party Transactions

SEBI Clause 49 under Listing Agreement – Coming Soon…

• RPT Policy to be formulated for dealing with RPT.• All RPT to require prior approval of Audit Committee.• All material RPT to require majority of minority resolution.• Transactions more than 5% of turnover or 25% of net-

worth to be deemed material.• RPT Policy to be uploaded on the website and Annual

Report of the Company.• All material RPTs to be disclosed on a quarterly basis to SE.

Thank You!

Anand Bathiyaanand@shbathiya.com

The views expressed herein are individual and personal in nature and neither the organizing body nor the representative firm has endorsed or supports nor rejects the view of the

individual. Reliance on matter herein should be after due care and professional advice.