companies act 2013 rpt - baroda - 11 july 2014
TRANSCRIPT
Change in approach of Companies Act 2013 Shift from Shareholders Protection to
stakeholders protection Corporate Governance /Investor Protection is
Mantra Lot of Disclosures Strict penalties and prosecution Liabilities of Directors / Professionals
increased Cost of Limited Liability increased Coverage of the Act increased
Approach TOWARDS Related Party Transaction Scope is widened Some RPT are prohibited with Director or Auditors Balance Transactions to be at arms length Avoiding conflict of interest at board meetings Avoiding conflict of interest at shareholders meeting Promotion of holding subsidiary and not group company
structure Protection of shareholders money by charging interest on
loans given Supervision on Appointment of Senior Management by
Independent Directors Pushing for self sufficient companies NOT dependent
Companies
What is the theme in Companies Act 2013 about RPT ?
There should not be unlimited powers with any person
No important person or entity should have conflict of interest
Scope of RPT is Widened
Is it only about Directors?
‘NO’
Who is regulated under the act? Working Directors Non Working / Independent Directors Entities in which Director is interested Key Managerial Personnel and relatives Senior Management Holding / Subsidiary / Associate
Company Auditors
What are restrictions on Director? Should disclose interest If interested, Can not participate at board
meeting Every related party transaction should be at
arms length and ordinary course [se.188]; else..
Related party shareholders cannot vote Company cannot give loan /guarantee /
security to directors or related entities Remuneration is regulated
What are restrictions on Director? Discourage non-cash transaction No forward contract No insider trading
ANY default would trigger – vacation and severe penalties
What are restrictions on KMP? Should disclose interest Every related party transaction should be at
arms length and ordinary course [se.188]; elseRelated party shareholders cannot vote
Remuneration is subject to Nomination & Remuneration Committee
Remuneration is disclosed in annual return No forward contract No insider trading
What are restrictions on Holding ? Every related party transaction should
be at arms length and ordinary course [se.188]; elseRelated party shareholders cannot vote
Related Party Transactions will be disclosed in Directors Report
Discourage non cash transaction Can not give loan to subsidiary [unless it
is WOS]?
What are restrictions on Auditors? Give disclosure of eligibility Can not provide any other conflicting
service to the company or its holding/ subsidiary company
Can not be a shareholder of the Company
Can not be indebted to the company Even relatives can not be shareholder or
indebted
Relevant Sections
Who is considered as related party?
Related Party [Section 2 (76)] Director Relative of Director Director of holding company [Rules] Relative of Director of Holding Company
[Rules] Key Managerial Personnel Relative of Key Managerial Personnel Key Managerial Personnel of Holding
Company [Rules] Relative of KMP of holding Company [Rules]
Related Party [Section 2 (76)] Firm in which Director or Manager is partner Firm in which relative of Director or Manager
is partner Private company in which Director is Director Private Company in which Director is
Shareholder Public company in which Director or Manager
is Director and in which Director or Manager holds along with relatives more than 2% paid up capital
Related Party [Section 2 (76)] Body Corporate – whose board is
accustomed to act as per instruction of a Director or Manager
A person on whose advice, direction or instruction a director or manager is accustomed to act
Holding company Subsidiary company Associate Company Subsidiary of its holding company
Relative [Section 2 (77)]
Members of HUF Husband and Wife Father [Includes Step-Father] Mother [Includes Step-Mother] Son [Includes Step-Son] Sons Wise Daughter Daughter’s husband Brother [Includes Step-Brother] Sister [Includes Step-Sister]
Director [section 2 (34)]
Means a director appointed to the board of a company
Whoever is not appointed to the board [shadow director] is not a director
Even Independent / Nominee / Non Executive are Directors
Key Managerial Personnel [Se.2(51)] Chief Executive Officer OR Managing
Director OR the Manager; Company Secretary Whole Time Director Chief Financial officer; and Such other officers as may be prescribed
Other officers not yet prescribed by Central Govt.
Some More Definitions
Chief Executive Officer means an officer of a company, who has been designed as such by it
Chief Financial Officer means a person appointed as CFO of the Company
Whole Time Director includes a director in whole time employment of the Company
Who is not covered?
Public company in which Director does not hold shares
Public companies in which Director hold shares less than 2% with their relatives
Public companies in which Director personally do not hold shares but other directors put together hold more than 2%
WHO will determine ‘who’ is Related Party?
Director [MBP 1]Management [MBP 1]Audit Committee
Which Transactions are covered in this section?
Related Party Transactions Following Transactions are covered –1. Sale, purchase or supply of any goods/
materials2. Selling or otherwise disposing of, or buying
property of any kind3. Leasing of property of any kind4. Availing or rendering of any services5. Appointment of any agent for purchase or
sale of goods, materials, services or property
Related Party Transactions6. Such related party’s appointment to any
office or place of profit in the Company, its subsidiary or associate company
7. Underwriting the subscription of any securities or derivatives thereof of the Company
Whether loan transactions are covered under this section?
Whether providing guarantee is rendering service?
Will depend on case to case basis
Which Transactions are not covered? Equity Loan Guarantee Security Directors’ salary
What are Exemptions ?
Nothing in this section [none of the approvals] shall apply to transaction in ordinary course of business and at arms length; ELSE ….
There are two approvals – 1. At the board of directors by non
interested directors2. #Special Resolution at the shareholders
meeting of non related party shareholders
What are Exemptions from requirement of Special Resolution ? Special resolution is not required if the paid up
capital is less than Rs. 10 crores or sale, purchase or supply of any goods or
materials directly or through appointment of agents exceeding 25% of the annual turnover
selling or otherwise disposing of, or buying, property of any kind directly or through appointment of agents exceeding 10% of net worth
leasing of property of any kind exceeding 10% of the net worth or exceeding 10% of turnover
What are Exemptions from requirement of Special Resolution ? availing or rendering of any services directly
or through appointment of agents exceeding 10% percent of the net worth
remuneration for underwriting the subscription of any securities or derivatives thereof of the company exceeding 1% of the net worth
appointment to any office or place of profit in the company, its subsidiary company or associate company at a monthly remuneration exceeding 2.5Lakhs
Who can not vote at Board Meeting [se. 184] If a Director is interested in proposed contract
with following entities –1. Body corporate in which Directors together with
other Directors hold more than 2%2. Body corporate in which Director is Promoter,
CEO or Manager3. Firm or other entity in which Director is Partner or
Owner or member Contracts with Directors or relatives not covered However Directors should not have conflict of
interest
Who can not vote at Shareholders Meeting? If transaction is in Ordinary Course and
Arms Length every shareholder can vote; ELSE
Shareholder who is related party for that transaction can not vote
What is Ordinary Course?
Strict view –Main business activity of the company
Liberal View –Any activity which is essential for the
company to perform in normal course of business
What is arms length?
Means a transaction between two related parties that is conducted as if they were unrelated so that there is no conflict of interest
Who will determine whether it is ordinary course and arms length?
Management?Audit Committee?Board of Directors?
What is the consequence of default? Contract voidable at the option of
Directors and Shareholders Director shall indemnify company against
the loss suffered by the Company Company can claim against the
employee or director for the loss suffered Fine 25000 – 500,000 If director does not disclose his interest –
vacation of directorship
Prohibited Loan/ Guarantee/ Security [se. 185]
Following Loan /Guarantee/Security are prohibited :To any director of the lending company, To any Director of its holding company or To any partner or relative of any such director;
To any firm in which any such director or relative is a partner;
To any private company of which any such director is a director or member
Prohibited Loan/ Guarantee/ Security To any body corporate at a general meeting
of which not less than twentyfive per cent. of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together;
To any body corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company
What would ‘Body Corporate’ include? Private Limited Company Public Limited Company Limited Liability Partnership Foreign Company Foreign LLP
What is control and exercise? Whether holding – subsidiary company
would be covered in this clause? Who is said to have control and exercise
over 25% voting power of other company?
Whether person attending general meeting of any company as a representative of body corporate would be considered as having exercising power?
What is accustomed to act?
Whether common director would mean accustomed to act?
Whether common Chairman / Managing Director would mean accustomed to act?
Whether holding subsidiary company would mean accustomed to act?
Whether 2 companies promoted by same owner would mean accustomed to act?
Exemption:
Any loan given to MD as part of employee benefits OR under some scheme approved by shareholders
Advance loan, give guarantee or provide security in respect of loan made by any person to wholly owned subsidiary
Give guarantee or provide security in respect of loan made by any bank or financial institution to subsidiaries companies
NBFC can give loans/ provide guarantee / security
If borrowing party is anybody other than prohibited list
Some Questions
Whether Holding Company not allowed to give loan its subsidiary company?
Whether company can not give loan to group company?
What happens to the loans which are given before 12 September 2013?
What is the consequence of default? For Company granting loan fine 5-25 lacs For director / entity receiving loan –
imprisonment upto 6 months OR fine 5-25 lacs
If director does not disclose his interest – vacation of directorship
Loan granted may be considered as ultra vires and person granting it may be personally responsible
Directors personal default in his duties
DIRECTORS Remuneration
Director – Remuneration
Total remuneration not to exceed 11% of the net profits computed as per section 198
Shareholders approval and CG approval for payment of remuneration exceeding 11% subject to schedule V
Remuneration to anyone of MD/WTD/Manager not to exceed 5 % and collectively 10%
Remuneration to directors other than MD/WTD not to exceed 1% if there is a MD/WTD/Manager 3% in other case
Sitting fees not to exceed Rs.100,000 Different fees for different classes of
directors however, Independent director not to be paid less than non independent director
Independent directors is not entitled to any stock option
Director – Remuneration
Director – Remuneration (Schedule V) If Company is having profits, it may pay remuneration
exceeding the limits subject to shareholders approval If Company is not having profits or inadequate profits,
without CG approval [for unlisted companies] Nomination & Remuneration committee approval Special resolution for payment of remuneration for a
period not exceeding 3 years no default in repayments of debts for a continuous
period of 30 days Explanatory statement to be provided as per
schedule
Director – Remuneration
If any director draws or receives in excess of the limits with or without approval of CG if required, he shall refund the same to the company unless waiver of excess remuneration is permitted by CG
If any provisions of section 197 is contravene, person shall be punishable with fine not less than RS. 100,000 but may extend upto Rs.500,000
What is status of Private company? Need Board Resolution and Shareholders
resolution Need compliance with Schedule V Need all disclosure in explanatory
statement No approval of CG is required, if no
default in payment of dues to bank and appointment is for 3 years
Who can vote?
Who is considered as interested while approving directors salary?
Can interested director vote at directors meeting?
What if director does not have quorum? Who can vote at shareholders meeting? Can same director vote at shareholders
meeting? Will there be any significance of ‘arms
length’?
KEY MANAGERIAL PERSONNEL
Key Managerial Personnel
Listed Company and Public Company paid up capital of Rs. 10 Cr require following KMP-
MD / WTD / CEO CS & CFO All companies with capital less than
Rs. 10 Crore if have CEO /CS / CFO / MD – he is officer in default.
Private Companies with capital of Rs. 5 crores are required to appoint CS
Key Managerial Personnel
Appointment by resolution of the Board A whole time KMP not to hold office in
more than one Company except in its subsidiary at the same time
KMP is allowed to be director with the permission of the Board
If holding office in more than one company, needs to choose one company he wishes to continue within 6 months from the commencement of the Act
Key Managerial Personnel
MD can be appointed as MD in not more than one company and such appointment is approved by the Board with consent of all directors present in meeting and specific notice is given
In case of contravention, company punishable with fine of 5 lakhs rupees and director and KMP who are in default shall be punishable with fine which may extend to Rs. 50 thousand and if contravention is of continuing one with a further fine upto Rs. 1000 for every day till default continues
Restriction on Transactions with KMP Section 188 – sale, purchase of goods/
materials / services / properties / agency – applicable to transactions with KMP / relatives
Loan can be given to KMP KMP can not enter into insider trading KMP can not enter into forward dealing
Responsibilties
CFO – to maintain books and preparation of financial statement
CS –report to board about compliance and guide board to discharge their duties
MD / WTD / CEO / CFO / CS – officer in default
What if company is not required to BUT has CFO
or CEO ?
ROC disclosures
Appointment / removal to be informed Remuneration details to be given in
Annual Return Details of RPT to be given in Directors
Report Appointment / removal of one level
below KMP is also required to be informed to ROC
DISCLOSURE OF INTEREST
DISCLOSURE OF INTEREST
Disclosure in the first board meeting of financial year
Disclosure whenever there is any change Form MBP 1 for making disclosure Interest/concern may be disclosed as director/
promoter/manager/shareholder/CEO/Partner/ owner/member in other body corporate /firm
Interested director not to participate if he holds more than 2 percent of shareholding or he is a promoter/manager/CEO of other body corporate
DISCLOSURE OF INTEREST
If contract or arrangement is entered without disclosure or director participate- voidable at the option of the Company
In case of contravention - imprisonment for a term which may extend to one year or with fine which shall not be less than fifty thousand rupees but which may extend to one lakh rupees, or with both
Office of the director shall become vacant If he fails to disclosure interest directly or indirectly
or Acts in contravention relating to entering into
contracts or arrangements in which he is interested
DISCLOSURE OF INTEREST
Noting of disclosure of interest to be intimated to ROC within 30 days
Register of contracts and arrangements to be maintained for disclosure of interest in the form MBP- 4
Entries in the register to be authenticated and the register is to be kept in safe custody by of CS or any other person authorised by Board
Whether MBP is required from KMP?
Auditors
AUDITOR – Disqualification
Disqualification of Auditor:- Person who is in full time employment
elsewhere A person who or his relative or partner- (a) holding any security or interest in the
company more than Rs. 1 lakh/-, its subsidiary or its holding or associate company or fellow subsidiary
(b) Indebted to the company, subsidiary, holding, associate or fellow subsidiary in excess of Rs. 5 Lakh
AUDITOR - Disqualification
Disqualification of Auditor:- A person/firm –directly/indirectly has
business relationship with the company /subsidiary / holding / fellow subsidiary/associate as may be prescribed
A person whose relative is director or is in employment of the company as a Director or KMP.
Restriction on Providing Services [Clause 144]
Auditor cannot provide following services to the company/holding/subsidiary directly or indirectly:- Accounting and book keeping Internal audit Design and implementation of any financial
information system Actuarial services Investment advisory Investment banking Rendering of outsourced financial services Management Services
Board Report
Board Report [RPT disclosures] Policy about directors appointment and
remuneration Criteria for determining qualification, attributes
and independence of directors Particulars of contracts with related party
transactions Formal annual evaluation of performance of
board Remuneration of Director and KMP is disclosed
in annual return which is part of Directors report
AS 18 / Companies Act 2013
Comparison
AS 18 Companies Act 2013
Related party transaction - a transfer of resources or obligations between related parties, regardless of whether or not a price is charged
Narrow definition which excludes loan / investment etc.
An Associate - an enterprise in which an investing reporting party has significant influence and which is neither a subsidiary nor a joint venture of that party
Restricted to company not an ‘enterprise’
Key management personnel - those persons who have the authorityand responsibility for planning, directing and controlling the activities ofthe reporting enterprise
It includes only MD / WTD / CEO / CFO and CS
Comparison
AS 18 Companies Act 2013
Relative – in relation to an individual, means the spouse, son,daughter, brother, sister, father and mother who may be expected toinfluence, or be influenced by, that individual in his/her dealings with thereporting enterprise.
It is a rule based definition and not principle based definition
Summary
Summary
Make a list of related parties under various sections
Understand what is completely prohibited and stop such transactions
All other transactions should be in ordinary course and arms length
Director should not have conflict of interest Ensure sufficient quorum at Board and
Shareholders meeting Company’s stand should not be in isolation, should
consider our stand in Direct and Indirect Tax laws
THANK YOU.Lets help industry to be better governed