companies bill 2011

7/28/2019 Companies Bill 2011

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Aditi Jhunjhunwala Mumbai address:

Vinod Kothari & Company 222, Ashoka Shopping [email protected] LT Road, Near GT Hospital

1012, Krishna 2nd Floor

224, AJC Bose Road Mumbai- 400 001

Kolkata- 700 017

Ph: 033- 2281 7715/3742/1276

Website: www.india-financing.com

Companies Bill 2011- At a glance
mailto:[email protected]://www.india-financing.com/http://www.india-financing.com/http://www.india-financing.com/http://www.india-financing.com/mailto:[email protected]


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Structure

January 2012

Companies Bill 2011-At a glance

Vinod Kothari & Company2

Companies Act, 1956

13 parts

More than 750

sections

15 schedules

Companies Bill, 2011

29 Chapters

470 clauses

7 schedules


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Quick snapshots Rearrangement of sections,

chapters making the Act much morereader friendly and compacting the

existing Act; however, Rules yet to

be prescribed;

Regulatory framework on

compromises and arrangements;

It proposes to introduce the

concept of class action suits for the

first time in India. That would

empower investors to sue a

company for 'oppression and

mismanagement' and claimdamages;

Introduction of One Person

Company concept;

Many new definitions have been

introduced and existing ones beenamended such as- accounting

standards, auditing standards,

associate company, charge, company

limited by shares, control, CEO, CFO,

books of accounts, deposit, promoter,

postal ballot, related party, small

company etc. Change in the definitionof Company, employee stock option

etc.;

Shareholders approval a must for

inter-corporate loans;

Introduction to Revival and

Rehabilitation of sick companies in

Chapter XIX- SICA to be repealed

Periodic rotation of Auditors after

every 4 years;

January 2012




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Snapshots.

Concept of Registered Valuerintroduced;

Dissenting shareholders to be

given exit option at the time of

decision making of the

company such as change inobject clause, any new

business proposal etc.;

Among other things, it also

proposes to tighten the laws

for raising money from thepublic;

The Bill also seeks to prohibit insidertrading by company directors or key

managerial personnel by treating

such activities as a criminal offence;

The Bill proposes that companies

should earmark 2 per cent of the

average profit of the preceding threeyears for corporate social

responsibility (CSR) activities, and

make a disclosure to shareholders

about the policy adopted in the

process; the same is not a mandatory

requirement;

Company Secretary included in

definition of Key Managerial

Personnel;

January 2012Companies Bill 2011-At a glance Vinod Kothari &

Company4


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Snapshots.

Provisions regarding the nameapproval now not in a separate

section but clubbed together

under incorporation

Additional documents to be filed

by a public/private company in

case of commencement of

business;

Share Transfer Agents, Registrars

to an issue, CFO also included

within the meaning of officer in

default;

Concept of video conferencing incase of board and general

meetings

Mandatory transfer to reserves

for dividend declaration, done

away with

Mandatory rotation of

independent directors

More Powers to Serious Fraud

Investigation Office (SFIOs)


Company5


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Definitions- Chapter I

Amendments and insertions

Analysis: On a

plain reading of

the definition on

Interested

Director, it would

mean that even ifa director is a

shareholder in

the company, he

becomes

interested

interested director means a director

who is in any way, whether by himself

or through any of his relatives or firm,

body corporate or other association of

individuals in which he or any of hisrelatives is a partner, director or a

member, interested in a contract or

arrangement, or proposed contract or

arrangement, entered into or to beentered into by or on behalf of a

company;


Company6


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associate company, in relation to another company, means a company in which

that other company has a significant influence, but which is not a subsidiary company

of the company having such influence and includes a joint venture company;

Explanation.For the purposes of this clause, significant influence means control of

at least twenty per cent. of total share capital, or of business decisions under anagreement;

ANALYSIS:


Company7

In case of a control, the essence of associate goes away

and it establishes a holding subsidiary relationship.

Therefore, though the definition explicitly says that there is

no holding-subsidiary relationship between the associates

but the usage of control takes away the substance.

A reading of the definition of associate company under

AS-23 clearly brings out the difference between control

and participation

Moreover, the said definition excludes joint venture to be

considered a part of associate company unlike the present

Bill


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independent director means an independent director referred to in sub-section

(5) of section 149;

January 2012



Introduced for the first time

All listed Companies to appoint independent directors

At least one third of BoD to comprise of independent directors

Independent Directors to abide by Code provided in Schedule IV

Only an independent director to be appointed as alternate director

In case on nominee directors by any institution/appointed by govt.representing shareholding not to be deemed as independent director

Cooling period introduced-Independent Dir to be appointed in samecompany after cooling period of 3years


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Analysis:

The entire definition may need a recast once IFRS gets applied, as

companies are allowed to use revaluation model for assets whereby the concept of revaluation reserve disappears

net worth means the aggregate value of the paid-up

share capital and all reserves created out of the profits

and securities premium account, after deducting the

aggregate value of the accumulated losses, deferred

expenditure and miscellaneous expenditure not writtenoff, as per the audited balance sheet, but does not

include reserves created out of revaluation of assets,

write-back of depreciation and amalgamation;

January 2012




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In case of class action

by a member, the

minimum number has

been fixed to that of

100, and possibly oneof the reasons to

increase the number of

members in case of

private company is to

get the same at par

with the requirementunder class action.

private company means acompany having a minimum paid-up

share capital of one lakh rupees or

such higher paid-up share capital as

may be prescribed, and which by itsarticles,

(i) restricts the right to transfer its

shares;

(ii) except in case of One PersonCompany, limits the number of its

members to two hundred;

xxxJanuary 2012

Companies Bill 2011-At a glance Vinod Kothari &

Company10


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relative, with reference to any

person, means anyone who is a

related to another, if

(i) they are members of a HinduUndivided Family;

(ii) they are husband and wife; or

(iii) one person is related to the

other in such manner as may be

prescribed;

The manner of ascertaining a

person as related is yet to be

prescribed unlike existing

Schedule 1A of the existing Act.

Small companies have

been defined (maximum

paid-up share capital not

exceeding Rs. 50 lakh) and

have been subjected to a

less stringent regulatory

framework [Clause 2(85)]


Company11


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Contd.

January 2012




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Few new clauses inserted

January 2012



Re-opening of books of accounts and recasting its financial statements on an order

by the competent court or Tribunal [Cl 130]

if that earlier accounts were prepared in fraudulent manner or financial

statements are not reliable due to mismanagement of affairs of the company.

The directors allowed to prepare revised financial statement or a revised Boards

report [Cl 131]

if it appears to them that the companys financial statement or the Boards Report

did not comply with the requirement of clause 129 or clause 134 after obtaining

approval of the Tribunal

Constitution of Corporate Social Responsibility Committee [Cl 135]

For every company having specified networth or turnover or net profit during

any financial year

Committee to formulate policies and include activities as specified in Schedule VII

BoD to disclose the content of the policy and display on its website

Prescribed Companies shall be required to conduct internal audit of functions and

activities of the company by internal auditor appointed by the company. [Cl 137]

Manner of conducting internal audit shall be prescribed by the Central

Government.


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Contd.

January 2012



Seeks to provides the ways in which a public company or a

private company may issue securities. [Cl 23]

Member or members of a company, in consultation with Board

of Directors, may offer a part of their holding of shares to the

public. [Cl 28]

The document by which the offer of sale to the public is made shall

be treated as prospectus issued by company.

A suit may be filed or any other action may be taken by any

person, group of persons or any association of persons who

have been affected by any misleading statement or the

inclusion or omission of any matter in the prospectus. [Cl 37]

A company may issue global depository receipts to be dealt

with in a depository mode in any foreign country. [Cl 41]


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Incorporation and incidental

matters- Chapter II

Concept of One Person Company introduced Memorandum to have another name too in the event

of death of the person

Dividing the objects into main, others and ancillary

is done away with

Model Articles of association specified in First

Schedule [clause 5]

Provision of printing of the MoA u/s 15 (a) doneaway with

January 2012




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Articles may contain provisions for entrenchment

to the effect that specified provisions of the articles

may be altered only if conditions or procedures asthat are more restrictive than those applicable in

the case of a special resolution, are met or complied

with. The provision to be made-

either on formation of a company or by an amendment in the articles agreed to by all

the members of the company in the case of a private

company

by a special resolution in the case of a publiccompany.

the company shall give notice to the Registrar of such

provisions in such form and manner as may be prescribed.

January 2012




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REGISTERED OFFICE-Clause 12 A company shall, on and from the fifteenth

day of its incorporation and at all times

thereafter, have a registered office capable

of receiving and acknowledging all

communications and notices as may beaddressed to it. [Clause 12]

The present Act says that co. to have a

registered office as from the day on which

company begins to carry business or from

thirtieth day after incorporation, whichever is

earlier (Section 146)

Notice of change in regd office to be given in

15 days to the Registrar [Clause 12 (4)]

Presently its 30 days

January 2012




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Rectification of Name-

Clause 16 Change in objects

Section 22 of the Act re-casted

CG to direct the company to

change its name in case it is

found that the name is

identical, within 3months

from the date of such

direction

In case the name resembles

a registered trademark, CG

to direct to change thename within 6months

Such change to be notified

to Registrar within 15days

In case of change in objects by

a company raising money

from public and has

unutilised amount of suchmoney raised, company to-

Pass a SR

Give exit options to the

dissenting shareholders

[Cl 13 (8)]

January 2012




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E-Governance

January 2012



E-Governance proposed for various company processes

like maintenance and inspection of documents inelectronic form,

option of keeping of books of accounts in electronicform, financial statements to be placed on companys

website,

Service of documents- clause 20 vis a vis sections 51,52, 53

Books of accounts- Clause 128 vis a vis sec 209 of theAct

Maintenance and inspection of documents- clause 120


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Annual General

Meetings

Calling of first AGM [Clause 96] First annual general meeting shall

be held within a period ofnine

months from the closing of first

financial yearand within a period

of six months of closure of

financial years in all other cases.

The present sec 166 lays that

1stAGM to be held within

18months from the date of

incorporation

Meetings not to be held onnational holidays unlike public

holidays

The clause also defines the term

National Holiday.

Quorum for AGM [Clause 103]

In case of a public company the

quorum shall depend on number

of members as on the date of ameeting. If members not more

than 1000, quorum is 5members

personally present

If such number is more than one

thousand but upto five thousand,

then quorum shall be fifteen

members personally present.

If such number exceeds five

thousand, then thirty members

personally present shall be the

quorum.

In case of a private company, two

members personally present shallbe the quorum for a meeting.

The requirement of quorum

now re-casted surely makes

sense.

January 2012




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Contd. In case of adjournment or of change of day, time and place of meeting, the company

shall give not less than three days notice to the members.

No such requirement in the Act Right to vote by e-voting- Clause 108

Newly inserted

Any document, record, register or minute, etc., required to be kept or allowed to be inspected

or copies given may be kept or inspected or copies given in the electronic form in the

prescribed manner.[Clause 120]

Newly inserted

Every listed company to prepare a report on each annual general meeting including

the confirmation to the effect that the meeting was convened, held and conducted as per the

provision of the Act and the rules made thereunder.

A copy of this report shall be filed with the Registrar.

The clause also provide penalty if company fails to file the report under this clausebefore the expiry of the period specified under clause 403.

[Clause 121]

January 2012


Company22


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Annual Return

Annual return of companies now to include addition data pertaining to: [Clause 92]

Change in the promoters and KMPs alongwith directors

Meetings of members, Board along with attendance details

Remuneration of KMPs to be disclosed

Penalty or punishment imposed on the company, directors and/or officers and

details of compounding and appeals (slight change from Companies Bill 2009)

Therefore, we expect change in the format of annual returns as well

Annual return to be signed by a director and a company secretary in whole time

employment/practice (in case where there is no CS in employment)

In case of non-filing within due time, penalty is strict in comparison to the Act and

now also includes imprisonment;

In case of change in number of shares held by promoters and top ten shareholders in alisted company such company shall file a return with the Registrar about such change.

[Cl 93]

Newly inserted

January 2012


Company23


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Directors and Meetings-Chapter XI

and XII

Appointment and rotation: [Clause149]

Prescribed class or classes ofcompanies shall have atleast onewomen director.

That every company shall have at

least one director who stays in Indiafor a total period of not less than onehundred and eighty two days in theprevious calendar year.

Minimum no. of independentdirectors prescribed

Rotation of Independent Directors

Retirement of directors by rotationshall not be applicable toappointment of independentdirectors.

The manner and selection: [Clause150]

Independent directors to be selectedfrom databank

Maintenance of databank by anybody, institute or association as may

be notified by the CentralGovernment.

The responsibility of exercising duediligence before selecting a personfrom the databank shall lie with thecompany making such appointment.

January 2012




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Contd.

Act/Duties of Directors: [Clause 166]

Newly inserted

Provides that a director of a company shall act in accordancewith the companys articles.

It further seeks to provide for various duties of directors.

In case of contravention, director is punishable with fine andif a director is found guilty of making any undue gain eitherto himself or to his relatives, partners or associates, he shallalso be liable to pay an amount, equal to that gain, to thecompany.

The clause further provides penalty for director of acompany if he contravenes provisions of this clause.

January 2012




26/51

Contd.

Participation in Board Meetings: [Clause 173]

Permitted both in person or through VideoConferencing/other audio-visual modes

Meetings to be recorded and stored The meeting of the Board may be called at shorter

notice to transact urgent business where at leastone independent director, if any, shall be present

Directors participating through Video-conferencing/audio-visual means to be counted forquorum [Cl 174]

January 2012




27/51

Contd.

A director may resignfrom his office

by giving a notice in writing and the Board shall, on receiptof such notice take note of the same and the company shall

intimate the Registrar and place such resignation in the

subsequent general meeting of the company.

The director shall also forward copy of resignation withreasons to Registrar.

The clause further provides for the date on which thenotice of resignation shall take effect.

The director shall be liable for the offences occurredduring his tenure.

January 2012



Resignation of Directors: [Clause 168]


28/51

Contd.

January 2012



CONSTITUTION OF NOMINATION ANDREMUNERATION COMMITTEE [CLAUSE 178]

Inserted Newly in the Bill (earlier part of Listing Agreement)

Provides requirement and manner of constituting nominationand Remuneration committee and Stakeholders RelationshipCommittees of the Board.

Nomination and Remuneration Committee shall consist of three or more non-executive directors as appointed by the Board out

of which not less than one half shall be an independent director.

Such Nomination and Remuneration Committee shall determinethe companys policies relating to the nomination and evaluation

of every directors performance. It shall also determine companys policies relating to

remuneration of the directors, key managerial personnel andother employees.


29/51

Contd.

Constitution of a Stakeholders Relationship Committee where There is combined membership of the shareholders, debenture holders, deposit

holders and other security holders of more than one thousand at any time during

a financial year

Committee to consist of a chairman who is a non-executive director and such

other members of the Board as decided by the Board.

Committee to consider and resolve the grievances of securities holders. The clause further provides punishment for company and every officer of the

company in case of contravention of provisions of clause 173 and this clause.

Constitution of Corporate Social Responsibility Committee [Cl 135]

For every company having specified networth or turnover or net profit

during any financial year

Committee to formulate policies and include activities as specified in

Schedule VII

BoD to disclose the content of the policy and display on its website

January 2012




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Managerial remuneration- Clause

197

Provisions relating to limits on remuneration provided in the existingAct with maximum limit of 11% (of net profits) retained.

Companies with no profits or inadequate profits

remuneration shall be payable in accordance with new Schedule of

Remuneration and

in case a company is not able to comply with such Schedule, approval ofCentral Govt would be necessary.

Remuneration payable by companies having profits (Section I of Part II

of Schedule V):

Subject to the provisions of clause 197, a company having profits in a

financial year may pay remuneration to a managerial person or persons notexceeding the limits specified in such clause.

January 2012




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Remuneration payable by companies having no profit or inadequate

profit without Central Government approval (Section II of Part II of

Schedule V):

Where in any financial year during the currency of tenure of a managerial person,a company has no profits or its profits are inadequate, it may, without Central

Government approval, pay remuneration to the managerial person not exceeding

the higher of the limits under (A) and (B) given below:

January 2012



Where the effective capital is Limit of yearly remuneration

payable shall not exceed (Rupees)Negative or less than 5 crores 30 lakh

5 crores and above but less

than 100 crores

42 lakh

100 crores and above but less

than 250 crores

60 lakh

250 crores and above 60 lakh plus 0.01% of the effective

capital in excess of Rs. 250 crores


32/51

Contd.

In case of a managerial person who was not ashareholder, employee or a director of the company

at any time during the two years prior to his

appointment as a managerial person 2.5% of the

current relevant profit. Provided that the above limits shall be doubled if the

resolution passed by the shareholders is a special

resolution.

January 2012



R l d P T i Cl


33/51

Related Party Transactions- Clause

188-vis a vis sec 297

January 2012



Every contract or arrangement entered into with a related party shall be referred to in the

Boards Reportalong with the justification for entering into such contract or arrangement[Clause 188(2)].

Now also includes selling/disposing or buying of any property

Leasing of property of any kind

Prior approval of shareholders in case the paid-up capital or transaction exceeds the

prescribed amount

PERSONS WITH WHOM CONTRACTS ARE COVERED: (newly insertedones)

KMP or his relative

Public company in which director or manager is a director or holds along

with relatives, more than 2% of its paid up capital Presently transaction between two public companies are excluded

Any body corporate whose BoD, MD or manager is accustomed to act inaccordance with advice, directions


34/51

Contd.

Consent/approval requirements

In Act

Prior consent of BoD

Prior consent of RD for paid up cap exceeding rs. 1

crore

In Bill

Prior consent of BoD

Prior consent of shareholders in case paid up

capital/transaction amount exceeds prescribed limit

In line with MCA circular no. 52/2011 introduced on 25th July,

2011, not yet effective yet

January 2012



R i i h


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Restrictions on non-cash

transactions- Clause 192

Any arrangement between a company and itsdirectors in respect of acquisition of assets for

consideration other than cash shall require prior

approval by a resolution in general meeting and if

the director or connected person is a director of itsholding company, approval is required to be

obtained by passing a resolution in general meeting

of the holding company [Clause 192].

January 2012




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Inter corporate loan/security/guarantee/invt-

and exemptions-Clause 186

Without prejudice to the provisions contained in this Act, acompany shall unless otherwise prescribed, make investment

through not more than two layers of investment companies:

Provided that the provisions of this sub-section shall not affect,

(i) a company from acquiring any other company incorporated in a

country outside India if such other company has investmentsubsidiaries beyond two layers as per the laws of such country;

(ii) a subsidiary company from having any investment subsidiary

for the purposes of meeting the requirements under any law or

under any rule or regulation framed under any law for the time

being in force.

January 2012




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Introduction of class action under

Oppression and Mismanagement-

Chapter XVI- Clause 245


Company January 201237


38/51

Rearrangements of provisions of existing sections 397,

398, 402 as 241 onwards in relation to oppression and

mismanagement Companies Bill 2009 drew the minimum number of

member/creditor to be one in case of a class action.

This was certainly a threat to the Indian Companies where

even a single shareholder could affect the day to day affairsof the company.

The Bill amends such minimum number from 1 to minimum

of 100 members and/or depositors or such percentage of

paid up capital/no. of depositors as may be prescribed,

whichever is less;

in case of a company having share capital whereas in case of a

company not having share capital, one fifth of its total no. of members;

it excludes the term creditors and instead includes depositors.Companies Bill 2011-At a glance

Vinod Kothari & Company January 201238


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Conditions precedent to consideration of an application underclass action are set out (earlier missing in Companies Bill2009): whether the member or depositor is acting in good faith in making the

application for seeking an order; any evidence before it as to the involvement of any person other than

directors or officers of the company on any of the matters provided inclauses (a) to (f) of subsection (1);

whether the cause of action is one which the member or depositor couldpursue in his own right rather than through an order under this section;

any evidence before it as to the views of the members or depositors ofthe company who have no personal interest, direct or indirect, in thematter being proceeded under this section;

where the cause of action is an act or omission that is yet to occur,whether the act or omission could be, and in the circumstances wouldbe likely to be

(i) authorised by the company before it occurs; or

(ii) ratified by the company after it occurs;

where the cause of action is an act or omission that has alreadyoccurred, whether the act or omission could be, and in thecircumstances would be likely to be, ratified by the companyCompanies Bill 2011-At a glance



40/51

Contd.

Two class action applications for the same cause of action shall notbe allowed; inserted newly and is sensible enough

The cost or expenses connected with the application for class

action shall be defrayed by the company or any other person

responsible for any oppressive act;

inserted newly.

Provisions for also safeguarding the interests of the Company in

case the application is found to be frivolous and vexatious in

nature;

Tribunal has the power to reject the application and impose cost

of not exceeding rupees one lakh.

This is certainly a boon regulation to companies in cases where

such applications may practically be mischievous in nature.

January 2012




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42/51

Removal of names of companies

from the Register of Companies-

chapter XVIII- Clause 248




43/51

Earlier the heading was- Power of Registrar to strike

defunct company off register (section 560)

The provisions have been completely changed. The period for in-operation of the company set out as

one year from incorporation or two years immediately

preceding financial years (the same was one year in case

of Companies Bill 2009); also to keep in mind whether the company has suo moto

applied for status of a dormant company within the time

prescribed;

The provisions also include case where the subscribersto the MoA have not paid the subscription within 180

days from the incorporation of the company;




44/51

Contd.

A company may also, after extinguishment of all itsliabilities, with a consent of atleast 75% of the

members (of the paid-up share capital) vide special

resolution file an application to the Registrar for

removal of name of the company from the Registerof Companies;

Restrictions laid down in case of making application

Cl 248 such as company not to make an application

in case of change of its registered office in theprevious three months; (these vary in comparison

to Companies Bill 2009)

January 2012




45/51

Regulations on Mergers andAcquisitions- Chapter XV- Clause 230




46/51

The existing heading reads as Arbitrations,Compromises, Arrangements and Reconstructionswhereas, the chapter in the Bill reads as Compromises,Arrangements and Amalgamation;

The existing section 390 applies to companies liable to

be wound up. The existing section 390 being excludedand part of it becomes part of explanation to section230;

Reduction of capital and corporate debt restructuringare also part of compromise and arrangements

To be (consented by atleast 75% of the unsecuredcreditors) to be disclosed by the applicant(s) vide anaffidavit at the time of making the application;


Vinod Kothari & CompanyJanuary 201246


47/51

Contd.

Consolidation of provisions of section 393 into sub-section (3) of section 230.

Thus, much more reader friendly and easy to understandat one go;

Sub-section (4) imposes restrictions on objections to be

raised by creditor. A creditor not holding less than 10% of the shareholding

or 5% of the total outstanding debt as per last auditedfinancial statements shall not be liable to raise anyobjection to the arrangement.

It is the same as in Companies Bill 2009. This does sound alittle absurd. Surely it could have been framed in a phasedmanner;




48/51

Compromise or arrangement now also includes buy backsubject to fulfillment of conditions specified.

Compromise or arrangement now also to include takeoveroffers;

Clause (f) of sub-section (3) of section 232 deals withinvestment of NRIs and treatment thereof in case of anmergers/amalgamations. Where the share capital is held by any non-resident

shareholder under the foreign direct investment norms orguidelines specified by the Central Government or inaccordance with any law for the time being in force, theallotment of shares of the transferee company to suchshareholder shall be in the manner specified in the order ofthe Tribunal;

Under the existing Act, all the powers in relation to ascheme of arrangement lies with the High Court which shallnow vest with the Tribunal.



Restrictions on non cash


49/51

Restrictions on non-cash

transactions- Clause 192

Any arrangement between a company and itsdirectors in respect of acquisition of assets for

consideration other than cash shall require prior

approval by a resolution in general meeting and if

the director or connected person is a director of itsholding company, approval is required to be

obtained by passing a resolution in general meeting

of the holding company [Clause 192].

January 2012




50/51

Some more amendments

Transfer of shares-

Shares of public company are freely transferable but contract ofarrangement between two or more persons, enforceable as a contract

Shares of public company freely transferable under the existing Act

Holding Subsidiary relation:

Class or class of holding companies not to have layer of subsidiariesbeyond a prescribed number, unlike the present Act

Provision for Registered Valuer- newly inserted Chapterxvii

January 2012




51/51

companies bill 2011

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