icai co act 2013 ppt ca sudhir soni

7/25/2019 Icai Co Act 2013 Ppt CA Sudhir Soni

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Companies Act Seminar

January 25, 2014

ICAI- Ahmedabad



Agenda

► An overview of key

requirements and impact:

► Directors

► Board Committees

► Managerial Remuneration

► Related Party & Arms’ Length



Directors- Key Changes and Requirements

► Maximum number of directors raised to 15 from 12

► Can be enhanced by special resolution without Central Government approval

► Atleast one director to be a resident director

► Atleast one women director by the prescribed class of Companies as stated in the rules

► Every listed company within 1 year from commencement of the proviso

► Every other company with paid up capital of Rs 100 cr or more within 3 years from commencement of the proviso

► Atleast one third of the board to comprise of Independent Director by

► Listed company ,

► Public Company having

► Turnover >= Rs 300 crore or

► Paid up share capital of >= Rs100 crore or

► O/s Loans / Borrowings / Deposits / Debentures > Rs 200 crore



Independent Directors

An ID cannot be –

► Present or past Promoter of Company/Holding/Subsidiary/Associate

► Relative of promoter or director in the Company/Holding/Subsidiary/Associate

► Pecuniary relationship with Company / Holding / Subsidiary / Associate or their

promoter/directors in last 2 years and current year

► Relative who has pecuniary relationship/transaction with Company / Holding /

Subsidiary / Associate or their promoter/directors >=2% of gross turnover / Rs. 50

lakhs (whichever is lower) in last 2 years or current year

► Neither he nor his relatives is KMP in the company - or employee of

Company/Holding/Subsidiary/Associate in last 3 years

► Neither he nor his relative is employee/proprietor/partner in last 3 years in firm of

auditors/company secretary in practice or cost auditor of

Company/Holding/Subsidiary/Associate

►

Neither he nor his relative is employee/proprietor/partner in last 3 years in legal or consultancy firm having transaction >=10% of gross turnover of such firm

► A person who together with his relatives hold >=2% of voting power of the

company

► Nominee Director

Independence

Section 149(6)



Independent Directors

► Not be entitled to any stock options

► Sitting Fees max of Rs 1 lakh per meeting, reimbursement of

expenses

► Profit related commission as approved by BOD subject to

limits

Remuneration

Section 149(9)

► Term of 5 Consecutive years; Can be extended for further 5

years by special resolution;

► Re-appointment only after a cooling period of 3 years

► Applies prospectively, ie current term will not be counted

► Not liable for rotation- Sec 149(6)

Tenure

[Section 149

(10) and (11)]



Code for Independent Directors- Schedule IV

► Appointment to be formalized through a letter of appointment

► Professional Conduct and Role to include inter alia:

► Bring independent judgement on issues of strategy, performance, risk management and

standard of conduct

► Satisfy themselves on integrity of financial information and financial controls

► Safeguard interest of minority shareholders

► Balance the conflicting interest of the stake holders

► Key role in appointment & remuneration of executive directors, key managerial personnel and

senior management

► Separate meeting to review performance of non- independent directors, board, chairperson and

flow of information

► Assist the company in implementing the best corporate governance practices

► Reappointment on the basis of performance evaluation



Board Evaluation Mechanism

► Provision for Evaluation of board under Companies Act, 2013.

► Evaluation of Directors was already in India as a non-mandatory requirement :

a) under Clause 49 of the Listing Agreementb) Corporate Governance Voluntary Guidelines (issued by MCA)

Evaluatee Evaluator Section

Board of directors Separate meeting of ID’s 134 and 149 (8) read with Schedule IV

Non-Independent director Nomination and remuneration committee 134 and 178 (2)

Separate meeting of ID’s 149 (8) read with Schedule IV

Independent director (ID) Entire Board of directors (other than the ID beingevaluated)

149 (8) read with Schedule IV

Chairman Separate meeting of ID’s 149 (8) read with Schedule IV



Liabili ty of Independent Directors – Sec 149(12)

► Liable only for such acts of omissions or commissions by a Company which haveoccurred with his knowledge, attributable through Board processes, with his

consent or connivance and where he had not acted diligently

► Director to be liable for offences occurred during his tenure



Committee’s of the Board

Companies Act, 2013 Rules prescribed under Companies Act, 2013

► Every listed company and such other class or

classes of companies, as may be prescribed,

shall constitute an Audit Committee.

► The audit committee shall consist a minimum of 3

directors with ID’s forming a majority.

► Public Companies having:

► paid up share capital of Rs 100 crore or more;

or

► aggregate, outstanding loans or borrowings or

debentures or deposits, exceeding Rs 200

crore

Audi t Commi ttee

Companies Act 2013 vs Clause 49

Provision Companies Act, 2013 Clause 49

► No of independent director ► Majority ► Two third

► Financially literate ► Majority members ► All Members

► Chairman ► Need not be Independent

Director

► Independent Director



Audit Committee- Overview and key changes

► Additional roles and responsibilities of Audit Committee will include

► Audit Committee to recommend Auditor’s

► Review and monitoring of auditor independence, performance and effectiveness of the audit

process

► Approval of related party transactions / any subsequent modification

► Scrutiny of inter-corporate loans and investments

► Valuation of undertaking or assets of the company, if required

► Monitoring the end use of funds raised through public offers and related matters instead of just

reviewing the monitoring report

► Evaluation of Internal Financial Controls and Risk Management Systems

► The AC shall have power to investigate and appoint advisors to assist

► If the Board has not accepted any recommendation of AC, disclosure along with reasons therefor is

required in Boards report



Other Committee’s

► Nomination and remuneration committee (NRC)

► Mandatory for listed companies and prescribed companies to constitute NRC. Listing

agreement requires NRC as a non-mandatory requirement

► To comprise 3 or more non-executive directors with not less than half independent directors

► Recommend appointment and removal of director and evaluate director’s performance

► Formulate policy for determining qualification, positive attributes and independence of director

► Recommend policy for remuneration of directors, KMP and senior management

► Chairman of the Company cannot be a chairman of the NRC

► Stakeholder Relationship Committee (SRC)

► Company with more than 1000 shareholders, debenture holders, deposit holders and any other security holders at any time during the year to constitute SRC.

► SRC will consider and resolve the grievances of security holders

► Presently, listing agreement requires ‘Shareholders/Investors Grievance Committee’ under

chairmanship of non-executive director



Vigil Mechanism

► Vigil Mechanism – For directors / employees to report their genuine concerns(Suspected fraud & unethical behavior) to the Audit Committee

► To be established by► Listed Company

► Companies which accept deposits from the public and

►

Companies which have borrowed money from banks and public financial institutionsin excess of fifty crore rupees

► To provide adequate safeguards against victimization of persons who use such

mechanism

► Make provision for direct access to the chairperson of the Audit Committee in

appropriate or exceptional cases

► Details of establishment of such mechanism shall be disclosed by the company on its

website, if any, and in the Board’s report



Directors- Key Changes and Requirements

►

Limit on directorship – Increased from 15 to 20, however includes:-► Directorship in private companies

► Alternate Directorship

► Caps the directorship in public companies to 10

► Director to vacate office if he remains absent f rom al l the meet ings of theBOD held during 12 months whether with or without seeking leave of

absence of the BOD

► Additional grounds of disqualification of directors

► Conviction of an offence dealing with related party transaction during the past 5

years

► Inclusion of private companies for disqualification of directors under the current

Section 274(1)g



Appointment of Key Managerial Personnel (KMP)

► KMP to include►MD/CEO/Manager/WTD

►CS

►CFO

►Mandatory for listed company and any other company whose paid up

capital exceeds Rs 5 cr as per draft rules

►MD/CEO can not be appointed as a Chairman unless► Articles provide or

►Company does NOT carry multiple business

► KMP (excluding MD) not to hold office in more than one Company except in

the subsidiary

► MD can also be a MD of one other company

► KMP can be a director with the permission of the Board



Appointment of MD/ WTD /Manager

Key Changes in comparison to Companies Act 1956

► Applicable to private companies

► Minimum age 21 years (25 years as per existing act) and maximum 70 years

►Upper age limit can be relaxed by the company if shareholders by special resolution

approve it

► No reappointment earlier than one year (2 years as per existing act)

► A person convicted by court for any offence and sentenced for a period exceeding

six months cannot be appointed as a MD/WTD/Manager ( offence involving moral

turpi tude as per existing act)

“ Applicability of above provisions to Private Co will enforce strict governance in such

companies”



Directors’ Report - Disclosures

► Extract of Annual Return (in prescribed form)

► Statement of declaration by Independent Directors that he is independent (Nominee directors’ notindependent )

► Policy on Directors appointment & remuneration, KMP’s remuneration

► Particulars of loans, guarantees and investments made u/s 186

► Particulars of Contracts/Arrangements with related parties along with justification for same u/s 188

► CSR and Risk Management policy developed and implemented

► Statement indicating the manner in which formal annual evaluation has been made by the board of

its own performance and that of its committees/individual directors

► Details of establishment of Vigil Mechanism

► Report on the performance and financial position of each of the subsidiaries, associates and joint

venture in consolidated financial statement. Currently, only the financial statement position of

subsidiaries had to be included in the Annual Report.

► Directors ’ Responsib il ity Statement - Confirmation on adequate and effective operation of

Internal Financial Controls and systems to ensure compliance will all provisions of all applicable

laws, compliance with Accounting Standards and Going concern principles



Director’s Report – Median Remuneration

The Act has introduced the requirement for various disclosures relating to remuneration

and concept of median remuneration –

► The ratio of the remuneration of each director to the median remuneration of theemployees

► % increase in remuneration of each director and CEO

► % increase in the median remuneration of employees

► Explanation on the relationship between average increase in remuneration and companyperformance

► Comparison of the remuneration of the KMP against the performance of the company.

► The key parameters for any variable component of remuneration availed by thedirectors.

► The ratio of the remuneration of the highest paid director to that of the employees whoare not directors but receive remuneration in excess of the highest paid director



Managerial Remuneration



Managerial Remuneration – Key changes

► In calculating the net profit for the purpose of managerial remuneration the following will be deducted:

“the excess of expenditure over income, which had arisen in computing the net profits in this section

in any year which begins at or after the commencement of this Act , in so far as such excess has

not been deducted in any subsequent year preceding the year in respect of which the net profits have

to be ascertained”

► Remuneration to include perquisites as defined under Income Tax. Whether valuation of perquisites

to be done as per Income Tax Rules ?

► MD/WTD in receipt of commission from the company can also receive remuneration/commission

from subsidiary or holding company subject to disclosure in Board’s Report

► Indemnity Insurance Premium paid for managerial person shall not be included in managerial

remuneration unless the person is proved guilty (Sec 197(13))

► Recovery of remuneration (including stock options) in case of restatement of FS (Sec 199)



Managerial Remuneration – Key changes

► Loss / inadequate profit companies – Increase of limits and option of paying higher of:

► Slab limits or

► A managerial person who was not a security holder of rupees five lakh or more or

an employee or a director of the company or not related to any director or promoter

at any time during the two years prior to his appointment can be paid upto 2.5% of

the current relevant prof it

► Current relevant profit is the profit as calculated under section 198 but without deducting the

excess of expenditure over income in respect of those years during which the managerial

person was not an employee, director or shareholder of the company or its holding or

subsidiary companies

► Newly incorporated Companies (for first seven years) and sick companies with revival

schemes ( for five years from sanction of scheme ) can pay twice the limits specified



Companies Act 2013

Effective CapitalRemuneration in

INR (Per Annum)

Negative Or less than 5 Cr 30 Lakhs

5 Cr to 100 Cr 42 Lakhs

100 Cr to 250 Cr 60 Lakhs

250 Cr and Above

60 Lakhs+ 0.01% of

the effective capital in

excess of 250 Cr.

Companies Act 1956

Effective CapitalRemuneration in INR

(Per month)

0 to 1 Cr 75,000

1 Cr to 5 Cr 100,000

5 Cr to 25 Cr 125,000

25 Cr To 50 Cr 150,000

50 Cr to 100 Cr 175,000

100 Cr and above 200,000

“ The above limits shall be doubled if the shareholders pass a special resolut ion to that effect “

Remuneration slabs as per Schedule V for loss makingor Co with inadequate profits



Secretarial Requirements

Provisions Companies Act 2013 Companies Act, 1956

► Appointment of Company

Secretary (Sec 203)

Listed NonListed

Public

PUC >=

Rs 5 cr

Private

PUC >=

Rs 5 cr

Listed

Mandated

by Clause

47 of LA

NonListed

Public

PUC >=

Rs 5 cr

Private

PUC >=

Rs 5 cr

► Secretarial Audit to be carriedout by PCS and attached to the

BR ( Sec 204)

PUC >=Rs 100 cr

NotRequired

NotRequired

NotRequired

NotRequired

► Observing Secretarial

Standards (Sec 118(10))

Not

Specified

Not

Specified

Not

Specified

► Certifying Annual Report to

ensure compliance with Act by

a PCS (Sec 92)

PUC >=

Rs 5 cr

and T/O

>= Rs 25

cr

PUC >=

Rs 5 cr

and T/O

>= Rs 25

cr

Not

Required

as CS

appointed

To be filed

with

Registrar

PUC >=

Rs 10 lacs

, not

exceeding

Rs 5 cr

To be filed

with

Registrar

PUC >=

Rs 10 lacs

, not

exceeding

Rs 5 cr

3

3

3 3 3

3

► PUC- Paid Up Capital T/O- Turnover PCS- Practicing Company Secretary LA- Listing Agreement



Related Party Transact ions

Section 188



Related Parties 2013 Act 1956 Act

Director of the Company or his relative

Key Managerial Personnel (“KMP”) or his relative

Senior Management of the Company (All members of

management one level below the executive directors,

including the functional heads)

A firm in which such director, manager or relative is a

partner

A private company of which director, manager is a member

or director

A public company in which a director or manager is a

director A public company in which a director or manager holdsalong with his relatives, more than two per cent of its

paid-up share capital

“ Related Parties” – Defined Term

3 3

3

3

3

3

3

3

3

l

l

ss

l

s

-- Not there in Co Act 1956 -- Existing with some changesl s



Related Parties 2013 Act 1956 Act

Any body corporate whose Board of Directors, managingdirector or manager is accustomed to act in accordance with the

advice, directions or instructions of a director or manager unless

advice is given in a professional capacity

Any person on whose advice, directions or instructions a director

or manager is accustomed to act, unless advice is given in a

professional capacity

A Holding, subsidiary or an associate company of such

company along with

• Their directors and relatives

• Their KMPs and relatives• Their Senior management

Fellow Subsidiary

“ Related Parties” – Defined Term

3

3

3

s

l

s

3 l

-- Not there in Co Act 1956 -- Existing with some changesl s



The Companies Act, 2013 – Related party

X Limited

Directors

Relatives

Private Co

Public Co

Firm

Senior Management KMP

Relatives

Subsidiary AssociateFellow

Subsidiary

► Director

► Member

► Partner

► Relatives arepartner

► Director

► Holds more than 2% withrelatives

► Directors and Relatives

► KMP and Relatives

► Senior Management

► A ny body corporate w hose B oard of Directors,

m anaging director ormanager is accustom ed to

act in accordance w ith the advice, directions orinstructions of a director or m anager unless

advice is given in a professional capacity

► A ny person on w hose advice, directions or

instructions a director ormanageris accustom ed

to act, unless advice is given in a professional

capacity

Holding

“ ”



What are the changes – “ Relative”

Cases of Relative

Co. Act,

1956

Co. Act,

2013 Cases of Relative

Co. Act,

1956

Co. Act,

2013

Members of HUF Yes Yes Mother’s father Yes Yes

Husband/ wife Yes Yes Son’s son/ daughter Yes Yes

Father (including step-father) Yes Yes Daughter’s husband Yes Yes

Mother (including step-mother) Yes Yes Son’s daughter’s husband Yes No

Son (including step-son) Yes Yes Daughter’s son Yes No

Daughter (including step

daughter)

Yes Yes Daughter’s Son’s wife Yes No

Son’s son’s wife Yes No

Brother (including step brother) Yes Yes Daughter’s daughter Yes No

Sister (including step sister) Yes Yes Daughter’s daughter’s

husband

Yes No

Son’s wife Yes Yes Son’s daughter’s husband Yes No

Father’s father Yes Yes Daughter’s son’s wife Yes No

Father’s mother Yes Yes Brother’s wife Yes No

Mother’s mother Yes Yes Sister’s husband Yes No

No significant change in the defini tion of “ Relative” as provided in the Act. However,

there are changes in relationships prescribed by Rules under the definition.



AS 18 Vs. Companies Act, 2013

► Covered in AS 18 but not in Companies Act

► Investing party with respect to associate/ JV

► Covered in Companies Act but not in AS 18

► Non-Executive Director

► Senior management (including functional heads)

► Unlike AS-18, ownership by director is not required. Partnership of firm, membership of Private Company and 2% holding in public company is enough to be cover them as

related party. Further, AS-18 does not include shareholding by relatives of director for the

purpose

►

Definition of relatives under AS-18 is more restricted► Companies with Common Directors



Covered transactions under Section 188

• Sale, purchase or supply of any goods or materials

• Selling or otherwise disposing of, or buying, property of any kind

• Leasing of property of any kind

• Availing or rendering of any services

• Appointment of any agent for purchase or sale of goods, materials, services

or property

• Related party's appointment to any office or place of profit in the company,

its subsidiary company or associate company

• Underwriting the subscription of any securities or derivatives thereof, of the

company



Related Party Transactions

Related Party Transaction Impact

In ordinary course of business – at arm’s length No prior approval

In ordinary course of business – not at arm’s length Approval through Board

Resolution

Not in the ordinary course of business apart from

below

Approval through Board

Resolution

Not in the ordinary course of business (in the case of

a company having a paid-up share capital of not less

than 1 cr or transactions not exceeding 5% of turnover or 20% of net worth)

Approval of shareholders by

special resolution AND

Board consent



Related party transactions

► Contract / arrangement shall be referred to in the Boards report to the shareholders

along with the justification

► If contract / arrangement entered into without obtaining approval as per above - The

same to be ratified by the Board / Shareholders at a meeting within 3 month, if not

done;

► Contract / arrangement shall be voidable at the option of the Board

► If the contract / arrangement is with a related party to any director, or is authorised by any other

director, the directors concerned shall indemnify the Company against the loss incurred by it

► Company can proceed against a director / employee for recovery of any loss sustained as a

result of such contract

► Significant penal consequences if director or employee has violated the provision of the

act:

► Listed Co- Fine (Rs 25,000 to Rs 500,000) or imprisonment upto 1 year

► Other Co- Fine (Rs 25,000 to Rs 500,000)



Arms’ length ?

► ALP is an estimate and not a finite number

► Sometimes a back filling exercise

► Divergent stands – Customs V/s Income Tax

► Important to produce the same facts and details

► What happens when the ALP is challenged by the tax authorities subsequently OR they

change the method of determining the ALP?



Thank You



Clause 49 v/s Companies Act 2013

Provisions Clause 49 Companies Act, 2013

► Non existence of pecuniary

relationship/transactions

► Time frame for consideration

of pecuniary


► Pecuniary

relationship/transactions with

relatives of ID

► Nominee Director

► Tenure

► Entitlement of stock options

► No of ID

► Only Material pecuniary


► Does not specify any time

frame to be considered

► No examination of the

independence of relatives

required

► Deemed to be ID

► Cannot serve for more than

nine consecutive years

► Entitled

► Chairman- ED/related to

promoter – one half

► Chairman- Non ED- one third

► All pecuniary


► Relationship should not have

existed either in the current FY

or immediately preceding 2

years

► Relatives cannot have pecuniary


exceeding a prescribed amount

► Cannot be ID

► maximum of two tenures of five

consecutive years

► Not entitled

► One third

icai co act 2013 ppt ca sudhir soni

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