R.SankaraiahExecutive Director Finance

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SYNOPSISCompanies Bill

Guiding principles Welcome changes Added Obstacles

Need for harmonization

Conflicting provisions/areas requiring harmonisation Listing agreement Accounting Standards Ind-AS converged with IFRS The revised Schedule VI CARO XBRL Competition Act

Way Ahead 2

Companies Bill-Guiding principles To enable a compact statute, amenable to easy

understanding and interpretation;

To encourage setting up of businesses while enabling measures to protect the interests of stakeholders / investors, including small investors;

To provide a framework for responsible and accountable self-regulation obviating the need for a regime based on Govt. approvals;

To provide for more effective and speedy winding up process based on international practices;

To strengthen enforcement powers and enhance penalties for offences; and

To segregate substantive law from the procedures which are proposed to be prescribed as rules.

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Companies BillWelcome Changes

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Companies Bill-Welcome changes

Remuneration to MDs/WTDs No statutory restriction on the payment of remuneration

to Managing Directors/Whole Time Directors. Approval of Central Govt. not required for payment of

remuneration. Only Shareholders’ approval through special resolution

is required.

Electronic Facility Permitted for Board Meetings

Directors can participate in the Board Meetings through Video conferencing or other prescribed electronic means.

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No Central Government Approval for Interested Contracts

No Central Govt. approval will be required for companies whose paid-up capital is more than Rs. 1 crore for entering into Contracts with Directors/their relatives/firms in which Directors or their relatives are Partners/Private Companies of which they are Members or Directors.

Only Shareholders’ approval through special resolution is required, in certain cases.

Transactions Pertaining to Immovable Properties Transactions with respect to immovable properties viz.

leasing, selling or purchasing have been appropriately brought under purview which requires consent of Board of Directors of a Public Company. This is not covered as a specific item in Sec. 297 of the Companies Act, 1956.

Companies Bill-Welcome changes

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Mergers/Amalgamations Simplified Simplification of process of merger between small

companies, and between holding and wholly owned subsidiary.

No Court approval required for such merger/ amalgamation.

One Person Company Concept of One Person Company introduced.

Companies with sole member may be incorporated.

Companies Bill-Welcome changes

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Removal of Obsolete Provisions Obsolete provisions viz. Obtaining Certificate of

Commencement of Business and holding of Statutory Meetings in case of Public Limited companies have been removed.

Companies Bill-Welcome changes

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Companies BillAdded Obstacles

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Companies Bill- Added Obstacles

Restriction on Accepting Public Deposits Prohibition on Companies other than NBFCs and

Banking Companies from accepting deposits from persons other than its members tends to restrict the options of fund raising by companies.

The rationale of such restrictive provision is also not clear. A person even holding One share will be Member of the Company and would thus be entitled to make deposits with the Company, which will tend to defeat the spirit of law.

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Companies Bill- Added Obstacles

Prohibition on Issue of Shares with Differential Voting RightsIssue of shares with differential voting rights has been prohibited, thus prohibiting certain classes of investors who are interested in returns on investments without interfering in the Management of the Company

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Restriction on Number of Directorships in Public Limited CompaniesThe existing limit of 15 Public Limited Companies has been retained. However, certain exclusions specified under Sec. 278 of the Present Companies Act have been removed viz.

Alternate Directorships Directorship in Companies which are not

carrying business for profits.Recommend that in addition to retaining of above exclusions, directorships in holding and subsidiary companies should also be excluded.

Companies Bill- Added Obstacles

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Class Actions by Member/Creditor Such a provision would make the Company and its

Directors at the mercy of individual shareholder/creditor, irrespective of his interest in the Company which could be detrimental to the functioning of the Company and could lead to vexatious litigations.

A person holding even One share or creditor of even One rupee will be able to jeopardize the functioning of the company

Companies Bill- Added Obstacles

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Why Harmonisation?

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Need for Harmonisation A good law is one which speaks goodness not

only for itself but also for others. It should neither over-ride the other related Acts nor allowed to be over-ridden by other statutes. Most of the Indian statutes in corporate laws including Companies Act, 1956 suffer from this lacuna

This becomes essential since a listed Company is administered by : Companies Act, 1956 the SEBI Act, 1992   the Securities Contracts (Regulation) Act,

1956 Listing Agreement with Stock Exchanges Host of Rules and regulations under these

Acts and others. 15

If not harmonised… Confusion and unnecessary legislative overlap Creation of multiple institutional mechanisms that result

in an administrative fracas. It burdens the judiciary by increasing litigation Often leaves the Indian state non-compliant with several

international law obligations Compromises the legal system as a whole by making it

less coherent. Poses an obstacle to economic growth and sustainable

development Increases commercial risks and transaction costs Hampers the activities of commercial entities and restrict

their participation in international trade Investment may be severely affected or may not take

place at all16

Provisions Harmonised with Other Statutes Introduction of One Person Company which is in harmony

with other legislations prevailing in other countries viz. United States, Australia, United Kingdom, European Union, Singapore etc.

Provision in the Companies Bill that issue and transfer of securities and non-payment of dividend by listed companies or those companies which intend to get their securities listed on any stock exchange in India, shall, except as provided under this Act, be administered by SEBI.

Adoption of definition of Acquirer and Persons Acting in Concert as per SEBI Takeover Regulations.

Harmonisation of Bill with Information Technology Act, 2000 relating to the manner in which records shall be filled, recognition of digital signatures for verification and authentication, Board Meeting by video conference, service of documents through electronic mode.

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Conflicting Provisions Requiring Harmonisation

Listing agreement1. Number of Independent Directors2. Audit Committee o f Directors3. Compromise/Arrangements/ Amalgamations

Accounting Standards1. Related Party - Meaning thereof2. Associate Company - Meaning thereof

Ind-AS converged with IFRS The revised Schedule VI CARO XBRL Competition Act

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Listing Agreement

Independent Directors – DefinitionCompanies BillCl. 132(5)- It is Non-executive director of the company,

other than a nominee director who neither himself nor any of his relatives:

1.has any pecuniary relationship (amounting to 10% or more of its gross turnover or total income) with the Company, holding, subsidiary or associate company, or its promoters, or directors amounting to 10% or more of its gross turnover or total income during the preceding 2 financial years or current financial year;

Cont.19

Listing Agreement

Independent Directors – Definition (Cont.)

Companies Bill2.has been an employee/partner, in any of the preceding 3

financial years of:a. a firm of auditors or company secretaries in practice or

cost auditors of the company or its holding, subsidiary or associate company; or

b. any legal or a consulting firm that has any transaction with the company, its holding, subsidiary or associate company amounting to 10% or more of the gross turnover of such firm;

3.is a CEO/Director, of any non-profit organisation that receives 25%. or more of its income from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds 2% or more of the total voting power of the company 20

Listing Agreement Independent Directors – Definition (Cont.)

Listing AgreementCl. 49 define as a non-executive director of the company who: 1.does not have any material pecuniary relationships with the

company, its promoters, its directors, its sr. management or its holding company, its subsidiaries and associates which may affect independence of the director;

2.is not a partner or an executive during the preceding 3 years, of:

a. the statutory audit firm or the internal audit firm that is associated with the company, and

b. the legal firm(s) and consulting firm(s) that have a material association with the company.

3.is not a material supplier, service provider or customer or a lessor or lessee of the company, which may affect independence of the director;

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Listing Agreement

Independent Directors – Definition (Cont.)

Conflict As per Listing Agreement the determining factor is the

materiality from the viewpoint of Company as well as Director concerned.

Whereas Bill quantifies materiality by prescribing cut-off of 10% or more of the gross turnover/income of the company.

Bill fails to cover transactions which may be insignificant for the Company but may be material for the concerned director which may affect his independence.

‘associate companies’ defined in Bill as a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence or of any other company.

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Listing Agreement Conflict In Cl. 49 reference is given to AS-23 which defines it as an

enterprise in which the investor has significant influence and which is neither a subsidiary nor a joint venture of the investor. Thus, in one case Joint Venture is covered. In another it is excluded.

Bill also restricts employment/ partnership in firm of company secretaries in practice/cost auditors/legal/consulting firms, not only of the Company but also of holding, subsidiary and associate companies.

However, Cl. 49 restricts only in case statutory audit and internal audit firms of the company.

Firm of Internal auditors has been included in Cl. 49 whereas it has not been included in Bill.

Bill includes CEO/Director of non-profit organizations in certain cases whereas Cl. 49 does not.

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Listing Agreement

Number of Independent Directors – Listed Company

Companies Bill Listed companies having such Paid-up Share Capital as may be

prescribed - At least One third of the Board

Listing Agreement In case Chairman is Non-Executive- At least One-third of the Board In case Chairman is Executive / related to any Promoter or Person

holding management position at the Board level or one level below the Board - At least Half of the Board

Conflict Disharmony arises in case where Chairman is Executive / Related

to Promoter etc. In such cases, as per Listing Agreement at least 50% of Board

should comprise of Independent Directors whereas as per Bill it should be One-third.

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Number of Independent Directors -Unlisted Company

Companies Bill Unlisted Public companies and Subsidiaries of any

Public company - Central Government may prescribe the minimum number.

Concern Provision of Independent Director, per se, is a vital

provision which needs to completely addressed in the Act itself rather than being left to the Rule making power of the Central Govt.

Will create uncertainties and may impose unnecessary burden on unlisted companies.

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Listing Agreement Audit Committee of DirectorsCompanies Bill Majority should be independent At least One Member should have knowledge of financial

management, audit or accounts. Authorisation to Central Govt. to prescribe the constitution of Audit

Committee in case of unlisted companies also.

Listing Agreement Two-thirds of the Members should be Independent directors. All members should be financially literate and at least one member

should have accounting or financial expertise. Financial literacy has been explained as the ability to read and

understand basic financial statements. Accounting or Financial expertise has been explained as experience

in finance or accounting, or requisite professional certification in accounting, or any other comparable experience or background

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Listing Agreement

Audit Committee of Directors (Cont.)

Conflict Composition of the Committee i.e. number of

independent directors. Bill provides for Majority to be independent whereas Listing Agreement requires Two-third.

Qualification of Members. Bill requires only one member to have financial knowledge.

Cl. 49 of Listing Agreement requires all members to be financially literate and at least one having financial expertise.

Rationale of having Audit Committee in closely held companies not clear.

Will lead to uncertainty and hardship to small companies.

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Listing Agreement Compromise/Arrangements/ AmalgamationsCompanies BillClause 201(5) requires: Notice of meeting for considering the compromise/arrangement/

amalgamation to be inter-alia sent to RBI/SEBI/ Stock Exchanges and such other authorities which are likely to be affected by the compromise or arrangement.

Representations, if any, by such authorities shall be made within one month from the date of receipt of such notice, failing which, it shall be presumed that they have no representations to make on the proposals.

Listing Agreement Cl. 24(f) requires company to file any such scheme/petition

proposed to be filed before any Court or Tribunal with the Stock exchange, for approval, at least a month before it is presented to the Court or Tribunal.

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Listing Agreement Compromise/Arrangements/ Amalgamations

(Cont.)

Conflict Once the approval has already been obtained from Stock

Exchanges, prior to filing of the Scheme with the Court/Tribunal, there is no reason/justification to again obtain the approval of Stock Exchanges.

Can the stock exchange which has earlier granted approval, subsequently object to the Scheme?

Requirement of obtaining SEBI’s approval is unwarranted, as SEBI administers Listed Companies through Stock Exchanges.

RBI’s consent may be relevant only for NBFCs/ Banking/Financial Companies and not in case of companies engaged in manufacturing/ trading/ service.

It would make the process of amalgamations etc. more cumbersome and time consuming.

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Accounting StandardRelated Party - Meaning thereofCompanies Bill- Cl. 2(1)(zzy) defines as:

a.a relative of a director or key managerial personnel;b.a firm, in which a director, manager or his relative is a

partner;c.a private company in which a director or manager is a

member or director;d.a public company in which a director or manager is a director

or holds along with his relatives, more than 2% of its paid-up share capital;

e.any body corporate whose Board/ MD/Manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager;

f. any person under whose advice, directions or instructions a director or manager is accustomed to act;

g.holding, subsidiary, fellow subsidiary or an associate company30

Related Party - Meaning thereof (Cont.)

Accounting Standard -AS-18 defines as:

a.Holding companies, subsidiaries and fellow subsidiariesb.Associates and joint venturesc. Individuals (incl. their relatives) – having voting power

giving them control or significant influenced.Key management personnel including their relativese.Enterprises where controlling individual or key managerial

personnel has significant influence

Accounting Standard

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Related Party - Meaning thereof (Cont.)

Conflict• Under AS-18, determining factor is the ability of the

party to control/exercise significant influence. Under the Bill it is the status of the person.

• A person who is a Professional Director will not come under the category of Related Party as per AS-18, whereas as per the Companies Bill not only such Director but even his relatives, firm in which he or his relative is partner, other companies in which he is a director or holds with his relatives more than 2% of Paid-up capital will come within the ambit of related party.

Accounting Standard

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Accounting StandardAssociate Company - Meaning thereofCompanies Bill Cl. 2(1)(f) defines as 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 or of any other company.

Significant Influence here means control of at least 26% of total voting power, or of business decisions under an agreement

Accounting Standard AS-18 defines as an enterprise in which the investor has

significant influence and which is neither a subsidiary nor a joint venture of the investor.

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Accounting StandardAssociate Company - Meaning thereof

(Cont.)

Conflict Bill exempts only subsidiary whereas Accounting Standard

exempts subsidiary as well as Joint Venture. The financial statement being prepared as per AS will give

a different treatment to an entity which is an associate whereas it will be viewed differently under Companies Act.

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Ind-AS converged with IFRSIllustrative List of areas where changes will be required in case Ind-AS are made mandated on standalone financial statementsComputation of profits available for dividend distribution

Whether profits/losses arising out of fair value changes will be available for distribution as dividend

Whether items of other comprehensive income will be considered for computing profits available for dividend

Computation of managerial remuneration Whether profits/losses arising out of fair value changes

will be available for distribution as dividend Whether items of other comprehensive income will be

considered for computing profits available for dividend

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Ind-AS converged with IFRS Availability of retained earnings (positive or negative)

arising on first time adoption of Ind-AS

The impact of transition to Ind-AS is going to affect the net worth. What will be the treatment of this impact

Impact of retrospective adjustment arising out of prior period errors and changes in accounting policies on returns filed with ROC, data submitted to banks and other authorities Prior period items and changes in accounting policies

require restatement Is it going to be permitted in law Impact on returns already submitted

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The revised Schedule VI The format and content of balance sheet and

statement of profit and loss account have been re-characterized and convergence to accounting standards have been attempted and henceforth accounting standards shall prevail over the revised schedule.

However the format of financial statements are neither in sync with those statements under the SEBI (ICDR) Regulations, 2009 nor under Clause 41 to the listing agreement.

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CARO

Companies Audit Report Order, 2003 is another segment which is prescribed only under the Companies Act, 1956 but not found elsewhere. While the objective of the Report is laudable, from the stakeholder point of view, it should be synchronised and harmonised with other allied corporate laws.

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XBRL

The green initiative of the Ministry of Corporate Affairs in bringing another feather change is that of introduction of new filing of financial statements in Extensible Business Reporting Language (XBRL)and it should found its place in other corporate laws as financial statements gets unified and filed under one common umbrella from which users and public can have the domain.

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Competition Act Matters relating to mergers and

amalgamations in the new Companies Bill should also take into account the compliances required under other laws such as the Competition Act.

The provisions on Mergers and Amalgamations are silent on the interface with the Competition Act, 2002 and the Competition Commission’s role in clearing merger proposals.

Whilst there seems to be a speedier mechanism for effectuating mergers, the uncertainties with respect to compliance with other laws including Competition Act needs to be addressed

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Way Ahead

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Way Ahead Adopt a systematic approach to corporate law reforms. A “principled” development of the law is preferable rather than

wholesale adoption or even a form of piecemeal reform. A more business-friendly approach with a laissez-faire spirit and

a more internationally competitive company law will gradually evolve. Perhaps, aspects such as democracy and citizenship may become more important in the future reform of company law.

It is hoped that Companies Bill would be revised in the light of issues addressed in the report of the Hon’ble Parliamentary Standing Committee and a brilliant piece of legislation would be brought out to usher in a new era of best governance practices.

The Companies Bill 2009, which has been pending for passage for quite some time now is expected to be tabled in the Parliament soon which would then be discussed, debated and considered for approval and would replace the Companies Act, 1956. The new bill is hoped to fulfil the expectations of its having greater shareholder democracy and stricter corporate governance norms.

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