faq’s on the companies act 2013 – accounts and audit … · ca sripriya kumar write to...
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FAQ’S ON THE COMPANIES ACT 2013 – ACCOUNTS AND AUDIT
CA SRIPRIYA KUMAR
Write to [email protected] for inclusion in the mailing list
This update is an endeavor to share some learnings obtained. The views expressed are of the author , in a
personal capacity and are intended as a generic guide only. Expert guidance, where required and user
discretion is highly recommended
1. Auditors Appointment and related aspects ........................................................................... 2
2. Audit Rotation.......................................................................................................................... 6
3. Restricted Services ................................................................................................................... 7
4. Audit Limit ............................................................................................................................. 11
5. Small Company ...................................................................................................................... 11
6. Deemed Public Companies ................................................................................................... 12
7. Uniform Financial Year and Accounting period ................................................................ 12
8. Financial Statements ............................................................................................................. 13
9. Consolidated Financial Statements ...................................................................................... 14
10. Engagement Letter ................................................................................................................ 16
11. Key managerial personnel .................................................................................................... 16
12. Audit Fees ............................................................................................................................... 17
13. Auditors Report ..................................................................................................................... 17
14. CARO ..................................................................................................................................... 21
15. Share Application Money pending allotment ..................................................................... 22
16. Loan from members and Directors Relatives obtained prior to April 1, 2014 ................ 23
17. Loans from Directors Relatives ............................................................................................ 24
18. Loans from members............................................................................................................. 25
19. Loans to Directors ................................................................................................................. 25
20. Advances received by the Company .................................................................................... 26
21. Depreciation ........................................................................................................................... 27
22. Managerial Remuneration .................................................................................................... 34
23. Deferred tax Adjustment ...................................................................................................... 35
24. AGM related .......................................................................................................................... 35
25. Private Limited Companies .................................................................................................. 35
26. Related Party Transactions .................................................................................................. 38
1. Auditors Appointment and related aspects
1. What are the critical aspects to be considered before accepting appointment as auditor
Parameter Act
Reference
Content
Education Sec 141(1) A Chartered Accountant shall only be an appointed as an auditor
of a Company
A firm can be appointed as an Auditor only if a majority of the
partners practicing in India are Chartered Accountants
A firm includes an LLP and can be appointed as an Auditor
Only the Chartered Accountants in the LLP can act and sign as
auditors. Based on the above, the LLP can be an auditor only if it
is manned in majority by Chartered Accountants
Tenure Sec 139 An auditor or an audit firm who have completed their maximum
tenure under Section 139 cannot be appointed as auditors
Retiring auditor Sec 139(9) Is not disqualified
Has not given his notice of unwillingness to be re-appointed
Special resolution has been passed at that meeting that some other
auditor has been appointed or the retiring auditor shall not be
reappointed
Other Services Sec 144 The Act prohibits auditors from rendering certain other services
such as Internal Audits, Accounting, Book keeping etc. Although
this section speaks of Auditors rendering other services, there is
also an inference that an auditor or a firm providing such other
services cannot be appointed as an auditor to perform both
functions
Categories of
Persons
Sec 141(3) Certain categories of persons / relatives cannot be appointed as
auditors as described in detail below
Category Sec
141(3)
Description Value limits
Entity Type Body corporate other than LLP as per the section cannot be an
auditor
None
Person being
the proposed
auditor is
An Officer or employee of the Company for which the audit
appointment is proposed
None
A Partner of an Officer or employee of the Company None
Is in employment of an Officer or employee of the Company
Is in full time employment elsewhere None
Person or partner of a firm holding appointment in more than 20
companies as the auditor
None
Has been convicted by a court of an offence involving fraud and a
period of ten years has not elapsed from the date of such conviction;
None
Any person whose subsidiary or associate company or any other form
of entity, is engaged as on the date of appointment in consulting and
specialised services as provided in section 144.
None
In Full time employment of a person or a partner of a firm holding
appointment as an auditor if such person or partner is as at the date of
such appointment or reappointment holding appointment as auditor of
more than 20 Companies
None
Category Sec
141(3)
Description Value limits
Convicted of an offence involving fraud and a period of ten years has
not elapsed from the date of such conviction
None
A person whose subsidiary or associate company or any other form of
entity is engaged on the date of appointment in consulting or
specialized services as provided in Sec 144
None
Person being
the proposed
auditor or his
relative or
partner
Holds security or interest in :
The Company-Holding- Subsidiary-Associate
Subsidiary of its holding company
The rule provides for corrective action to be initiated within 60 days
of such acquisition of interest
Not exceeding
Rs. 1 lakh.
Is Indebted to
The Company-Holding- Subsidiary-Associate
Subsidiary of its holding company
Rs 5 lakhs
Has provided a guarantee to or provided any security in
connection with the indebtedness of a third person to
The Company-Holding- Subsidiary-Associate
Subsidiary of its holding company
Rs 1 lakh
Person of firm
whether
directly or
indirectly has
business
relationship
with
The Company-Holding- Subsidiary-Associate
Subsidiary of its holding company
Note : Business relationship:- Any transaction entered into for a
commercial purpose excluding commercial transactions
In the nature of professional services permitted to be
rendered by an auditor or firm under the Companies Act or
the CA Act or rules and regulations
Which are in the ordinary course of business at Arms
Length Price
Eg:- Sale of products or services to the auditor as customer in the
ordinary course of business, by companies engaged in the business of
telecommunications, airlines, hospitals, hotels, etc.
A person
whose relative
Is a director OR Is in the employment of the company as a director or
key managerial personnel
2. As per the old Act, the Auditors were required to submit details of their appointment to MCA
for compliance with Sec 224(1) (B) limits. What is the present status
The auditor should be appointed in the AGM. The Company has to intimate the Company and the
registrar within 15 days of the meeting. Previously the auditor was required to intimate the RoC. This
information is now required to be filed by the Company in Form ADT - 1
3. Is there any requirement of Auditors Consent under the new Act 2013
Section 139 ( provisio to Sec 139(1) requires the following to be complied with before the appointment of
an auditor. And this carries a penalty for non-compliance, the auditors portion being Rs 25000 to Rs 5
lakhs ( Sec 147 (2) )
Provided further that before such appointment is made, the written consent of the auditor to such
appointment, and a certificate from him or it that the appointment, if made, shall be in accordance with the
conditions as may be prescribed, shall be obtained from the auditor:
Provided also that the certificate shall also indicate whether the auditor satisfies the criteria provided in
section 141
Provided also that the company shall inform the auditor concerned of his or its appointment, and also file a
notice of such appointment with the Registrar within fifteen days of the meeting in which the auditor is
appointed.
Coming to the aspect of the respect of the written consent and the certificate, the relevant rule for the
Certificate is as per Rule 4 of the Companies ( Audit and Auditors Rules ) 2014.
A certificate format requires the following.
o The auditor or firm is eligible for appointment and is not disqualified for appointment under the
Companies Act, 2013 (the Act), the Chartered Accountants Act, 1949 and the rules or regulations
made thereunder;
o The proposed appointment is as per the term provided under the Act.
o The proposed appointment is within the limits laid down by the Act under Clause (g) of Sub-section
(3) of Section 141of the Act.
o Confirmation that there are no proceedings against our firm or any partner of the firm with respect to
professional matters of conduct or that Or that the following proceedings against our firm or any
partner of the firm with respect to professional matters of conduct is true and correct
4. My client’s previous auditor does not want to continue as auditor for 2014-15. He has been
appointed in the AGM held in Aug 2014. What is the solution ? We are proposed to be
appointed as auditors
Casual
Vacancy Resignation :
Filled by the BoD within 30 days and also approved by the Company at a General
Meeting convened within 3 months of recommendation of the BoD. Holds office
till the conclusion of the next AGM
Other reasons : Filled by the BoD within 30 days. No EGM approval is required
5. If an auditor who has been appointed for a 5 year term has not been ratified in a subsequent
AGM will it be a casual vacancy to be filled by the BoD
The Act specifies a 5 year appointment. However if the ratification is not done, then the new auditor need
not be appointed by the BoD but can be appointed by the AGM. It need not be treated as a casual vacancy.
6. Should auditors of companies be compulsorily appointed for 5 years. My client does not come
under the category relevant for rotation.
Sec 139 of the Act states that the auditor of a Company shall be appointed for a five year term. The
reference to the first AGM can be construed as First AGM of the Company as well as First AGM under the
Act. Hence it appears that the AGM can appoint for five years and ratify every year. Hence, if you are
proposed as an auditor of a non-rotation type company, then you can be appointed for a 5 year term.
―Subject to the provisions of this Chapter, every company shall, at the first annual general meeting,
appoint an individual or a firm as an auditor who shall hold office from the conclusion of that meeting till
the conclusion of its sixth annual general meeting and thereafter till the conclusion of every sixth meeting
and the manner and procedure of selection of auditors by the members of the company at such meeting
shall be such as may be prescribed‖
7. My new client has failed to appoint the Statutory Auditor till date. They were incorporated on
Feb 15, 2015
Parameter Others
First Auditor
Appointed by the BoD within 30 days of registration
If the above is not done, The appointment to be done by members in an EGM to
be held within 90 days. Such auditor shall hold office until the conclusion of the
first AGM
Non compliance with the above may result in penalties as specified in Sec 147 of the Act
8. Mr Ram was the Managing Partner of Ram & Co Chartered Accountants who were the auditors
of a large listed company Best Wishes Limited. . He quit the firm and joined RR & Associates.
Are RR & Associates eligible to be appointed as auditors of Best Wishes Limited. What will the
position be if
Mr Ram was the signing partner in charge of the engagement
Mr Ram was “not” the signing partner in charge of the engagement
Reply :
There is an ambiguous position on this aspect as of date. The Act specifies as under Sec 139 (2 ) regarding
Commonality of partners between incoming and outgoing firm between the Act and the rules. Four
different scenarios emerge. The Act and rules have been elaborated below. This will need further
clarification
Sec 139
Proviso 2
On the date of appointment no audit firm having a common partner or partners
to the other audit firm, whose tenure has expired in a company immediately
preceding the financial year shall be appointed as auditor of the same company
for a period of five years.
Rule 6 (3)
(ii)(b)
if a partner , who is in charge of an audit firm and also certifies the financial
statements of the Company, retires from the said firm and joins another firm of
Chartered Accountants, such other firm shall also be ineligible to be appointed
for a period of five years
9. Can the Internal Auditor render other services
This is not specified in the Companies Act. The ICAI regulations need to be referred for this purpose. For
instance, there is a bar on Internal Auditor performing tax audits
10. Can the Internal and Statutory Auditor swap roles for rotation purposes
Sec 144 specifies the list of restricted services that a Statutory Auditor cannot perform. But does not
specify the time frame. It is obvious that a person who was the internal auditor for 2016-17 cannot be a
statutory auditor for the same year. Clarity may be needed whether one can do the internal audit for 2015-
16 and later be the statutory auditor for 2017-18
2. Audit Rotation
11. We have been the Statutory Auditors of XYZ Private Limited for 20 years now. Can we sign the
financial statements as auditors for YE March 31, 2015. Or should be pave way for another firm
on account of Audit rotation.
Although Sec 139(2) makes it mandatory for firms to be rotated, there is a three year time frame from
the date of notification of this section viz April 1, 2014
12. Does rotation apply to private limited companies
Rotation is applicable to the following classes of Companies. It applies to Private Companies, if as
below
Type of
company
Paid up share
capital
Public Borrowing from banks / FI’s OR
Public deposits
Listed
Companies
All All
Unlisted public
companies
Rs 10 Crore or
more OR Rs 50 Crores or more
Private limited
companies
Rs 20 Crore or
more
OR Rs 50 Crores or more
Rotation of Auditors will not apply to the following classes of Companies
One Person Companies
Small Companies
13. As of what date should the above limits be reckoned
The Act has not provided the date – end of financial year or audited financials or any time during the year.
Hence a conservative interpretation will be necessary. The exact wording of the rules is as under
For the purposes of sub-section (2) of section 139, the 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 rupees ten crore or more;
(b) all private limited companies having paid up share capital of rupees twenty crore 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 rupees
fifty crores or more.
14. For calculating the five year term or the ten year term, do we have to include the past years
when we have been the auditors of the Company or is it 5 / 10 more years from the date of
commencement of the Act
The past years for which an individual / firm have served as auditors needs to be included for the purpose
of computation of tenure restrictions
15. My client has a loan of Rs 55 crores this year but is proposed to be repaid next year. Will they
move out of the rotation threshold next year
As per a simple reading of the Act , they will not be subject to rotation and if the previous auditor has
retired, he can be reappointed although they may have not taken a 5 year break. This is one possible
interpretation
16. Is a compulsory break of 5 years needed.
The rules read as under
(a) a break in the term for a continuous period of five years shall be considered as fulfilling the
requirement of rotation;
17. A Company has Joint Auditors for the last 35 years. Should they both not retire in the same
year
The rules provide as under and provide for an “option” so that both auditors do not complete their
term in the same year
Where a company has appointed two or more individuals or firms or a combination thereof as joint
auditors, the company may follow the rotation of auditors in such a manner that both or all of the joint
auditors, as the case may be, do not complete their term in the same year Where a company has
appointed two or more individuals or firms or a combination thereof as joint auditors, the company
may follow the
rotation of auditors in such a manner that both or all of the joint auditors, as the case may be, do not
complete their term in the same year
18. Can a Company extend one auditor beyond the permitted period so as to provide for the Joint
Auditors not retiring in the same year
The Act or the Rules do not provide for any relaxation in terms for Joint Auditors. One of the auditors
may be encouraged to retire, say a year ahead of the other
3. Restricted Services
19. Our firm also renders accounting services for a client for the year 2014-15. Can we be the
auditor for the year 2014-15.
According to Sec. 144 an auditor appointed under this Act is bound by the Board of directors or the Audit
committee to provide only those services as approved by them. Accordingly, a Statutory auditor cannot
render directly or indirectly to the company or the holding or the subsidiary company, the following
services
a. Accounting and book keeping services
b. Internal audit
c. Design and implementation of any financial system
d. Actuarial services
e. Investment advisory services
f. Investment banking services
g. Rendering of outsourced financial services
h. Management services and
i. Any other kind of services as may be prescribed.
This section was notified on April 1, 2014 and provides for that if the auditor is providing any such
service, he shall comply within one year from the date of commencement of this Act. One can take the
view that the Act provides for a one year transition for this section, an auditor may not be restricted for
the year 2014-15. The transitionary provision may have been introduced to enable auditors to complete
their existing commitments and engagements in other capacities. Further Clarification may needed on
this aspect. However certain services, which directly impair independence ( such as accounting
services ) are restricted under the code of ethics and they should not be performed
20. What is the process to be followed before acceptance
The IESBA Code of Ethics 2015 provides a conceptual framework approach to independence, which is
required to be applied by professional accountants to
(a) Identify threats to independence,
(b) Evaluate the significance of the threats identified, and
(c) Apply safeguards, when necessary, to eliminate the threats or reduce them to an acceptable level
21. What are the guiding principles to determine if an engagement is a conflicting one or not
Threats to an auditors independence need to be evaluated. These threats as per IESBA are
Advocacy threat,
Self-interest threat and
Self-review threat
Familiarity threat
Intimidation Threat
22. What exactly are the above threats ?
IESBA describes these threats as under
Advocacy threat occurs if the Auditor promotes a position or an opinion to the point that the Auditor's
subsequent objectivity is compromised. In other words, Advocacy threat occurs when the auditor is being
asked to promote or represent their client in some way
Self-review threat is when the auditor has to re-evaluate work completed by himself.
Self-interest threat is the threat that a financial or other interest will inappropriately influence the
professional accountant‘s judgment or behavior
Familiarity threat ─ the threat that due to a long or close relationship with a client or employer, a
professional accountant will be too sympathetic to their interests or too accepting of their work
Intimidation threat – the threat that a professional accountant will be deterred from acting objectively
because of actual or perceived pressures, including attempts to exercise undue influence over the
professional accountant
23. What are the cases where one should not accept the engagement ?
As per IESBA, engagements which cause the following actions should not be accepted as the threats would
not be at a manageable level
Authorizing, executing or consummating a transaction, or otherwise exercising authority on behalf
of the assurance client, or having the authority to do so.
Determining which recommendation of the firm should be implemented.
Reporting, in a management role, to those charged with governance.
24. What is the key challenge in determining these threats
The key challenge is mostly in the definition of management services. These are scope driven and hence
may result in conflict as the Act does not specifically define Management services
25. Is it permissible to do VAT audits, Certifications etc for the Company for which we are auditors.
Is it restricted under Section 144 of the Act
No, there are no restrictions on rendering attest services such as Tax audits, VAT audits, Transfer Pricing
Audits and various certifications that may be required such as Royalty, Transfer pricing etc
26. As a Statutory Auditor of a Company, can I also provide an opinion on a certain tax matter
where I advise a client that a financial provision is not necessary. Is there a conflict of interest
In this case, the client decides to carry out / not carry out a financial entry based on your opinion. Hence
the ―work‖ is performed by the auditor. It may, then, not be appropriate for the auditor to express an
opinion on the subject matter which is a part of the financial statements. This could be construed as
impacting independence especially if the value is material vis a vis the financial statements
27. What does “directly or indirectly” mean ?
For the purposes of this sub-section, the term ―directly or indirectly‖ shall include rendering of services by
the auditor,—
(i) in case of auditor being an individual, either himself or through his relative or any other person
connected or associated with such individual or through any other entity, whatsoever, in which such
individual has significant influence or control, or whose name or trade mark or brand is used by such
individual;
(ii) in case of auditor being a firm, either itself or through any of its partners or through its parent,
subsidiary or associate entity or through any other entity, whatsoever, in which the firm or any partner of
the firm has significant influence or control, or whose name or trade mark or brand is used by the firm or
any of its partners.
28. How does one interpret management services ?
No there is no definition of the term management services under this Act . But reference can be drawn
from ICAI as under. The ICAI is in the process of bringing out a detailed guidance on this aspect
As per the Guidelines for Practice in Corporate Form which came into force w.e.f. 1.10.2006, Management
Consultancy & Other Services means ‗Management Consultancy & Other Services‘ permitted by the
Council in pursuance to Section 2(2)(iv) of the Chartered Accountant Act, 1949. The definition of the
expression ―Management Consultancy and Other Services‖ as stated at pages 8-10 of the code of Ethics,
2005 edition as under:
The expression ―Management Consultancy and other Services‖ shall not include the function of statutory
or periodical audit, tax (both direct taxes and indirect taxes) representation or advice concerning tax
matters or acting as liquidator, trustee, executor, administrator, arbitrator or receiver, but shall include the
following:
(i) Financial management planning and financial policy determination
(ii) Capital structure planning and advice regarding raising finance.
(iii) Working Capital management
(iv) Preparing project reports and feasibility studies.
(v) Preparing cash budget, cash flow statements, profitability statements, statements of sources and
application of funds, etc.
(vi) Budgeting include Capital Budgets and revenue budgets.
(vii) Inventory management, material handling and storage.
(viii) Market research and demand studies.
(ix) Price-fixation and other management decision making.
(x) Management accounting systems, cost control and value analysis.
(xi) Control methods and management information and reporting.
(xii) Personnel recruitment and selection.
(xiii) Setting up executive incentive plans, wage incentive plans, etc.
(xiv) Management and operational audits.
(xv) Valuation of shares and business and advice regarding amalgamation,merger and acquisition.
(xvi) Business policy, corporate planning, organisation development, growth and diversification.
(xvii) Organisation structure and behavior, development of human resources including design and conduct
of training programmes, work study, job description, job evaluation and evaluation of workloads.
(xviii) Systems analysis and design, and computer related services including selection of hardware and
development of software in all areas of services which can otherwise be rendered by a Chartered
Accountant in practice and also to carry out any other professional services relating to EDP.
(xix) Acting as advisor or consultant to an issue, including such matters as :-
(a) Drafting of prospectus and memorandum containing salient features of prospectus. Drafting and filing
of listing agreement and completing formalities with stock exchanges, Registrar of companies and SEBI.
(b) Preparation of publicity budget, advice regarding arrangements for selection of (i) ad-media, (ii) centres
for holding conferences of brokers, investors, etc., (iii) bankers to issue, (iv) collection centres, (v) brokers
to issue, (vi) underwriters and the underwriting agreement, distribution of publicity and issue material
including application form, prospectus and brochure and deciding on the quantum of issue material(In
doing so, the relevant provisions of the code of Ethics must be kept in mind)
(c) Advice regarding selection of various agencies connected with issue, namely Registrars to issue,
printers and advertising agencies.
(d) Advice on the post issue activities, e.g., follow up steps which include listing of instruments and
dispatch of certificates and refunds, with the various agencies connected with the work.
Explanation: For removal of doubts, it is hereby clarified that the activities of broking, underwriting and
portfolio management are not permitted
(xx) Investment counseling in respect of securities [as defined in the Securities Contracts (Regulation) Act,
1956 and other financial instruments.] (In doing so, the relevant provisions of the Code of
Ethics must be kept in mind)
(xxi) Acting as registrar to an issue and for transfer of shares/other securities. (In doing so, the relevant
provisions of the Code of Ethics must be kept in mind)
(xxii) Quality Audit
(xxiii) Environmental Audit
(xxiv) Energy Audit
(xxv) Acting as Recovery Consultant in the Banking Sector.
(xxvi) Insurance Financial Advisory Services under the Insurance Regulatory & Development Authority
Act, 1999, including Insurance Brokerage.
29. How does one evaluate a conflict situation in case of management services
Most management services are scope driven, these engagements should be ticked off against the threats
mentioned above before such engagements are accepted
4. Audit Limit
30. The CA 2013 Act specifies a maximum limit of 20 Companies. Does this include Private
Companies
There is a notification ( under Sec 462 ) dated 05 Jun 2015 exempting Small, OPC and Dormant companies
and Private Companies with less than paid up share capital of Rs 100 crores
31. What about Small, OPC , Dormant companies
Small, OPC and Dormant companies are not included in the limits
32. Is the limit at a firm level or partner level
The limits are at a per partner level
5. Small Company
33. What is the relevance of Small Company to an auditor
As regards an auditor, two main aspects are relevant – No rotation and no need to prepare cash flow
statements.
2(85) defines a small company as a company other than a public company,
(i)paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be
AND
(ii) turnover of which as per its last profit and loss account does not exceed 2 crore rupees or such
higher amount as may be prescribed which shall not be more than twenty crore rupees:
Provided that nothing in this clause shall apply to—
i. a holding company or a subsidiary company;
ii. a company registered under section 8; or
iii. a company or body corporate governed by any special Act .
Note the word “AND” which implies that a private company fulfilling both of the conditions i.e turnover
less than Rs. 2 crores and paid up capital less than Rs. 50 lacs will ONLY be considered as small company.
34. A Pvt. Ltd. Company has a Turnover of Rs. 5 Crore and paid up Capital of Rs. 30 Lac on
31.03.2014. Is it a Small Company for the purposes of the Act
The Company is a SMALL COMPANY upto 13th February, 2015 and not a SMALL COMPANY w.e.f.
13th February, 2015. The MCA Removal of Difficulty Order dated: 13th February, 2015 amended the
―or‖ condition to ―and‖ thereby restricting concept of Small Companies
6. Deemed Public Companies
35. My client is a private company XYZ Private Limited and is a wholly owned subsidiary of ABC
Limited which is a public Company. Is XYZ to be considered and treated as a public or a
Private Company. What precautions should I take in this regard
Section 2 (71 ) of the new Act defines a Public Company as ―public company‖ means a company which—
(a) is not a private company;
(b) has a minimum paid-up share capital of five lakh rupees or such higher paid-up capital, as may be
prescribed:
Provided that a company which is a subsidiary of a company, not being a private company, shall be
deemed to be public company for the purposes of this Act even where such subsidiary company
continues to be a private company in its articles
Several sections of the new Act depend on the type of the company as Private or Public and also on the
thresholds of Share Capital, Loans, Deposits, Turnover, Profits etc. Further, certain sections are exempted
and proposed to be exempted for private limited companies. While determining the applicability or
otherwise of the above provisions, care needs to be taken to examine if this client is to be treated as a
public company and not as a private Company. Let me illustrate this with some examples
Case 1 : For instance, Sec 203 of the Act specifies the compulsory appointment of KMP‘s for listed
Companies and public companies with paid up share capital of rupees ten crores or above. For the purpose
of this section, the client would be a public company and would have to comply
Case 2 : The June 24 , 2014 draft notification proposes to exempt private companies from the limit of 20
companies. This client cannot be considered as an exempted case as it is deemed to be a public company
Case 3 : In the below table if a Private Company is a subsidiary of a public company and has more than Rs
10 Crore paid up share capital then rotation will apply ( it will be treated as an unlisted public company )
Type of
company
Paid up share
capital
Public Borrowing from banks / FI’s OR
Public deposits
Listed
Companies
All All
Unlisted public
companies
Rs 10 Crore or
more OR Rs 50 Crores or more
Private limited
companies
Rs 20 Crore or
more
OR Rs 50 Crores or more
7. Uniform Financial Year and Accounting period
36. My client follows an accounting year of Jan – Dec. Is there any issue in this
Sec 2(41) prescribes a uniform Accounting year as April to March. If no alignment is proposed then the
company has to make an application to the Tribunal. The only reason can be for the purpose of
consolidation with a holding or subsidiary abroad.
However, this section provides for a transitionary time frame of 2 years and hence may not be critical for
the year ended March 31, 2015 .This section was notified wef April 1, 2014
37. A client does not want to close his financial period as of March 31, 2015. They would like to
extend to 15 months and close on 30 Jun 2015. Is this allowed. The earlier Act had permitted the
same
Section 2 (41) ―financial year‖, in relation to any company or body corporate, means the period ending on
the 31st day of March every year, and where it has been incorporated on or after the 1st day of January of a
year, the period ending on the 31st day of March of the following year, in respect whereof financial
statement of the company or body corporate is made up:
Provided that on an application made by a company or body corporate, which is a holding company or a
subsidiary of a company incorporated outside India and is required to follow a different financial year for
consolidation of its accounts outside India, the Tribunal may, if it is satisfied, allow any period as its
financial year, whether or not that period is a year:
Provided further that a company or body corporate, existing on the commencement of this Act, shall,
within a period of two years from such commencement, align its financial year as per the provisions of this
clause;
Section 210(4) of the 1956 Act had provided for extending the period upto 15 months at the discretion of
the Company and upto 18 months with the consent of the registrar. This is no longer codified in the New
Act and stands withdrawn
38. Sec 2 (41) does not specify any penalty for non compliance. This is true of most definition
sections under Section 2. Why would it be a concern
Sec 450 is a residual clause for penalties if no penalties are specified under the sections
If a company or any officer of a company or any other person contravenes any of the provisions of
this Act or the rules made thereunder, or any condition, limitation or restriction subject to which any
approval, sanction, consent, confirmation, recognition, direction or exemption in relation to any matter has
been accorded, given or granted, and for which no penalty or punishment is provided elsewhere in this
Act,
the company and every officer of the company who is in default or such other person shall be punishable
with fine which may extend to
ten thousand rupees,
and where the contravention is continuing one, with a further fine which may extend to one
thousand rupees for every day after the first during which the contravention continues.
8. Financial Statements
39. What are financial statements
Financial statement‖ in relation to a company, includes-
i) a balance sheet as at the end of the financial year
ii) a profit and loss account, or in the case of a company carrying on any activity not for profit, an
income and expenditure account for the financial year
iii) cash flow statement for the financial year
iv) a statement of changes in equity, if applicable; and
v) any explanatory note annexure to, or forming part of any document referred to in sub-clause (i)
to sub-clause(iv)
Cash flow is not mandatory for One Person Company, Small Company and Dormant Company
40. Whether a private Company having paid-up share capital 45 Lakhs and turnover of Rs. 25
Crores as per last audited balance sheet will be treated as small company or not? Do we need to
prepare a cash flow statement
Yes a cash flow statement need be prepared as this company will be not be treated as small company.
41. Who should sign financial statements under the Companies Act, 2013
Ans. As per section 134(1), Financial Statement is required to be signed by:
- the chairperson of the company where he is authorised by the Board or by two directors out of
which one shall be managing director;
- the Chief Executive Officer, if he is a director in the company,
- the Chief Financial Officer; and
- the company secretary of the company, wherever they are appointed,
In the case of a One Person Company, the Financial Statement is required to be signed only by one
director.
This means that where there are KMP’s, the financial statements shall be signed by KMP’s also. In
other cases, they shall be signed by the Chairman ( if authorized by the BoD ) or by a minimum of 2
directors
42. What is the format for the preparation of Financial Statements
Financial Statements shall be prepared in Schedule III format
9. Consolidated Financial Statements
43. What is Consolidated Financial Statements
Sec 129(3) Where a company has one or more subsidiaries, it shall, in addition to financial statements
provided under sub-section (2), prepare a consolidated financial statement of the company and of all the
subsidiaries in the same form and manner as that of its own which shall also be laid before the annual
general meeting of the company along with the laying of its financial statement under sub-section (2):
Provided that the company shall also attach along with its financial statement, a separate statement
containing the salient features of the financial statement of its subsidiary or subsidiaries in such form as
may be prescribed:
Provided further that the Central Government may provide for the consolidation of accounts of companies
in such manner as may be prescribed.
Explanation.—For the purposes of this sub-section, the word ―subsidiary‖ shall include associate company
and joint venture
44. Should private companies also prepare CFS
Yes, all companies having one or more subsidiaries shall prepare CFS. For the purposes of this sub-
section, the word ―subsidiary‖ shall include associate company and joint venture
45. What is an Associate ?
Sec 2(6) of the Act defines an Associate as under
―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
Significant Influence- It means control of at least twenty percent of total share capital, or of business
decisions under an agreement.
46. What is a Subsidiary
Sec 2 (87) defines a Subsidiary company” or subsidiary, in relation to any other company (i.e.; holding
company) means a company in which the holding company-
i) Controls the composition of the board of directors or
ii) Exercises or controls more than one-half of the total share capital either at its own or together
with one or more of its subsidiary companies
Further, such class or classes of holding companies as may be prescribed shall not have layers
of subsidiaries beyond such numbers as may be prescribed.
Explanation-
a. A company shall be deemed to be a subsidiary company of the holding company even if
the control referred to in sub-clause (i) or sub-clause(ii) is of another subsidiary company
of the holding company
b. The composition of a company‘s Board of directors shall be deemed to be controlled by
another company by exercise of some power exercisable by it at its discretion can appoint
or remove all or majority of the directors
c. The expression company includes any body corporate
―layer‖ in relation to a holding company means its subsidiary or subsidiaries
10. Engagement Letter
47. What is the format of an engagement letter to be issued
SA 700 - The financial statements will have to comply with the principles enunciated in SA 700,Forming
An Opinion and Reporting on Financial Statements. However, the format of the auditor's report will have
to be suitably changed to meet the reporting requirements of section 143(2) and (3) of the said Act and the
relevant Rules. The revised format of the engagement letter as per ICAI now available.
http://www.icai.org/new_post.html?post_id=11197&c_id=219
As IFC is applicable for the present period ending March 31, 2016, the second format should be used
11. Key managerial personnel
48. Should my client necessarily appoint a KMP
Sec 2(51) of the Act specifies a KMP as a CEO or MD, Company Secretary, Whole Time Director, CFO
and such other officer as may be prescribed
Every listed company and every other public company having a paid-up share capital of Rs 10 crore
rupees or more shall have whole-time key managerial personnel. (Rule 8 of Appointment and
remuneration of managerial personnel rules)
Every whole-time key managerial personnel of a company shall be appointed by means of a Board
resolution containing the terms and conditions of the appointment including the remuneration. (Sec
203 (2))
If the office of any whole-time key managerial personnel is vacated, the resulting vacancy shall be
filled-up by the Board at a meeting of the Board within a period of 6 months from the date of such
vacancy.(Sec 203(4))
Company to file a return of appointment of KMP within 60 days of such appointment in form as
prescribed with the registrar.(Rule 3)
49. My client is a public Company with paid up share capital of Rs 20 crores. But they have been
incurring heavy losses and don’t want to appoint a KMP . What is the implication
Penalty for contravention of Sec 203
Company KMP in default
Fine – Rs 1 to 5 lakhs
1. Fine up to Rs 50,000
2. Continuing contravention – Rs 1000 per day
after the first day of contravention.
12. Audit Fees
50. What is the key change in the provisions relating to audit fees
Auditors‘ remuneration under the new Act includes facility extended to the auditor. A practical example
would be in respect of guest house owned or leased by the company and provided for the auditors. In this
case, the cost of such accommodation has to be estimated and disclosed in the financial statements. This
would necessitate all costs incurred on auditors to be recorded in a separate ledger to enable accurate
disclosure
13. Auditors Report
51. What are the key changes in the 2013 Act with reference to Auditors report on the Financial
Statements
The key aspects are summarized as under in a simple tabular format. Consequent to these changes, the
format of the report as required under SA 700 needs to be modified
S
No
Contents Old Law
(a) Information and explanations necessary
for the audit have been obtained and
effects of non-obtaining / providing of
such information on the financial
statements.
Sec 227(3)(a) does not require the auditor to
specify the effects of not receiving such
information relevant for the audit
(b) Proper maintenance of Books of accounts
and Receipt of adequate returns from the
Branches not visited by him.
Sec 227(3)(b) – No change
(c) Whether the Branch auditor‘s report (not
the company auditor) has been sent to the
company auditor. The manner of dealing
with the branch audit report in the
company auditor‘s report
Sec 227(3)(bb) – No change
S
No
Contents Old Law
(d) Agreement of the company‘s balance sheet
and the profit and loss statement with the
books of accounts and returns
Sec 227(3)(c) – No change
(e)
Compliance of financial statements with
accounting standards
Sec 227(3)(d) – No change
(f) Observations or comments of the auditors
which have adverse impact on the
functioning of the company.
New Law does not specify the use of thick
type or italics for such adverse comments
Sec 227(3)(e) – Use of thick type or in italics for
the adverse comments.
(g) Disqualification of director for
appointment (Sec 164(2))
Sec 227(3)(f) – No change
(h) Qualification, reservation or adverse
remark on maintenance of accounts
Not in the Old Act
(i) Adequacy and operating effectiveness of
internal financial controls Not in the Old Act, not applicable for financial
statements for year ended March 31, 2015
(j) Other matters including
1. Disclosure of impact of pending
litigations on the financial position.
2. Creation of provisions on
foreseeable material losses on long term
contracts.
3. Delay in transferring amounts
such as the Investor Education and the
protection Fund
4. CARO ( notified recently )
Not in the old Act, Rule 11 of Companies
(Audit and Auditors Rules 2014)
CARO modified in the latest Act
52. What is the format of the Audit report under CA 2013
53. Sec 143(3)(f) which states that “The auditor’s report shall also state …“the observations or
comments of the auditors on financial transactions or matters which have any adverse effect on
the functioning of the company”. In the above circumstance, should this para find a mention in
the audit report although there is no such adverse finding
No the audit report format need not include a para unless there is an adverse finding on the matter in which
case the same shall be specified. Please await the revision to SA700 – Audit reports to be issued by the
ICAI.
54. What is the recent change on Fraud Reporting ?
Fraud reporting under Section 134(12)
The MCA has announced new rules on fraud reporting under Section 143(12). This is a welcome move
and the salient features are as under
Procedure for fraud > Rs 1 crore
Procedure for fraud < Rs 1 crore
Procedure for fraud > Rs 1 crore ( individually )
(1) If an auditor of a company, in the course of the performance of his duties as statutory auditor, has
reason to believe that an offence of fraud, which involves or is expected to involve individually an amount
of rupees one crore or above, is being or has been committed against the company by its officers or
employees, the auditor shall report the matter to the Central Government.
(2) The auditor shall report the matter to the Central Government as under:-
(a) the auditor shall report the matter to the Board or the Audit Committee, as the case may be,
immediately but not later than two days of his knowledge of the fraud, seeking their reply or
observations within forty-five days;
(b) on receipt of such reply or observations, the auditor shall forward his report and the reply or
observations of the Board or the Audit Committee along with his comments (on such reply or
observations of the Board or the Audit Committee) to the Central Government within fifteen days
from the date of receipt of such reply or observations;
(c) in case the auditor fails to get any reply or observations from the Board or the Audit Committee
within the stipulated period of forty-five days, he shall forward his report to the Central Government
along with a note containing the details of his report that was earlier forwarded to the Board or the
Audit Committee for which he has not received any reply or observations;
(d) the report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed cover by
Registered Post with Acknowledgement Due or by Speed Post followed by an e-mail in confirmation
of the same;
(e) the report shall be on the letter-head of the auditor containing postal address, e-mail address and
contact telephone number or mobile number and be signed by the auditor with his seal and shall
indicate his Membership Number; and
(f) the report shall be in the form of a statement as specified in Form ADT-4.
Procedure for fraud < Rs 1 crore
(3) In case of a fraud involving lesser than the amount specified in sub-rule (1), the auditor shall report the
matter to Audit Committee constituted under section 177 or to the Board immediately but not later than
two days of his knowledge of the fraud and he shall report the matter specifying the following:-
(a) Nature of Fraud with description;
(b) Approximate amount involved; and
(c) Parties involved.
(4) The following details of each of the fraud reported to the Audit Committee or the Board under sub-rule
(3) during the year shall be disclosed in the Board‘s Report:-
(a) Nature of Fraud with description;
(b) Approximate Amount involved;
(c) Parties involved, if remedial action not taken; and
(d) Remedial actions taken.
(5) The provision of this rule shall also apply, mutatis mutandis, to a Cost Auditor and a Secretarial
Auditor during the performance of his duties under section 148 and section 204 respectively
55. What is the new reporting requirement on Adequacy and operating effectiveness of internal
financial controls
The Auditors in their audit report are now required to comment on the Adequacy and operating
effectiveness of internal financial controls. In this context, the following aspects merit consideration.
This is mandatory, presently, for accounting periods beginning on or after April 1, 2015
A. The Companies Act 2013 has mandated three significant requirements in relation to Internal
Financial Controls over Financial Reporting.
a. One, a requirement to state in the Board report under Section 134(5) that the directors, in the case
of a listed company, had laid down internal financial controls to be followed by the company and that such
internal financial controls are adequate and were operating effectively.
b. Two, Rule 8(5)(viii) of the Companies ( Accounts ) Rules 2014 requires the Board of Directors
report of all Companies to state the details in respect of the adequacy of internal financial controls with
references to the financial statements
c. Three, a requirement under Section 143(3) to comment in the Independent Auditors report on
whether the company has adequate internal financial controls system in place and the operating
effectiveness of such controls
56. What is internal financial Controls
The term ―internal financial controls‖ has been defined as the means the policies and procedures adopted
by the company for ensuring the following. And it is the auditors responsibility that every account and
component and disclosure in the financial statements that they audit comply with the following elements of
internal financial control
the orderly and efficient conduct of its business,
including adherence to company‘s policies,
the safeguarding of its assets,
the prevention and detection of frauds and errors,
the accuracy and completeness of the accounting records, and
the timely preparation of reliable financial information
for example, if you consider the component of fixed assets, the auditor is expected to ensure that the above
controls exist over all the processes involved in fixed assets namely additions, deletions, impairment,
depreciation, register maintenance, physical verification etc. This is the Indian SOX. This will require a
completely different approach to the statutory audit engagements that we do.
57. Section 143 ( 3 ) (i) (Powers of Auditors and auditing standards ) requires the Auditor to state in
their report whether the company has adequate internal financial controls system in place and
the operating effectiveness of such controls. Is this required for financial statements for the year
ended March 31, 2015 which are signed by Auditors, lets say in Jun 2016.
No, this is not required for the year ended March 31, 2015 as per the below mentioned notification issued
on October 14, 2014. As of now, it is required for year ended March 31, 2016.
In the Companies (Audit and Auditors) Rules, 2014, after rule 10, the following shall be inserted,
namely:—
―10A. For the purposes of clause (i) of sub-section (3) of section 143, for the financial years commencing
on or after 1st April, 2015, the report of the auditor shall state about existence of adequate internal financial
controls system and its operating effectiveness
Provided that auditor of a company may voluntarily include the statement referred to in this rule for the
financial year commencing on or after 1st April, 2014 and ending on or before 31st March, 2015.‖
58. What are the specific aspects for IFCOFR to be considered
The AASB has provided a Guidance note on the subject and this contains
A Separate report format
An engagement letter format
A Representation letter format
The Control framework
14. CARO
59. What are the companies to which CARO applies and what is the change on the applicability
clause vs CARO 2015
a. CARO 2016 applies to all Companies except those which are exempted.
b. The order also applies to foreign companies which are required to get their books audited
c. CARO does not apply to
Small Companies ( same as 2015 CARO )
One Person Companies ( Same )
Banking Companies as per the Banking Regulation Act 1949 ( Same )
Insurance Companies as defined by the Insurance Act 1938 ( Same )
Section 8 Companies ( and erstwhile Sec 25 Companies ) ( Same )
A private limited company which satisfies ALL the below criteria
Not a subsidiary or a holding company of a Public Company ( New )
Paid up Capital and reserves does not exceed Rs 1 Crore as at Balance Sheet date (
Rs 50 lakhs in 2015 CARO )
Borrowings from banks and financial institutions does not exceed Rs 1 crore at any
time during the financial year ( Rs 25 lakhs earlier )
Total revenue as per Schedule III does not exceed Rs 10 Crores during the
financial year. ( Rs 5 Crores earlier )
60. Does CARO apply to Consolidated Financial Statements
CARO 2016 does not apply to Consolidated Financial Statements
61. Should the auditor report on all clauses or only where there is a discrepancy vs the CARO
requirement
The auditor is required to report on all clauses as per the wordings of the order ―- Every report
made by the auditor under section 143 of the Companies Act, 2013 on the accounts of every
company audited by him, to which this Order applies, for the financial years commencing on or
after 1st April, 2015, shall in addition, contain the matters specified in paragraphs 3 and 4,as may
be applicable‖. Paras 3 and 4 of the Order contain the various clauses and requirements that the
auditor is required to comment on
62. What is Paid Up share capital
d. Paid up share capital includes Paid up or amount received as paid up
e. Both Equity and preference capital are to be considered
f. Share application money should not be included
63. What is Borrowings ?
g. Borrowings from banks and financial institutions are to be considered
h. Short term and Long term borrowings are to be included
i. Secured and unsecured loans are to be included
j. Non fund limits are to be included only to the extent that they are crystallised and
payable or invoked ( bank guarantees )
k. The amount of Rs 1 crore needs to be reckoned at any time during the financial
year
l. Financial institutions are as defined in the Companies Act – Sec 2 (39) as ―includes
a scheduled bank, and any other financial institution defined or notified under the
Reserve Bank of India Act, 1934 (2 of 1934)‖. Accordingly, NBFC‘s, Private
banks, Hire purchase Companies, Leasing companies, Chit companies etc.
64. What is Revenue ?
m. Revenue as per Schedule III is to be considered as per the financial statements
n. Will include revenue from discontinued operations as per the order
o. Revenue limit of Rs 10 crore is to be ascertained at any point in time during the
year
15. Share Application Money pending allotment
65. My client has share application money of Rs 5 crores which is pending allotment for over 500
days as of March 31, 2016?. What should we do ?
The rule 2 (c) (vii) provides that any share application money received and not allotted within 60 days and
not refunded within 75 days will be treated as a deposit. It is pertinent to note that any adjustment of the
amount for any other purpose shall not be treated as refund
66. Any dispensation for share application money received before the commencement of the Act
Yes, there is a specific dispensation under The Companies (Acceptance of Deposits) Amendment Rules,
2015 dated March 31, 2015 which reads as under :
Provided that unless otherwise required under the Companies Act, 1955 (l of 1956) or the Securities and
Exchange Board of lndia Act, 1992 (15 of 1992) or rules or regulations made thereunder to allot
sharestock, bond, or debenture within a specific period,
if a company had received any amount by way of subscriptions to any shares, stock, bonds or debentures
before lst April. 2014 and disclosed it in the balance sheet for the financial year. ending on or before the 31
March, 2014 against which the allotment is pending on the 3lst March, 2015, the company shall, by the lst
June 2015, either refund such amounts to the persons from whom these were received or allot shares, stock,
bonds or debentures or comply with these rules. Hence the time period for such application money is
lapsed as of now
16. Loan from members and Directors Relatives obtained prior to April 1, 2014
67. Our client, a Private limited company, has obtained a loan from a directors relative. Should this
be repaid. Is this a deposit. How should we handle this for YE March 31, 2015
The previous Act had excluded loan from a director‘s relative from the purview of deposit. This is no
longer so under the new Act. However the MCA has issued a General Circular 5 / 2015 on March 30,
2015 the MCA has finally clarified that amounts received by Private Companies ( prior to April 1, 2014 )
from Members, Directors or their relatives prior received prior to April 1, 2014 need
not be treated as deposits
provided that the same is disclosed in the notes to its financial statement for the financial
year commencing on or after 1st April, 2014 the figure of such amounts and the accounting head in
which such amounts have been shown in the financial statement
However amounts received after that date or renewed after that date of April 1, 2014 will be treated as per
the Companies Act 2013 provisions
The text of the circular is as under : General Circular No. O5/2O15
1.Stakeholders have sought clarifications as to whether amounts received by private companies from their
members, directors or their relatives prior to 1st April, 2014 shall be considered as deposits under the
Companies Act, 2013 as such amounts were not treated as 'deposits' under section 58A of the Companies
Act, 1956 and rules made thereunder.
2.The matter has been examined in consultation with RBI and it is clarified that such amounts received by
private companies prior to 01st April, 2Ol4 shall not be treated as 'deposits' under the Companies Act,2013
and Companies (Acceptance of Deposits) Rules, 2014 subject to the condition that relevant private
company shall disclose, in the notes to its financial statement for the financial year commencing on or after
1st April, 2014 the figure of such amounts and the accounting head in which such amounts have been
shown in the financial statement.
3. Any renewal or acceptance of fresh deposits on or after 1st April, 2014 shall, however, be in accordance
with the provisions of Companies Act, 2013 and rules made thereunder.
4.This issues with the approval of the competent authority.
Rule -2013 Parameter – deposit exclusion – 2013 1956 Act
2(c)(viii) Any amount received from a director of a
company ( Director at the time of receipt)
Provided the director furnishes a
declaration in writing that the amount is
not being given out of funds acquired by
him or accepting loans or deposits from
others.
any amount received by a private company
from a person who, at the time
of the receipt of the amount, was a director,
relative of director or
member: “Relatives and members
dropped”
68. In respect of the above circular and the exemption, the definition of relatives has changed.
Should we take this as relatives under the Old Act or under the New Act
The circular is not clear on this aspect. However it would be logical to assume that this is relatives as
under the earlier Act as the definition is larger. This is an interpretation which is beneficial to the corporate
especially as it speaks about amounts received and outstanding as at the date of commencement of the new
Act
17. Loans from Directors Relatives
69. What are the Key changes with reference to loans from directors relatives
Phase 1 –
Companies
Act 1956
Loans from directors relatives exempt for all companies and not treated as deposits
Phase 2 –
Companies
Act 2013
Loans from directors relatives was not exempt and were required to be treated as deposits
Phase 3 -
General
Circular
No.
O5/2O15
30-Mar-15
1.Stakeholders have sought clarifications as to whether amounts received by private
companies from their members, directors or their relatives prior to 1st April, 2014 shall be
considered as deposits under the Companies Act, 2013 as such amounts were not treated
as 'deposits' under section 58A of the Companies Act, 1956 and rules made thereunder.
2.The matter has been examined in consultation with RBI and it is clarified that such
amounts received by private companies prior to 01st April, 2Ol4 shall not be treated as
'deposits' under the Companies Act,2013 and Companies (Acceptance of Deposits) Rules,
2014 subject to the condition that relevant private company shall disclose, in the notes to
its financial statement for the financial year commencing on or after 1st April, 2014 the
figure of such amounts and the accounting head in which such amounts have been shown
in the financial statement.
Any renewal or acceptance of fresh deposits on or after 1st April, 2014 shall, however, be
in accordance with the provisions of Companies Act, 2013 and rules made thereunder
Phase 4 –
Deposit
Amendment
rules
15 Sep
2015
Loans from directors relatives of private company not to be treated as a deposit provided
that there is a declaration that it is not out of borrowed funds and disclosed in the BoD
report
70. What is the Caution to be exercised ?
a. There is a change in the definition of relatives in the new Act as compared to the old Act
b. Exemption available for loans upto 01. 04.2015 ( circular dated March 30, 2015 ) and loans after
15 Sep 2015 ( circular dated 15 Sep 2015 ). Loans obtained during the intervening period need to
be considered appropriately
18. Loans from members
71. Will loans from members be treated as deposits. What is the relevant impact
The Jun 6, 2015 notification has specified that the following exemptions are available for loans from
members from certain categories of companies. sub-section (2) of section 73 Clauses a to e
Shall not apply to private companies having 50 or less number of members if they accept monies from their
members not exceeding hundred percent of aggregate of the paid up capital and free reserves and which
inform the details of such monies to the Registrar in the prescribed manner.
19. Loans to Directors
72. What is the present status on Loans to Directors by Private Limited Companies ?
Sec 185 of the Act restricted loans to directors including private limited companies. However as per the
notification dated 6 Jun 2015, the following private companies are exempted
A company in whose share capital no other body corporate has invested any money
Borrowings from banks, financial institutions or any body corporate is less than twice of its paid
up share capital or fifty crores whichever is lower
The company has no default in repayment of such borrowings subsisting at the time of making
transactions under this section
73. Default subsisting at the time of grant of loans. What does this mean
This means that at the time of giving a loan to a director there should be no ―overdue‖ on the loan. That is
the actual loan balance should be less than or equal to the repayment schedule as committed with the
banker. The intent of this provision is that there should be no diversion of funds to directors by companies
which have defaulted on borrowings
74. Is it only loans from banks and FI’s
No, this includes loans from other body corporates also.
75. If the loan has been subject to restructuring under say a CDR mechanism. Will it be treated as a
“default subsisting”
There is no clarity on this. However CDR cases need to be handled carefully and specific guidance and
opinions may be requested
76. Does this mean that a private company not falling under the above categories can give unlimited
loans to its directors
While Sec 185 has been exempted for certain private limited companies, there is no exemption from Sec
186. Loans to any person exceeding a certain limit have to be approved by a special resolution of the share
holders in a General Meeting.
Sec 186(2) specifies as under
(2) No company shall directly or indirectly —
(a) give any loan to any person or other body corporate;
(b) give any guarantee or provide security in connection with a loan to any other body corporate or person;
and
(c) acquire by way of subscription, purchase or otherwise, the securities of any
other body corporate, exceeding sixty per cent. of its paid-up share capital, free reserves and securities
premium
account or one hundred per cent. of its free reserves and securities premium account, whichever is more.
(3) Where the giving of any loan or guarantee or providing any security or the acquisition under sub-
section (2) exceeds the limits specified in that sub-section, prior approval by means of a special resolution
passed at a general meeting shall be necessary.
77. What does “borrowings” mean ?. Are non fund limits to be included. What about Bank
Guarantees ?
There is no definition of the term borrowings. One possibility is to consider the Balance of Borrowings as
per the Balance Sheet of the Company as at the date of the loan.
20. Advances received by the Company
78. What is the position on Trade advances received by Company
Present Act Rule 2 ( c ) (xii) Earlier Act
Any amount received in course of business:
Advances for goods supply or provision of
services
Advance received in connection with
consideration for property under an agreement
Security deposit for performance of contract for
supply of goods or services
Advance against long term projects for supply of
capital goods (except those covered under (2))
Provided such advance is appropriated against
supply of goods/services within 365 days from
date of acceptance of such advance
The earlier law was fairly simple and read as
under :
―Any amount received by way of security or
as an advance from any purchasing agent,
selling agent, or other agents in the course of
or for the purposes of the business of the
company or any advance received against
orders for the supply of goods or properties
or for the rendering of any service;
Now the rules stipulate the specific category
of advances and time limit upto which they
may not be treated as deposits
Time limit shall not apply in subject matter of any
legal proceeding
Provided such advance is adjusted against the
property in accordance with the terms of
agreement.
Provided if amounts received under (1), (2) and
(4) becomes refundable (where the company does
not have the permission to deal in goods/services
for which the money has been received) then the
amount shall be treated as a deposit.
21. Depreciation
A. Companies Act 1956 Vs Companies Act 2013
79. What are the key changes in Depreciation in CA 2013
The important changes in the Act are as under
Useful life is the period over which an asset is expected to be available for use by an entity, or the
number of production or similar units expected to be obtained from the asset by the entity. Change from
rate based approach to useful life approach and the Act has specified useful lives for various classes of
assets
Schedule II rates are not necessarily the minimum or mandatory rates and the company can
adopt different useful lives based on technical advise
Assets less than Rs 5000 need not be depreciated completely
No rates for double and triple shift but extra depreciation of 50% and 100%
Componentisation - If a part of an asset has a separate useful life independent of the parent, then a
separate rate has to be applied for that part if that part is material in relation to the asset
Assets which do not have a useful life as at the commencement of the Act are required to be
written off completely. Such amounts may be debited to P& L or adjusted to General Reserves
B. Methods of depreciation and changes
80. What are the different methods of providing depreciation
Straight Line Method
Written Down Value Method
Unit of Production Method
Amortisation method for specific assets under BOT, BOOT as discussed later
81. Is it permissible to Adopt different methods for similar assets at different geographical locations
Selection of a method of depreciation is a matter of judgement by the management considering various
factors, such as, type of asset, the nature of the use of such asset and circumstances prevailing in the
business, to allocate the depreciable amount of an asset over its useful life so that the depreciation method
best reflects the way the asset is consumed, i.e., depreciation should be allocated so as to charge a fair
proportion of the depreciable amount in each accounting period during the expected useful life of the asset
Different methods for similar assets at different geographical locations can only be used if the said methods
are selected based on the factors discussed in paragraph 61 above. Otherwise, the use of different methods
for similar assets at different geographical locations is not justified
82. What is the Unit of Production method for calculating depreciation?
The depreciation on an asset can be provided, where appropriate, on the basis of the units expected to be
obtained from the use of the asset.
This method of providing depreciation is generally known as ‗Unit of Production‘ method (UOP).
In view of the above, as a result of application of Schedule II, a company may use UOP method, where
appropriate, keeping in view the various factors mentioned in paragraph 12 of AS 6.
UOP method is generally considered appropriate where the number of units that can be produced or
serviced from the use of the asset is the major limiting factor for the use of the asset rather than the time.
Following are some examples where UOP method can be identified appropriate: (i) Useful life of Aircraft
engine is restricted by number of flying hours (ii) Useful life of Boiler is limited to number of hours (iii)
Useful life of Mould is limited by the number of imprints
83. When is the depreciation method changed?
A change from one method of providing depreciation to another is made only if the adoption of the new
method is required by statute or for compliance with an accounting standard or if it is considered that the
change would result in a more appropriate preparation or presentation of the financial statements of the
enterprise.
84. How is the revision in method applied?
When such a change in the method of depreciation is made, depreciation is recalculated in accordance with
the new method from the date of the asset coming into use. The deficiency or surplus arising from
retrospective recomputation of depreciation in accordance with the new method is adjusted in the accounts
in the year in which the method of depreciation is changed.
In case the change in the method results in deficiency in depreciation in respect of past years, the
deficiency is charged in the statement of profit and loss. In case the change in the method results in surplus,
the surplus is credited to the statement of profit and loss. Such a change is treated as a change in
accounting policy and its effect is quantified and disclosed.
C. Applicability
85. Do we have to align depreciation with the new Companies Act 2013 rates for the year ended
March 31, 2015
Of the above, the change in rates has to be effected for the year ended March31, 2015 whereas the
component level depreciation has been deferred as per a notification and is not applicable for the period
ended March 31, 2015 but only for periods commencing 2015-16
86. My client has a financial year ending December. Should we revise the depreciation as per the
new Act or does the old Act apply for ―year ended Dec 31 2014‖
The revised useful life system applies for accounting periods commencing on or after April 1, 2014 and
hence the client may prepare the accounts as per the earlier Act in reference to depreciation as there is a
specific mention of the term accounting period
D. Concept of Useful life
87. What are the factors to be considered in determining the useful life of the asset
As per AS 6, The useful life of a depreciable asset should be estimated after considering the following
factors: (i) expected physical wear and tear; (ii) obsolescence; (iii) legal or other limits on the use of the
asset.
88. Should useful lives be reviewed periodically
As per paragraph 23 of AS 6, the useful lives of major depreciable assets or classes of depreciable assets
may be reviewed periodically. Where there is a revision of the estimated useful life of an asset, the
unamortized depreciable amount should be charged over the revised remaining useful life.
Further, paragraph 21 of Accounting Standard (AS) 5, Net Profit or Loss for the Period, Prior Period Items
and Changes in Accounting Policies, notified under the Companies (Accounting Standards ) Rules, 2006,
provides ‗an estimate may have to be revised if changes occur regarding the circumstances on which the
estimate was based, or as a result of new information, more experience or subsequent developments. The
revision of the estimate, by its nature, does not bring the adjustment within the definitions of an
extraordinary item or a prior period item.‘‘
Therefore, a company is required to assess whether there have been any changes in the measure of wearing
out, consumption or other loss of value of the asset during the year and in future. Where there have been
such changes, the company is required to reestimate the useful life of the asset.
E. Technical Opinion
89. As per the new Act, a Company can adopt any useful life ( not as per the Act ) provided it is
supported by a Technical advise. What is the logic behind this
Schedule XIV was prescriptive in nature as it specified the minimum rate of depreciation, Schedule II
provides indicative useful lives for various assets. As a consequence, the companies are in a position to
charge depreciation based on the useful life of an asset supported by technical advice, even though such
lives are higher or lower than those specified in the said schedule. In view of this, depreciation charged as
per the useful life is true commercial depreciation bringing the financial statements prepared accordingly
closer to those prepared in accordance with international standards
90. Schedule II speaks of technical opinion. Should this be an independent opinion
The Schedule II does ―not‖ speak of an independent opinion. But from an auditors perspective, one may
not be wrong in asking for one especially if the value of the depreciation and change to the same is material
F. Computation
91. How do we calculate the WDV rates based on the useful life of the asset
The WDV rates are
calculated by applying the
formula as specified below
Cell
reference
Useful life –n Years 5 C4
Residual value – s Rs. 5 C5
Cost of the asset – c – Rs. 100 C6
Rate % 1-POWER((Residual value/Cost),(1/No of years)) C7
92. How do we calculate the WDV rates if residual value is Rs zero
Assume Rs 1 as the residual value
93. Is this depreciation revision to align with the new Act a change in estimate or accounting policy
This change is a change in accounting estimate only
G. Residual Value
94. What is the concept of residual value as per Schedule II
Part A of Schedule II, states that the residual value of an asset shall not be more than five percent of the
original cost of the asset;
Further, where a company uses a residual value different from the “limit” specified above, the financial
statements shall disclose such difference and provide justification in this behalf duly supported by technical
advice.
95. Schedule II speaks of a residual value of 5%. Can a different rate be adopted
Yes, a different rate can be applied based on technical advise. In the event a rate higher than 5% is
adopted, the same needs to be disclosed in the financial statements
If a rate lower than 5% is adopted, no disclosures are necessary
H. Certain Special Categories of Assets
96. What is the significance of Continuous Process Equipment ?
The Schedule has prescribed a generic useful life of 25 years for CPE assets not covered in specific
categories
97. Are there any specific carve outs for assets belonging to entities governed by specific regulatory
authorities ( Regulatory Assets as per the GN )
The useful life or residual value of any specific asset, as notified for accounting purposes by a Regulatory
Authority constituted under an Act of Parliament or by the Central Government shall be applied in
calculating the depreciation to be provided for such asset irrespective of the requirements of this
Schedule.‖
In view of the above, where a Regulatory Authority prescribes useful life, rate of depreciation or residual
value for any specific asset for accounting purposes, the company should use that useful life, rate of
depreciation or residual value even though it is different from that as estimated by the management. For
example, Govt. Of India, Ministry of Power vide resolution dated 6th January, 2006 has notified Tariff
Policy in terms of section 3 of the Electricity Act, 2003.
The said policy inter-alia provides that rates of depreciation as notified by Central Electricity Regulatory
Commission (CERC) would be applicable for the purpose of tariffs as well as accounting. Therefore, in
accordance with Part B of Schedule II, companies which are regulated by the abovementioned tariff policy
should apply the rate of depreciation as specified in the abovementioned tariff policy.
98. Does Schedule II speak of depreciation on Intangible assets
For intangible assets, the provisions of the accounting standards applicable for the time being in force shall
apply. There is one exception as under
Intangible assets (Toll Roads) created under Build, Operate and Transfer‘, ‗Build, Own, Operate and
Transfer‘ or any other form of public private partnership route in case of road projects.
The amortization amount or rate should ensure that the whole of the cost of the intangible asset is
amortised over the concession period.
Revenue Shall be reviewed at the end of each financial year and projected revenue shall he adjusted to
reflect such changes, if any, in the estimates as will lead to the actual collection at the end of the
concession period.
99. Depreciation at 100% on assets less than Rs 5000. Is this permitted under CA 2013
It may be noted that Schedule II does not prescribe any such requirement to provide depreciation at the rate
of hundred percent. Therefore, an issue may arise whether the earlier requirement of providing hundred
percent depreciation on assets with value less than rupees five thousand can still be followed or not.
In this regard, it may be noted that the provisions of Schedule XIV permitting 100% depreciation of the
cost of an asset having individual value of Rs. 5000/- or less was based on practices followed by the
companies based on the materiality of the financial impact of such charge. As the life of the asset is a
matter of estimation, the materiality of impact of such charge should be considered with reference to the
cost of asset. The size of the company will also be a factor to be considered for such policy. Accordingly, a
company may have a policy to fully depreciate assets upto certain threshold limits considering materiality
aspect in the year of acquisition
100. How is the useful life determined for second hand assets held by the entity
B Limited, a company incorporated under the Companies Act, acquired a second hand machinery for Rs.
5,00,000 from C Ltd. As per the estimate of the C Ltd., the useful life of the asset when it was newly
purchased by it was 15 years out of which 8 years have already elapsed (duration for which machinery is
used by the C Ltd.). B Limited, for the purpose of providing depreciation on SLM basis under Schedule II,
estimates that the asset can be used for 10 years and the residual value is estimated to be nil.
Issue: What useful life of such second hand machinery should be considered by the B Ltd. for providing
depreciation?
Response: In this case, B Limited should provide for depreciation on the machinery on the basis of useful
life of 10 years and not 7 years remaining as per the earlier estimate of C Ltd. (15 years – 8 years).
Therefore, depreciation expense to be recognised in the statement of profit and loss for the year would be
Rs. 50,000 (5,00,000/10 yrs.).
I. Extra Shift Depreciation
101. What are the assets eligible for Extra Shift depreciation
It is noted that extra shift depreciation does not apply to Continuous Process Plants and the assets which
have been marked as No Extra Shift Depreciation (NESD) under Schedule II. The concept of extra shift
depreciation applies only to those assets for which the useful life has been estimated on single shift basis at
the beginning of the year.
102. What are the provisions relating to assets working on double shift or triple shift basis?
The guidance note of ICAI specifies assets used on Sporadic basis and Not on Sporadic basis and specifies
two different modes for such assets
103. How is extra Shift depreciation calculated on assets used on Sporadic basis?
Useful life given in Part C assumes single shift working. For Assets used on Extra Shift on Sporadic basis,
depreciation is calculated as under
• Double shift - increase depreciation by 50%
• Double shift – increase depreciation by 50%
• Triple shift – increase depreciation by 100%
• Take note of number days for which the company has worked double shift and triple shift and the
rates have to be increased proportionately
104. How is extra Shift depreciation calculated on assets used on Non Sporadic basis?
In case the company estimates that the use of the asset for extra shift would not be on sporadic basis i.e. the
extra shift working for the asset would be on regular or continuous basis, it should reassess its useful life
considering its use on extra shift basis. The reassessed useful life should then be used for the purpose of
charging depreciation expense henceforth.
105. Where an asset is put to use / ceased to use during the year, should prorata basis be applied
only based on number of days ?
The Schedule speaks of prorata application.
Note no.2 in Schedule II prescribes that ―where, during any financial year, any addition has been made to
any asset, or where any asset has been sold, discarded, demolished or destroyed, the depreciation on such
assets shall be calculated on a pro rata basis from the date of such addition or, as the case may be, up to the
date on which such asset has been sold, discarded, demolished or destroyed.‖.
The company may group additions and disposals in appropriate time period(s), e.g., 15 days, a month, a
quarter etc., for the purpose of charging pro rata depreciation in respect of additions and disposals of its
assets keeping in view the materiality of the amounts involved.
J. Component based Approach
106. What is the component based approach ?
Useful life specified in Part C of the Schedule is for whole of the asset.
Where cost of a part of the asset is significant to total cost of the asset and useful life of that part is
different from the useful life of the remaining asset, useful life of that significant part shall be determined
separately
As per the amendment dated August 29, 2014 notified by the MCA, the said requirement shall be voluntary
in respect for the financial year commencing on or after the April 1, 2014 and mandatory for financial
statements in respect of financial years commencing on or after April 1, 2015.
For instance:
A Ship may be bifurcated into the following components – (i) Hull (ii) Keel (iii) Engine (iv)
Navigation system (v) Major overhaul/ inspections (vi) Other fit out assets
107. Is component based approach mandatory ?
Companies will need to identify and depreciate significant components with different useful lives
separately. The component approach is already allowed in paragraph 8.3 of the current AS 10.
Under AS 10, there seems to be a choice in this matter; however, Schedule II requires application of
component accounting mandatorily. The determination as to whether a part of an asset is significant
requires a careful assessment of the facts and circumstances.
108. Is component based approach mandatory ?
This assessment would include at a minimum:
part as compared to the useful life of the asset
109. My client is unable to determine the value of the individual components of the asset. What
should they do ?
As component accounting was hitherto not mandatory in India, it is possible that the separate cost of each
significant component of an asset is not available in the books of account. For the purpose of determining
the cost of such component, the following criteria can be used in the order given below:
a) Break-up cost provided by the vendor;
b) Cost break-up given by internal/external technical expert;
c) Fair values of various components; or
d) Current replacement cost of component of the related asset and applying the same basis on the historical
cost of asset
110. Should componentization be applied for assets which have reached residual value or are
lower than the residual value
No, componentization is not necessary
111. How should replacement costs be treated on componentized assets ?
The application of component accounting is likely to cause significant change in the measurement of
depreciation and accounting for replacement costs. Currently, companies need to expense replacement
costs in the year of incurrence.
Under component accounting, companies will capitalise these costs as a separate component of the asset
and decapitalise the carrying amount of previously recognised component. When it is not practicable to
determine the carrying amount of the replaced part, the cost of the replacement may be used as an
indication of what the cost of the replaced part was at the time it was acquired or constructed
Transitional Provisions
112. What are the transitional provisions for changing the approach from rate based to useful life
based
From the date this Schedule comes into effect, the carrying amount of the asset as on that date- (a) shall be
depreciated over the remaining useful life of the asset as per this Schedule; (b) after retaining the residual
value, may be recognised in the opening balance of retained earnings where the remaining useful life of an
asset is nil.
113. In case of componentization exercise undertaken in 2015-16 , an entity finds that the useful
life of a particular component has been completed, how should the carrying cost be treated
The same transitional provisions will apply as in the case of normal , non componentized assets. Viz, the
entity has an option to charge off the balance amount net of residual value to reserves or to profit and loss
account
22. Managerial Remuneration
114. Managerial Remuneration – Are limits as per Schedule V applicable for loss making private
companies. Sec 197(3) states that in the event of loss or inadequacy of profits, managerial
remuneration should be restricted as per Schedule V. Is this applicable for private limited companies ?.
Answer : The restrictions on Managerial remuneration will NOT apply to a loss making private company
although Sec 197(3) appears to suggest that there will be a restriction for ―all‖ loss making companies.
Hence the limits as per Schedule V will not apply. However such limits will apply to deemed public
companies which are private limited companies being subsidiaries of public companies
Sec 197(1) The total managerial remuneration payable by a public company, to its directors, including
managing director and whole-time director, and its manager in respect of any financial year shall not
exceed eleven per cent. of the net profits of that company for that financial year computed in the manner
laid down in section 198 except that the remuneration of the directors shall not be deducted from the gross
profits:
Provided that the company in general meeting may, with the approval of the Central Government,
authorise the payment of remuneration exceeding eleven per cent. of the net profits of the company, subject
to the provisions of Schedule V:
197(3) ―Notwithstanding anything contained in sub-sections (1) and (2), but subject to the provisions of
Schedule V, if, in any financial year, a company has no profits or its profits are inadequate, the company
shall not pay to its directors, including any managing or wholetime director or manager, by way of
remuneration any sum exclusive of any fees payable to directors under sub-section (5) hereunder except in
accordance with the provisions of Schedule V and if it is not able to comply with such provisions, with the
previous approval of the Central Government‖.
23. Deferred tax Adjustment
115. Will the depreciation change impact the deferred tax computation
Yes, this is a timing difference. Hence the deferred tax computation will be impacted
116. In case of adjustment to reserves, will the adjustment be made “net of tax basis”.
Yes, the adjustment has to be made on a net of tax basis. The DTL will be reduced to that extent
24. AGM related
117. Is Auditors presence necessary in the AGM ., What is the relevant provision ?
Yes, the auditor needs to be present in the AGM either by himself or through an authorized representative
25. Private Limited Companies
118. What will be the impact of the Jun 6 notification on transactions undertaken during the period
April 1, 2014 to Jun 5, 2015. Will the benefit of the notification be available for such transactions .
For instance do the resolutions have to be filed under Sec 117 (3) g which has been exempt now
There is no clarity on the transitional impact of this notification. The provisions are less stringent than the
earlier provisions.
Chapter/ Section
number/ Sub-section(s) in
the Companies Act, 2013
Comments
Chapter l, sub-clause viii of clause (76) of section 2 and Section 188
A holding, subsidiary, associate company or fellow subsidiary of a private
company, shall not be treated as ‗related party‘ for the purpose of section 188.
A Member of a private company can vote on a resolution for contract or
arrangement to be entered into by the company with related party even if such
member is a related party. This will be a significant relief to small owner
managed private companies which otherwise would have had to induct
additional directors to satisfy the requirement of quorum
Chapter IV, section 43 and section 47
Kinds of share capital and Voting rights proportionate to shares held shall not
apply where Memorandum or articles of association of the private company
so provides.
Chapter IV, sub-clause (i) of clause (a) of sub section (1) and sub section (2) of section 62
Further issue of shares only by rights issue to existing share holders. Now,
with the consent of 90% of the members of a private company, rights issue
can be kept open for a period lesser than 15 days and notice of the rights offer
can be dispatched for a period lesser than 3 days before opening of the issue.
Chapter/ Section
number/ Sub-section(s) in
the Companies Act, 2013
Comments
Chapter IV, clause (b) of
sub-section (1) of section
62
Shares to employees under a scheme of employees‘ stock option, subject to
special resolution now changed to ordinary passed by company and subject to
such conditions as may be prescribed;
Shall apply except that instead of the words ―special resolution‖, ordinary resolution shall be substituted
Chapter IV, Section 67 Restrictions on purchase by company or giving of loans by it for purchase of
its shares. Shall not apply to Private companies - (a) in whose share capital no other body corporate has invested any money;
(b) if the borrowings of such a company from banks or financial institutions
or any body corporate is less than twice its paid up share capital or fifty crore rupees, whichever is lower and
(c)such a company is not in default in repayment of such borrowings subsisting at the time of making transactions under this section
Chapter V, sub-section (2)
of section 73
Conditions relating to acceptance of deposits from members such as
Deposit insurance, Deposit redemption reserve, credit rating etc have been
dispensed with for certain categories of private limited companies
Shall not apply to a Private company which accepts from its members monies not exceeding one hundred per cent. of aggregate of the paid up share capital and free reserves, and such company shall file the details of monies so accepted to the Registrar in such manner as may be specified.
Chapter VII, sections 101
to 107 and section 109
Provisions relating to:
Notice of meeting
Explanatory statement
Quorum for the meeting
Chairman of the meeting
Proxies
Restrictions on voting rights
Voting by show of hands
Demand of poll
shall be governed as per the provisions of the AOA of the private company.
In absence of provisions in the AOA, the provisions of 2013 Act will apply
Chapter VII, clause (g) of
sub-section
(3) of section 117.
Resolutions passed by the Board of Directors of a private company on
exercise of specified powers by means of a resolution in a Board meeting
need not be filed with ROC
117 (3) (g) resolutions passed in pursuance of sub-section (3) of section 179
need not be filed with the ROC
The Board of Directors of a company shall exercise the following powers on
behalf of the company by means of resolutions passed at meetings of the
Board, namely:— ( Sec 179(3) )
Chapter/ Section
number/ Sub-section(s) in
the Companies Act, 2013
Comments
(a) to make calls on shareholders in respect of money unpaid on their shares;
(b) to authorise buy-back of securities under section 68;
(c) to issue securities, including debentures, whether in or outside India;
(d) to borrow monies;
(e) to invest the funds of the company;
(f) to grant loans or give guarantee or provide security in respect of loans;
(g) to approve financial statement and the Board‘s report;
(h) to diversify the business of the company;
(i) to approve amalgamation, merger or reconstruction;
(j) to take over a company or acquire a controlling or substantial stake in
another company;
(k) any other matter which may be prescribed:
Chapter X, Clause (g) of
sub-section (3) of section
141
20 company limit shall not apply to private limited companies unless they fall under the limits as specified. Shall apply the modification that the words "other than one person companies
dormant companies, small companies and private companies having paid-up
share capital less than one hundred crore rupees" shall
be inserted after the words "twenty companies".
Chapter XI, section 160 Right of persons other than retiring directors to stand for directorship subject
to deposit of Rs 1 lakh and conditions for refund have been dispensed with
Chapter XI, section 162 Appointment of directors to be voted individually has been dispensed with
Chapter XII, Section 180 Restrictions on powers of Board requiring shareholders approval in a
special resolution will not be applicable to private companies namely
(a) to sell, lease or otherwise dispose of the whole or substantially the whole
of the undertaking of the company or where the company owns more than one
undertaking, of the whole or substantially the whole of any of such
undertakings.
b) to invest otherwise in trust securities the amount of compensation received
by it as a result of any merger or amalgamation
(c) to borrow money, where the money to be borrowed, together with the
money already borrowed by the company will exceed aggregate of its paid-
up share capital and free reserves, apart from temporary loans obtained from
the company‘s bankers in the ordinary course of business:
(d) to remit, or give time for the repayment of, any debt due from a director
Chapter XII, sub section
(2) of section 184
Interested director may participate in Board meeting in which a contract or
arrangement is considered where he is interested in such contract. This is
possible after disclosure of his interest.
Chapter/ Section
number/ Sub-section(s) in
the Companies Act, 2013
Comments
Chapter XII, section 185 Prohibition on providing loan to directors and other person in whom director
is interested shall not be applicable if following conditions are fulfilled:
1. No other body corporate has invested any money in its share capital
2. Borrowings from banks, FI‘s or anybody corporate is less than twice its
paid up capital or Rs 50 Crores,
whichever is lower, and
Such a company is not in default in repayment of such borrowings subsisting
at the time of granting loan
Chapter XIII, section 196, sub-section (4) and subsection (5)
Shareholders approval , Central Government approval and filing of return
with ROC not required for appointment of managing director, whole-time
director or manager of a private company. Sec 196(3) on age, insolvency,
conviction for offence etc applies
Not applicable
196 (4) Subject to the provisions of section 197 and Schedule V, a managing
director, whole-time director or manager shall be appointed and the terms and
conditions of such appointment and remuneration payable be approved by the
Board of Directors at a meeting which shall be subject to approval by a
resolution at the next general meeting of the company and by the Central
Government in case such appointment is at variance to the conditions
specified in that Schedule:
Provided that a notice convening Board or general meeting for considering
such appointment shall include the terms and conditions of such appointment,
remuneration payable and such other matters including interest, of a director
or directors in such appointments, if any:
Provided further that a return in the prescribed form shall be filed within
sixty days of such appointment with the Registrar.
26. Related Party Transactions
119. What is the law on Related Party transactions ?
Sec 188 of the Act specifies the actions in respect of related party transactions and mandates certain
approvals
By the BoD
By the Share holders
120. Is it applicable only to Public Companies ?
No the provisions of Sec 188 on RPT‘s are applicable to all Companies – Private or Public
121. Who is a Related Party?
Related Party with reference to a Company, means –
a director or his relative; a Key Managerial Personnel or his relative;
a firm, in which a director , manager or his relative is a partner;
a private company in which a director or a manager is a member or director;
a public company in which a director or a manager is a director or holds along with his relatives,
more than 2% of its paid-up share capital;
any Body corporate whose Board of Directors, managing director or a manager is accustomed to
act in accordance with the advice, directions or instructions of a director or manager;
any person on whose advice, directions or instructions a director or a manager is accustomed to
act
any company which is a holding, subsidiary or associate of the such company
subsidiary of the holding company of which it is also a subsidiary
Advice provided by the director or manager highlighted above in a professional capacity shall not be
covered under the related party definition
122. Who is a relative ?
Relative, with reference to any person, means anyone who is related to another, if –
they are members of a Hindu Undivided Family
they are husband and wife; or
one person is related to the other in such manner as may be prescribed
123. As regards related party, is it only relating to the contract in question, or all related parties
as per the Act
As per General Circular 30 / 2014 dated 17 Jul 2014, Related party refers to a related party only in
reference to the proposed contract or arrangement for which such resolution is intended to be passed
124. Are transactions arising out of Compromises, arrangements etc under the purview of Sec 188
As per General Circular 30 / 2014 dated 17 Jul 2014, transactions arising out of Compromises,
Arrangements and Amalgamations dealt with under specific provisions of the Companies Act,
1956/Companies Act, 2013, will not attract the requirements of section 188 of the Companies Act, 2013.
125. What about transactions entered into before the commencement of the Act and as per Sec
297 of the previous act?
As per General Circular 30 / 2014 dated 17 Jul 2014, Contracts entered into by companies, after making
necessary compliance under Section 297 of the Companies Act, 1956, which already came into effect
before the commencement of Section 188 of the Companies Act, 2013, will not require fresh approval
under the said section 188 till the expiry of the original term of such contracts. Only in the event of
modifications in such contracts made on or after 1st April, 2014, the requirements under section 188 will
have to be complied with.
126. What categories of transactions are excluded ?
As per the Act, nothing in this sub-section shall apply to any transactions entered into by the company in
its ordinary course of business other than transactions which are not on an arm‘s length basis.
127. What is arms length basis ?
As per the Act , the expression ―arm‘s length transaction‖ means a transaction between two related parties
that is conducted as if they were unrelated, so that there is no conflict of interest.
128. What are the categories of transactions requiring BoD Approval
As per Sec 188, Except with the consent of the Board of Directors given by a resolution at a meeting of the
Board and subject to such conditions as may be prescribed, no company shall enter into any contract or
arrangement with a related party with respect to
(a) sale, purchase or supply of any goods or materials;
(b) selling or otherwise disposing of, or buying, property of any kind;
(c) leasing of property of any kind;
(d) availing or rendering of any services;
(e) appointment of any agent for purchase or sale of goods, materials, services or property;
(f) such related party's appointment to any office or place of profit in the company, its subsidiary
company or associate company; and
(g) underwriting the subscription of any securities or derivatives thereof, of the company
129. What is “office or place of profit “?
a) the expression ―office or place of profit‖ means any office or place—
(i) where such office or place is held by a director, if the director holding it receives from the company
anything by way of remuneration over and above the remuneration to which he is entitled as director, by
way of salary, fee, commission, perquisites, any rent-free accommodation, or otherwise;
(ii) where such office or place is held by an individual other than a director or by any firm, private
company or other body corporate, if the individual, firm, private company or body corporate holding it
receives from the company anything by way of remuneration, salary, fee, commission, perquisites, any
rent-free accommodation, or otherwise;
This means that only those transactions other than salary,fees, commission etc are covered under the
purview of RPT‘s
130. Can Directors interested in the transaction participate in the BoD meeting
The Directors who are related parties to such contract or agreement cannot vote on such transactions and
need to excuse themselves from the said agenda
131. Should the approval be by a meeting or is a resolution by circulation acceptable
A Board meeting is necessary for approval. Resolution by Circulation is not acceptable
132. What are the categories of transactions requiring Share holder Approval
Companies having paid-up share capital of Rs.10 Crores or more need to get approvals in a share holder
meeting only
Further, the following categories of transactions would need Share holder approval and a mere BoD
approval will not suffice. ( amended 14-8-2014 )
Sale, purchase or supply of any goods or materials directly or through appointment of agents for
sale or purchase of goods, services, materials or property exceeding 10% of the annual turnover or
Rs 100 crores which ever is lower
Selling or otherwise disposing of, or buying, property of any kind directly or through appointment
of agents exceeding 10% of net worth or Rs 100 crores which ever is lower
Leasing of property of any kind exceeding 10% of the net worth or exceeding 10% of turnover or
Rs 100 crores which ever is lower
Availing or rendering of any services directly or through appointment of agents exceeding 10% of
the net worth or Rs 50 crores which ever is lower
Related party‘s appointment to any office or place of profit in the company, its subsidiary company
or associate company at a monthly remuneration exceeding Rs. 2.5 Lakhs
Remuneration for underwriting the subscription of any securities or derivatives thereof of the
company exceeding 1% of the net worth
133. As regards paid up share capital threshold of Rs 10 crores or turnover, what is the date of
evaluation
The capital / turnover is determined as per the Audited financial statements of the preceding financial year
134. Can members interested in the transaction vote on the resolution
No, share holders interested in the transaction cannot vote on the resolution
135. What is the type of resolution that is required – Ordinary or Special ?
While the Act specified that a Special resolution was necessary, this was subsequently amended to
Resolution ( meaning ordinary ) in the Companies Amendment Act as ―For the word ―Special Resolution‖
the word ―Resolution‖ is substituted under the Act.‖
136. Should transactions entered into between holding and subsidiary companies be approved by
both
In case of wholly owned subsidiary, the special resolution passed by the holding company shall be
sufficient for the purpose of entering into the transactions between wholly owned subsidiary and holding
company.
137. What is the latest change in relation to omnibus approvals
Background All related party transactions will require audit committee approvals. Such
approvals may also be Omnibus in nature
Considerations Omnibus approvals will be accorded after considering
Transactions not permissible under the Omnibus route
Total overall value
Maximum limit per individual transaction under the Omnibus route
Manner of disclosures to the Audit Committee
Review mechanism and intervals of such review
Approval details Omnibus approvals shall indicate the following
Name and nature of related parties
Nature and duration of the transaction
Maximum amount
Indicative base price or current contracted price and the formula for
variation in the price
Any other information relevant or important to the Audit Committee
Restrictions Where need for such related party transaction cannot be foreseen or
where the aforesaid details are not available, the omnibus approvals
will be restricted to Rupees One Crore per transaction
Not permitted for transactions in respect of selling or disposing of the
undertaking of the Company
Validity Approvals shall be valid for a period not exceeding one financial year and
shall require fresh approval upon expiry