DIFFERENCE BETWEEN COMPANIES ACT 1956

& COMPANIES ACT 2013

AADITYA NAGPALASHIMA AGGARWAL

AKRITA FOTEDARHARSIMRAT KAUR

SHIVI GARG

IntroductionThe Companies Bill 2012 was passed in Rajya Sabha on8th August 2013 (during the monsoon session of theparliament). Earlier, the bill was passed by the Lok Sabha on 18th December 2012. Now, It has also got thePresidential assent and has now become the CompaniesAct, 2013. The new Act comprises of 29 chapters, 470 Sections and

7 Schedules as against 658 sections and 14 Schedules in the Companies Act, 1956. In 470 Sections the word “as may be prescribed” has been used at around 336 places.

The Act extents to the whole of India and different 4 provisions of the Act will be applicable on such date(s) as the Central Government, by notification in the official gazette, may appoint and different dates may be appointed for different provisions of the Act.

Purpose

• The existing Companies Act, 1956 has been amended several times in the past 57 years, with many of its provisions found to be outdated and inadequate.

• The objective behind the 2013 Act is lesser Government approvals and enhanced self-regulations coupled with emphasis on corporate democracy

ONE PERSON COMPANYOld Companies Act 1956

New Companies Act 2013

Definition of “One Person Company”

No Provision It allows for formation of a company having only one member

•It's a Private Company having only one Member and at least One Director. •No compulsion to hold AGM. •Conversion of existing private Companies with paid-up capital up to Rs 50 Lacs and turnover up to Rs 2 Crores into OPC is permitted.

MEMBERS OF A PRIVATE COMPANY

Old Companies Act 1956

New Companies Act 2013

No. of Permissible members

Maximum no. of members/shareholders was 50

The limit of maximum no of members has been increased to 200

BOARD OF DIRECTORSOld Companies Act 1956

New Companies Act 2013

Maximum no. of directors

Maximum no. of directors is 12. The no can be increased by taking permission from the Government

Maximum no. directors have been increased to 15. The no can be increased by a resolution in the AGM

Woman Director No compulsion for appointment of a woman director to the BOD

Every Listed Company /Public Company with paid up capital of Rs 100 Crores or more / Public Company with turnover of Rs 300 Crores or more shall have at least one Woman Director.

Resident Director The law does not talk about this aspect

INDEPENDENT DIRECTORS

Provision in Companies Act 2013 :Every listed public company shall have at least one-third of the total number of directors as independent directors and the Central Government may prescribe the minimum number of independent directors in case of any class or classes of public companies.

WHO IS AN INDEPENDENT DIRECTOR

An independent director in relation to a company, means a director other than a managing director or a whole-time director or a nominee director,—(a) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;(b) (i) who is or was not a promoter of the company or its holding, subsidiary or associate company;

(ii) who is not related to promoters or directors in the company, its holding, subsidiary or associate company;(c) who has or had no pecuniary relationship with the

company, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year;

(d) none of whose relatives has or had pecuniary relationship or transaction with the company, its holding, subsidiary or associate company, or their promoters, or directors,Bamounting to two per cent. or more of its gross turnover or total income or fifty lakh rupees or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year;

Corporate social responsibility

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What is CSR? What is not CSR?

It should be rupee measurable;

That which is not rupee measurable is not a CSR activity;

It must bring direct benefits to marginalized , disadvantaged, poor or deprived sections of the community;

If it does not benefit the poor & backward sections of the community it is not a CSR activity;

It should not benefit only the employees of the company & their families;

Employee benefits will not count as CSR;

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What is CSR? What is not CSR?

CSR activities must be in the form of projects/programmes. Thus CSR activities should be projectivized ;Components of a project are as follows: •Need Based Assessment/Baseline Survey/Study•Clearly identified time frame•Specific annual financial allocation•Clearly identified milestones•Clearly identified & measurable objectives /goals•Robust & periodic review & monitoring•Evaluation & Assessment (Where possible, by third party)

Pure philanthropy or mere donations will not count as CSR

What is CSR and what is not?

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What is CSR What is not CSR?

Corporates are expected to fund projects from their own accounts through implementing agencies;

Government programmes/initiatives can be complemented/supplemented

Programmes/projects must be within India;

Funds/moneys deposited in Central or Government accounts will not count as CSR;

Government programmes/initiatives should not be duplicated.

Programmes/projects undertaken outside India will not count as CSR;

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What is CSR What is not CSR?

It should be independent of compliance with any regulation or law;

Activities which are in compliance with any regulation or law will not count as CSR;Activities undertaken in pursuance of normal course of business of a company.

Under the Companies Act, 2013, any company having a net worth of rupees 500 crore or more or a turnover of rupees 1,000 crore or more or a net profit of rupees 5 crore or more should mandatorily spend 2% of their net profits per fiscal on CSR activities. The rules came into effect from 1 April 2014.

The CSR provisions within the Act is applicable to companies with an annual turnover of 1,000 crore INR and more, or a net worth of 500 crore INR and more, or a net profit of five crore INR and more. The new rules, which will be applicable from the fiscal year 2014-15 onwards, also require companies to set-up a CSR committee consisting of their board members, including at least one independent director.

The Act encourages companies to spend at least 2% of their average net profit in the previous three years on CSR activities.

Benefits of CSR:•Communities provide the licence to Operate•Attracting and retaining employees: •Communities as suppliers:•Enhancing corporate reputation:

• Surplus arising out of CSR activities will have to be reinvested into CSR initiatives, and this will be over and above the 2% figure-• Only CSR activities undertaken in India will be taken into consideration• Activities meant exclusively for employees and their families will not qualify• A format for the board report on CSR has been provided which includes amongst others, activity-wise , reasons for spends under 2% of the average net profits of the previous three years and a responsibility statement that the CSR policy, implementation and monitoring process is in compliance with the CSR objectives, in letter and in spirit. This has to be signed by either the CEO, or the MD or a director of the company

D.P. Shah – D. Shah & Associates 23

Companies Act, 1956 Companies Act, 2013

“Financial Year” means, in relation to any body corporate, the period in respect of which any profit and loss account of the body corporate laid before it in annual general meeting is made up, whether that period is a year or not:

“Financial Year” means in relation to any company or body corporate, means the period ending 31st day of the March every year, and where it has been incorporated on or after the 1st day of January of a year, the period ending on 31st day of march of the following year, in respect where of financial statement of the company or body corporate is made up.

Changes• 1. Definition - now financial year can only be of April to

March and only a company or body corporate, which Is a holding company or subsidiary company of a company incorporate outside India and is required to follow a different financial year for consolidation of its accounts out side India, may have different financial year subject to approval of tribunal.

• 2. A transition period of 2 year has been prescribed for companies existing on the commencement of this Act to align their financial year to April-March.

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Consolidated Financial Statement (CFS)

Neither the Companies Act, 1956 nor AS 21 requires the Companies to prepare Consolidated Accounts. At present, Clause 32 of the Listing Agreement mandates listed Companies to publish its Consolidated Accounts which is neither required to be laid before the AGM nor to be filed with ROC.

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• Under the Companies Act, 2013 where a company has one or more subsidiaries, it shall, in addition to financial statements, prepare consolidated financial statement of the company and laid before the annual general meeting of the company.

• All subsidiaries, associates and joint ventures will be covered under CFS.

• Company shall prepared the Consolidated Financial Statements according to Schedule III of the Companies Act, 2013 which is in line with revised schedule VI.

• All Companies including unlisted and private companies, with subsidiaries will need to prepare CFS.

D.P. Shah – D. Shah & Associates 27

General Instructions for preparation of CFS

• Profit or Loss attributable to ‘minority interest’ and to owners of the parent in the statement of profit and loss shall be presented as allocation for the period.

• A company will disclose the list of subsidiaries or associates or joint ventures, which have not been consolidated along with the reasons for non consolidation.

Prospectus & Allotment of Securities

This section explains that a public company may issue securities in any of the following manners:• To public through prospectus • Through private placement• Through rights issue or a bonus issue.

PRIVATE PLACEMENT

Under the Act, 1956 the conditions relating to private placement were applicable only to public companies.

Act, 2013 provides various conditions for private placement of shares which apply to both private companies and public companies.

ISSUE OF PROSPECTUS:

The 1956 Act currently requires that the report will not be earlier than 120 days before the issue of the prospectus.

The 2013 Act states that the report by the auditors on the assets and liabilities of business shall not be earlier than 180 days before the issue of the prospectus.

VARIATION IN TERMS OF CONTRACT AND OBJECTS

The 1956 Act currently requires approval in a general meeting by way of an ordinary resolution.

The 2013 Act states that a special resolution is required to vary the terms of a contract referred to in the prospectus or objects for which the prospectus was issued . It also requires that dissenting shareholders shall be given an exit offer by promoters or controlling shareholders .

It does not have such provision. The 2013 Act includes a new section under which members of a company, in consultation with the board of directors, may offer a part of their holding of shares to the public.

OFFER OF SALE OF SHARES BY CERTAIN MEMBERS OF THE COMPANY

SHELF PROSPECTUS

The 1956 Act currently limits the facility of shelf prospectus to public financial institutions, public sector banks or scheduled banks .

The 2013 Act extends the facility of shelf prospectus by enabling SEBI to prescribe the classes of companies that may file a shelf prospectus.

SHARE CAPITAL

The part of the capital of a company that comes from the issue of shares.

KIND OF SHARE CAPITAL 

• Equity Share Capital:  refers to the portion of a company's equity that has been obtained by trading stock to a shareholder for cash.

• Preference Share Capital: Preference shares allow an investor to own a stake at the issuing company with a condition that whenever the company decides to pay dividends, the holders of the preference shares will be the first to be paid.

There was no right of a stockholder to vote on matters of corporate policy and who will make up the board of directors. Voting often involves decisions on issuing securities, initiating corporate actions and making substantial changes in the corporation's operations.

Here this distinction is removed.

VOTING RIGHTS

VARIATION OF SHAREHOLDER’S RIGHTS

There is no such provision. Act states that if the variation by one class of shareholders affects the rights of any other class of shareholders, the consent of three-fourths of such other class of shareholders shall also be obtained and the provisions of this section shall apply to such variation.

Companies are permitted to issue shares at discount.

Companies would no longer be permitted to issue shares at a discount. The only shares that could be issued at a discount are sweat equity .

PROHIBITION ON ISSUE OF SHARES AT A DISCOUNT

POWER OF THE COMPANY TO PURCHASE ITS OWN SECURITIES

A special resolution has been passed at a general meeting of the company authorising the buy-back.

The only difference is that the option available to company for a buy-back from odd lots is no longer available .

FURTHER ISSUE OF SHARE CAPITAL

If a company proposes to increase its capital by issuing further shares, it can do so after the expiry of two years.

Under this act, period of two years has been dispensed with.

ISSUE OF BONUS SHARES

The existing 1956 Act does not have any specific provision dealing with issue of bonus shares .

The 2013 Act includes a new section that provides for issue of fully paid-up bonus shares out of its free reserves subject to the compliance with certain conditions such as approval in the general meeting .

Loan to directors Not applicable to private companies and for public companies, prior approval of the CG is required.

This section does not apply to:•Private companies •Holding to its subsidiaries•Banking companies

CG approval done away with and applicable to private companies as well.Loan can be given to MD. A director can be given loan pursuant to scheme approved by the members by passing a special resolution or as a part of the conditions of service extended by the company to all its employees.

A company whose business in ordinary course is to provide loan or guarantee or securities for repayment of such loans, can provide loan or guarantee or security to its directors provided interest on loan is not less than bank rate declared by RBI.

Related party transactions

Covered only sale and purchase of goods, rendering of services, underwriting the subscription of any shares or debentures.

Also covers leasing of property, appointment of agent for the sale or purchase related party’s appointment to any office or place of profit in the company, its subsidiary or associate company.

In the case of company’s prescribed amount of share capital and transactions exceed Rs. 1 crore, prior approval of CG is required.

Not applicable to contracts between two public companies.

In the case of company having prescribed amount of share capital and transactions exceeding the prescribed amount, prior approval of members of company by way of special resolution is required.

Applicable to contracts between two public companies as well.

The transactions entered into in ordinary course of business require Board’s approval.

The transactions entered into in ordinary course of business are exempted from taking Board’s approval except the transactions which are not on arm’s length basis.

Debentures:

Special resolution required for issue of debentures with conversion option and other provisions clause.

Appointment of debenture trustees(DT) compulsory for public issue of debentures through prospectus to more than 500 persons.

No such requirement existed.

No such ceiling of 500 existed. Appointment of debenture trustees(DT) compulsory for company issuing prospectus or a letter of offer to the public for subscription of its debentures.

Needs special resolution of the members for issue of debentures with conversion option, wholly or partly.

Appointment of debenture trustees compulsory for public issue of debentures through prospectus to more than 500 persons.

Redemption of debentures

In case the DT comes to a conclusion that the assets of the company are insufficient or are likely to become insufficient, then he or she can file a petition before the Tribunal. The Tribunal after hearing the parties concerned directly order the company to redeem the debentures forthwith the payment of principal and interest due thereon.

Petiton is filed in this case as well and in case of failure to comply with any order of the Tribunal, the punishment has been increased.

AMAGAMATION OF A COMPANY WITH A FOREIGN COMPANY

• The provision under this act shall apply mutatis mutandis to schemes of mergers & amalgamation between companies registered under this act.

• Central Govt may make rules in consultation with the RBI.

• Subject to the provisions of any other law for the time being in force, a foreign company, may with the prior approval of RBI merge into a company or vice-versa.

COMPANY’S ACT 2013

• No provision was made under this act.

COMPANY’S ACT 1956

• The company’s act (1956) allows a foreign company to merge with a Indian company but not vice-versa.

• But The Act (2013) has allowed Indian companies to merge with their counterparts.

• The manner in which such cross border merger will take place would be given under rules which would be prepared in consultation with RBI.

COMMENTS

PROHIBITION ON ACCEPTANCE OF DEPOSITS

• After the commencement of this act, no company shall invite, accept or renew deposits under this Act from the public except in a manner provided under this chapter.

• Provided that nothing in this sub section shall apply to a banking company & non banking financial company as defined in the RBI Act, 1934 & to such other company as the Central Government may specify in this behalf.

COMPANY’S ACT 2013

• The Central Government may prescribe the limits up to which the manner in which and the conditions subject to which deposits may be invited or accepted by a company either from the public or from its members.

• No company shall invite or allow any other person to invite any deposit.

COMPANY’S ACT 1956

• The depositors being in the nature of unsecured creditors, had been subjected to a lot of hardship and in many cases lost their hard earned money.

• The Act 2013 proposes to prohibit companies from accepting deposits except from members.

COMMENTS

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