As per the Companies Act, 2013, some New Concepts have been introduced with clear definitions in view of the changed scenario of business. In addition, some amendments/modifications to certain already existing definitions/concepts have also been effected to ensure better and effective implementation of the provisions of the Companies Act, 2013 as well as cohesiveness with the other related/connected business laws. Amongst many such concepts, few important of them are discussed hereunder.
1. Control - Section 2 (27) of the Companies Act, 2013
“Control” Shall include the right to:-
i. appoint majority of the directors; or
ii. control the management or policy decisions exercisable by a person(s) including by virtue of their shareholding or management rights or shareholders agreements or voting agreements.
2. Financial Statement - Section 2 (40) of the Companies Act, 2013
“Financial statement” in relation to a company, includes –
i. Balance Sheet as at the end of the financial year;
ii. Profit and Loss Account/ Income and Expenditure Account for the financial year;
iii. Cash Flow Statement for the financial year;
iv. Statement of changes in equity;
v. Any explanatory note annexed to any document referred to in sub –clause (i) to (iv)
3. Associate Company - Section 2(6) of the Companies Act, 2013
Associate Company (AC) in relation to another Company means a company in which that other Company has a significant influence and includes a Joint Venture Company. However, the Subsidiary Companies of other Company are excluded.
• “Significant influence” means control of at least 20% of total share capital or of business decisions under an agreement.
• Accounting Standard (AS) 23 defined “Associate” for accounting for investment in Associates.
4. Small Company – Section 2 (85) of the Companies Act, 2013
“Small Company” means a Company other than a public Company :-
i paid –up share capital of which does not exceed Rs.50 lakhs. or higher prescribed amount not exceeding Rs.5 Crores.; or
ii turnover of which as per its last Profit & Loss Account does not exceed Rs. 2Crores. or higher prescribed amount not exceeding Rs.20 Crores.
• This clause shall not apply to:-
- A holding Company or a subsidiary Company;
- A Company registered for charitable objects ;
- A Company governed by any Special Act.
5. One Person Company – Section 2 (62) of the Companies Act, 2013
One Person Company (OPC) means a Company which has only one person as a member. Only a natural person who is Indian Citizen and resident in India may form an OPC. However, no person shall be eligible to incorporate more than one OPC
• Memorandum of OPC shall indicate the name of the other person, with his consent, who shall become the member of OPC upon death of subscriber.
• The words “One Person Company” shall be mentioned in Brackets below the name of OPC, wherever its name is printed, affixed or engraved.
• The member shall be its first director. Though holding of Annual General Meeting is not mandatory, OPC is required to hold atleast one Board Meeting in each half of the calendar year.
• Where paid up share capital of OPC exceeds Rs. 50 Lakhs or its average annual turnover during relevant period exceeds Rs. 2Crores, it shall cease to be entitled to continue as an OPC.
• OPC cannot carry out Non- Banking Financial Investment activities including investment in securities of anybody corporate.
• OPC cannot convert voluntarily into any kind of Company unless two years have expired from the date of its incorporation.
6. Dormant Company (DC) - Section 455 of the Companies Act, 2013
A Company formed and registered under the Companies Act, 2013 for a future project or to hold an asset or intellectual property and having no significant transaction or an inactive Company may apply for obtaining the status of a “Dormant Company”. The eligibility has been prescribed as under:-
- Special resolution in the general meeting ; or
- Issue notice to all shareholders and obtain consent of 3/4th shareholders ( in value)
- No inspection , inquiry or investigation is pending ;
- No pending prosecution under any law;
- No outstanding public deposits/default;
- No outstanding loans, taxes, dues & duties;
- Securities are not listed on any stock exchange.
• “Inactive Company” means a Company which has not been carrying on any business or operations or has not made any significant transaction during the last two financial years or has not filed financial statements and annual returns for the last two financial years.
• “Significant Accounting Transaction” means any transaction other than :
a. Payment of fees to the Registrar ;
b. Payments made to fulfil requirements of law;
c. Allotment of shares to fulfil requirements of the Companies Act,2013;
d. Payments for maintenance of its office and records.
• The Registrar may allow the status of Dormant Company to the Applicant Company and issue a certificate to this effect. Thereafter, the provisions relating to rotation of auditors are not applicable to the Dormant Company.
• The Dormant Company shall file a “Return of Dormant Company” annually indicating financial position duly audited by a Chartered Accountant in practice. In addition, DC shall continue to file return of allotment and change in directors .
• DC may apply to become an active Company if the circumstances change
7. Independent Directors (ID) – Section 149(4) of the Companies Act, 2013
Every listed public company shall have at least 1/3rd of the total number of directors as Independent Directors. In addition, the Public Companies fulfilling one of the following three conditions, shall also have at least two Independent Directors on their Boards:-
i. paid up share capital of Rs. 10 Crores or more; or
ii. in aggregate, outstanding loans, debentures and deposits exceeding Rs. 50 Crores; or
iii. turnover of Rs. 100 Crores or more
• Nominee director(s) is /are not be treated as Independent Director(s).
• ID can hold office for 2 terms of up to 5 consecutive years each (total 10 years). However, ID shall be eligible for reappointment after cooling period of 3 years.
• IDs may receive sitting fees, reimbursement of expenses for attending meetings and profit related commission but no stock option. At the same time, IDs shall abide by the Code of Conduct as provided under Schedule 4 of the Companies Act, 2013.
• An ID shall be held liable only for such acts of omission or commission by a company which had occurred with his knowledge attributable through Board processes and with his consent or connivance or where he had not acted diligently.
• IDs shall hold at least 1 meeting in a year without Non-IDs and management personnel. The meeting shall review the performance of:-
a. Non-IDs and the Board as a whole ;
b. Chairperson of the Companies, after taking into account the views of Executive Directors as well as Non- executive Directors;
c. The quality, quantity and timeliness of flow of information to the Board
• On the basis of the report of performance evaluation, it shall be determined whether to extend or continue the term of appointment of the Independent Director.
8. Resident Director – Section 149(3) of the Companies Act, 2013
• Every Company shall have at least one director who has stayed in India for a period of not less than 182 days in the previous calendar year.
9. Woman Director - Section 149(1) of the Companies Act, 2013
- The following classes of companies shall appoint at least one Woman Director :-
i. every listed company ;
ii. every other public company having :-
- paid up share capital of Rs.100 Crores or more; or
- turnover of Rs.300 Crores or more.
• It will ensure gender diversity on the Boards of such companies and may improve the quality of decision making.
10. Expert - Section 2 (38) of the Companies Act, 2013
• “Expert” includes an engineer. a valuer , a chartered accountant, a company secretary , a cost accountant and any other person who has the power or authority to issue a certificate in pursuance of any law for the time being in force.
11. Chief Executive Officer - Section 2(18) of the Companies Act, 2013
• “Chief Executive Officer” means an officer of a company , who has been designated as such by it
• Globally, a person who leads a business enterprise is generally designated as “CEO”.
12. Chief Financial Officer - Section 2(19) of the Companies Act, 2013
• “Chief Financial Officer” means an officer of a company, who has been designated as such by it.
• Globally, a person who leads the finance and treasury functions of a business enterprise is generally designated as “CFO”.
13. Key Managerial Personnel - Section 2(51) Of The Companies Act, 2013
• “Key Managerial Personnel” (KMP) in relation to a company means the :-
(i) Chief Executive Officer or the Managing Director or the Manager;
(ii) Company Secretary ;
(iii) Whole Time Director;
(iv) Chief Financial Officer; and
(v) Such other officer as may be prescribed.
• Board of every listed company and every other public company having a paid- up share capital of Rs.10 Crores or more shall appoint the whole time (i) Managing Director or Chief Executive Officer and in their absence, a Whole Time Director (ii) a Company Secretary and (iii) a Chief Financial Officer.
• A Whole Time KMP shall not hold office in more than one company except in its subsidiary company at the same time.
• Vacancy in the office of Whole Time KMP shall be filled up by the Board within six months.
14. Rotation of Auditors - Section 139 of the Companies Act, 2013
• No listed company or prescribed class of companies, excluding small and one person companies, shall appoint / re-appoint :-
(i) an individual as an auditor for more than 1term of 5 consecutive years ; and
(ii) an audit firm as an auditor for more than 2 terms of 5 consecutive years.
• The aforesaid prescribed class of companies shall mean the following classes of companies excluding One Person Companies and Small Companies:-
a. all unlisted public companies having paid up share capital of Rs.10crores or more;
b. all private limited companies having paid up share capital all Rs.20crores or more;
c. all Companies having paid up share capital of below threshold limit mentioned in (a) and (b) above, but having public borrowings from financial institutions, banks or public deposits of Rs.50crores or more;
• An auditor/ audit firm which has completed its term, shall not be eligible for re- appointment as an auditor in the same company for 5 years.
• A period of 3 years from the commencement of the Act has been provided to every company existing on or before such commencement to comply with the provisions.
• As per Section 144 of the Companies Act, 2013, an auditor appointed under the Companies Act, 2013 shall provide to the company only such services as are approved by the Board of Directors or the Audit Committee but which shall not include any of the following services:-
- Auditing and book keeping services ;
- Internal audit;
- Design & implementation of any financial information system ;
- Actuarial services ;
- Investment advisory and banking services ;
- Outsourced financial services ; and
- Management services.
15. Secretarial Audit - Section 204 of the Companies Act, 2013
• Every listed and every public company having a paid – up share capital of Rs.50 Crores or more or a turnover of Rs.250 Crores or more shall annex with its Board’s Report, a Secretarial Audit Report given by a Practicing Company Secretary(PCS).
• The Board of Directors, in its report, shall explain in full any qualification or observation or other remarks made by the PCS in his report.
• If a company or any officer of the company or the PCS contravenes the provisions of Section 204, the company, every officer of the company or the PCS, who is in default, shall be punishable with fine which shall not be less than Rs.1 lakh but which may extend to Rs.5 lakhs.
16. Secretarial Audit - Section 143 (12), (15) & 204 of the Companies Act, 2013
• If a Practicing Company Secretary conducting Secretarial Audit, has reason to believe that an offence involving fraud is being or has been committed against the company by its officers / employees, he shall immediately report the matter to the Central Government.
• If Practicing Company Secretary does not comply with the above provision, he shall be punishable with fine of minimum Rs.1 lakh and may extend to Rs.25 lakhs.
17. Secretarial Standards - Section 118(10) of the Companies Act, 2013
• Every company shall follow secretarial standards with respect to General and Board meetings specified by Institute of Company Secretaries of India constituted under Section 3 of the Company Secretaries Act, 1980 and approved as such by the Central Government.
18. Internal Audit – Section 138 of the Companies Act, 2013
• An internal auditor shall either be Chartered Accountant/Cost & Management Accountant/other professional to conduct internal audit of the functions and activities of the company.
• The Central Government may prescribe the manner and the intervals in which the internal audit shall be conducted & reported to Board.
(a) Every listed company’
(b) Every unlisted public company having, during the preceding financial year:-
(i) paid up share capital of Rs.50 crores or more; or
(ii) turnover of Rs.200 crores or more; or
(iii) outstanding loan or borrowing from Banks of public Financial Institutions exceeding Rs.100 crores or more; or
(iv) outstanding deposits of Rs.25 crores or more.
a) Every private company having:-
(i) Turnover of Rs.200Crores or more during the preceding financial year; or
(ii) Outstanding loans or borrowings from Banks or public Financial Institutions exceeding Rs.100 Crores or more at any point of time during the preceding Financial Year;
19. E-Governance – Sections 119 to 121 of the Companies Act, 2013
• E-Governance has been proposed for various company processes like maintenance and inspection of documents in electronic form, option of keeping of books of accounts in electronic form, financial statements to be placed on company’s website, holding of board meetings through video conferencing/other electronic mode, voting through electronic means etc.
• Online services would reduce the need for hard copy paper forms and have positive impact on environment.
• It will substantially improve the standards of disclosure and transparency, involve more and stakeholders in the company process and provide real time information and service to the shareholders and others stakeholders.
20. Registered Valuer (RV) - Section 247 of the Companies Act, 2013
• Valuation of any property, stocks, shares, debentures, securities, goodwill, any other asset or net worth or liabilities of a company shall be valued by a RV.
• The RVs shall have prescribed qualifications and experience and registered as a valuer on prescribed terms & conditions.
• Audit Committee/Board of Directors shall appoint an RV.
21. Company Liquidator - Section 2 (23) of the Companies Act, 2013
• “Company Liquidator” means a person appointed by the:-
a) Tribunal in case of winding up by the Tribunal; or
b) Company or creditors, in case of voluntary winding, from a panel of professionals maintained by the Central Government.
• The panel shall consist of Chartered Accountants, Company Secretaries, Cost Accountants, Advocates, other notified professionals or a firm or a body corporate of persons having a combination of such professional and having at least 10 years’ experience in company matters.
22. Related Party Transactions - Section 188 of the Companies Act, 2013.
• Prior consent of the Board is needed and no Central Government permission is required. In the Board meeting, interested director will not remain present for the purpose of passing the specific resolution where he/she is interested.
• A related party transaction can be entered into only if it is approved by a special resolution at the General Meeting :-
(i) Where the company has paid-up share capital, which is not less than Rs.1crore;
(ii) Transactions amount (individually or taken together with previous transactions during a financial year) exceeds 5% of the annual turnover or 20% of the net worth of the company as per the last audited financial statements whichever is higher;
(iii) Transactions relating to appointment to any office or place of profit in the company, its subsidiary or associate company at a monthly remuneration exceeding Rs.1 lakh; or for a remuneration for under-writing and the subscription of any securities or derivatives.
• The scope of Section has been widened to include selling, buying and leasing;
• Related party transactions including the reasons for entering into the relevant transactions are to be included in the Board’s Report to the shareholders. However, an arm-length transaction entered into in the ordinary course of business of the company is an exception to the related party transaction rule.
• Shareholders’ approval for non-cash transactions with directors of the company, its holding company, its associate company or a person connected with him would be required;
23. National Financial Reporting Authority (NFRA) – Section 132 of the Companies Act, 2013.
• The Central Government may constitute a National Financial Reporting Authority to provide for matters relating to accounting/auditing standards which shall:-
(a) Make recommendations to Central Government on the formulation of accounting and auditing policies and standards for companies or their auditors;
(b) Monitor and enforce compliance with account and auditing standards;
(c) Oversee the quality of service or professionals;
(d) Perform such other functions as may be prescribed;
• NFRA shall have power to investigate into matters of professional or other misconduct committed by any member or firm of Chartered Accountant;
• Where professional or other misconduct is proved, NFRA shall have the power to make order for imposing penalty or not less than Rs.10 lakhs but which may extend to 10 times of the fees received in case of firms.
24. Vigil Mechanism – Section 177 of the Companies Act, 2013
• Following classes of companies shall establish a vigil mechanism for their directors and employees to report genuine concerns:-
(i) Every listed company;
(ii) Companies which accept deposits from the public; and
(iii) Companies which have borrowed money from banks and public financial institutions in excess or Rs.50crores;
• The companies which are required to constitute audit committee, shall operate the vigil mechanism through the audit committee. In case of other companies, the Board of Directors shall nominate a director to play the role of audit committee.
• Adequate safeguards shall be provided against victimization of employees/directors.
25. Class Action – Section 245 of the Companies Act, 2013
• Class action is a collective action filed by the plaintiff on behalf of a class of shareholders or users of goods or services or in relation to matters of public interest, seeking collective remedy.
• Requisite number of members or depositors may file an application before National Company Law Tribunal if they are of the opinion that the management or conducts of the affairs of the company are being conducted in a manner prejudicial to the interest of the company or its members of depositors.
• The application for class action may claim damages or compensation or demand any other suitable action from:-
(i) The company or its directors;
(ii) The auditor including audit firm of the company;
(iii) Any expert or advisor or consultant or any other person for any incorrect or misleading statement made to the company etc.