SEMINAR ON COMPANY LAW ORGANISED BY DTPA STUDY CIRCLE, ICAI

SEMINARON COMPANY LAW

ORGANISED BYDTPA STUDY CIRCLE, ICAI

22/04/14

COMPANIES ACT, 2013SOME SELECTED TOPICS

CA. NITESH MORE

Companies Act, 1956 Companies Act, 2013

• It has 658 Sections, Rules & 15 Schedules

• It was introduced on 1st April, 1956

• It extends to the whole of India (except Sikkim- it has its own Companies Act)

The Act has 470 Sections (309 pages), 29 chapters, 7 Schedules & 29 rules (338 pages)

98 Sections has been notified w.e.f. 12th September, 2013 & 282 sec. has been notified w.e.f. 1st April, 2014.

It applies to the whole of India

Relevant provisions

• SEC 185• SEC 186• CHAPTER V & ITS RULES: SEC 73 TO SEC 76 &

Sec 185: An Anti-business sec NO LOAN / SECURITY / GUARANTEE TO DIRECTORS &other PERSONS IN WHOM DIRECTOR IS INTERESTED

• No company can directly or “indirectly” advance loan to its “directors” or to “other persons in whom directors are interested”.

• No company can give any guarantee or provide any security in connection with any loan taken by him or such other person.

• Company can’t give loan represented by a book debt to above mentioned person”.

Meaning of the word ‘Indirect’

The word ‘indirect’ used means that the co does not give a loan to director through the agency of one or more intermediaries. The word ‘indirect’ cannot be read as converting what is not a loan into a loan. [Dr. Fredie Ardeshir Mehta V Union of India (1991) 70 Comp Cas 210]

Planning

1) Convert Lender co & borrower co to LLP or2) Convert other co (to whom loan is given) to public

Ltd to enjoy 25% limit or 3) Rearrange shareholding pattern & directorship

pattern: a)Appoint new directors in lender Co, who

personally neither hold any share in other co nor are directors in other co. If their relatives holds shares or are directors than there is no problem or

b) Gift of shares

MEANING OF “TO ANY OTHER PERSON IN WHOM DIRECTOR IS INTERESTED”

• (a) INDIVIDUAL: Director of lending co., or holding co. or any partner or relative of any

“such director”; (b) FIRM: in which any such director or relative is a partner;(c) PVT LTD CO: of which such director is a director or member;

• [Note - Relative of Director are not covered under this sub clause]

MEANING OF “TO ANY OTHER PERSON IN WHOM DIRECTOR IS INTERESTED”

• (d) BODY CORPORATE at a general meeting of which at least 25 % of voting power may be exercised or “controlled” by such director, or by two or more such directors, together; or[Note - Relative of Director also not covered under this sub-clause]

• (e)BODY CORPORATE Board, MD or manager, whereof is accustomed to act in accordance with directions or instructions of Board, or of any director or directors, of lending company.

Planning

1) Convert Lender co to LLP or2) Convert other co (to whom loan is given) to public

Ltd to enjoy 25% limit or 3) Rearrange shareholding pattern & directorship

pattern: a)Appoint new directors in lender Co, who

personally neither hold any share in other co nor are directors in other co. If their relatives holds shares or are directors than there is no problem or

b) Gift of shares

How to rearrange shareholding & Directorship pattern?

Suppose A,B,C,D are 4 members in a family. They have 2 Cos: A Pvt Ltd & C Pvt Ltd.

i) We can appoint A& B as directors of A Pvt Ltd. & gift all shares in name of C & D in A Pvt Ltd to A & B.

ii) We can appoint C& D as directors of C Pvt Ltd & gift all shares in name of A & B in C Pvt Ltd to C & D.

MEANING OF “CONTROL” [Sec. 2(g)]

"Control" has been defined as to include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholding or management rights or shareholders agreements or voting agreements or in any other manner.

EXCEPTIONS

a) MD/WTD - The giving of any loan to a Managing or Whole-time director-

(i) as a part of the conditions of service extended by the company to all its employees; or

(ii) Pursuant to any scheme approved by the members by a special resolution;

b) ORDINARY COURSE - A company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the bank rate declared by RBI.

Ordinary Course of Lending:

TWO TEST(MY VIEW) :• If the company is engaged in lending activities

regularity & • Lend not only to directors/directors’ entities

but also to “arms’ length parties/unrelated parties”

Question: “All NBFC” engaged in lending activities in “ORDINARY COURSE”?

Ans: May not be

• Loan has not been defined under Co Act. • Any transaction of giving money to be returned in

money with or without interest can be treated as “loan”.

• Group companies usually give guarantee or provide securities for loan taken by other group company.

• Q: Should we stop doing this also?• Ans: Depend on shareholding & directorship

pattern.

DEFINITION OF LOAN

ADVANCE NOT COVERED BY SEC 185

• Normally an advance is not repayable as an advance

• It usually conveys an idea of a prepayment, that is, paying something in advance before it is actually due.

IMPRISONMENT & FINE UPTO 25 LAKHS

• Lender Company – Fine Rs. 5 lakhs to Rs. 25 lakhs &

• Receiver: Director or other person to whom any loan is advanced or guarantee or security is given -Imprisonment upto 6 months or fine Rs. 5 lakhs to Rs. 25 Lakhs, or both.

Guarantee covered, not letter of comfort

• In case of Guarantee, guarantor undertakes the liability of principal debtor, whereas

• In case of letter of Comfort, intention is to give introduction of debtor, without undertaking the liability of principal debtor

LOAN existing on 12 sep: Repay on due dates

• Existing loan/guarantee/security provided before 12th Sep, 2013 is not affected by above provisions. However, it should not be renewed & should be repaid on due date.

• “Loan repayable on demand” should be repaid on demand.

• “Loan repayable after fixed period” should be repaid on expiry of Fixed period.

LOAN given after 11th Sept.

• If any loan had already been given after 11th sep., there is contravention.

• However, if share application money/ advance for property/purchase of goods/ services etc. is given than there is no contravention.

LOAN given to group companies

• A family has two Pvt Ltd Companies. One Co has surplus fund , which they require in other.• Can they transfer surplus fund to other

as loan? • Ans: Depend on shareholding &

directorship patter

LOAN given by subsidiary to holding co. & Vice versa

• Assuming that directors (& “persons in whom directors are interested”)of subsidiary co. does not hold any shares in holding co, Sec. 185 is not attracted.

• Q: Can a subsidiary give loan to its holding? • Ans: Depend on shareholding pattern &

directorship patter of both company.

LOAN/security/guarantee given by holding to subsidiary co. & vice versa

MAY NOT COVERED IN • Clause (a) (as applicable for individual) or • Clause (b) (as applicable for Firm), • Clause (c) (for Pvt Ltdco.,only if director is a director or member), • Clause (d) (only if the director either by himself or two or more such

directors hold 25% or more of total voting power in the borrowing company,

• Clause (e) (only if borrowing company /its Board/Directors are accustomed to act as per the Directors of the board/Directors of the lending company

• To attract Sec. 185, any interest of director (or other person) in his “personal capacity(not holding as nominee of company)” is relevant. Interest of holding co. in subsidiary is not relevant.

Cont………..

Rule 10 of chapter XII: Whether Valid ?

(1) Any loan made by a holding co to its wholly owned subsidiary co or any guarantee given or security provided by a holding co in respect of any loan made to its wholly owned subsidiary co is exempted from the requirements under this section; and

Example

If H ltd gives loan to its 100% subsidiary S Ltd, it is exempted from application of sec 185 provided fund is used for principal business purpose.

Rule 10 of chapter XII: Whether Valid ?

(2) Any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company is exempted from the requirements under this section:

Provided that such loans made under sub-rule (1) and (2) are utilised by the subsidiary company for its principle business activities.

PRIVATE LTD COMPANIES HAVING TURNOVER UPTO 60 LAKHS SHOULD BE CONVERTED TO LLP

1) LLP is not a company, hence limit of audit of 20 company will not be applicable.

2) As Companies Act will not be applicable, you can transfer fund from one LLP to another group LLP.

3) Many of exemption which Pvt Ltd company enjoy under old Companies Act has been withdrawn, which are not applicable to LLP.

4) Compliances under new companies Act for Pvt Ltd Companies has been substantially increased, which are not applicable for LLPs.

Cont…

PRIVATE LTD COMPANIES HAVING TURNOVER UPTO 60 LAKHS SHOULD BE CONVERTED TO LLP

5) There is heavy penalty for non compliances under New Company Act. Penalty of Rs 50,000 is a small amount for a single violation.

6) Cost benefit analysis suggests that these should be converted into LLP.

7) However, as per Sec 47(xiiib) of Income tax Act, for tax neutrality of such conversion , turnover of Pvt Ltd company in any of last 3 years must not exceeds 60 lakhs. So, if turnover exceeds 60 lakhs than such conversion will be subject to income tax.

SHOULD PRIVATE LTD COMPANIES BE CONVERTED INTO PUBLIC LTD COMPANIES ??

1) Clause (d) is not applicable to a company at a general meeting of which less than 25% of the total voting power of Body corporate may be exercised or controlled by any such director, or by two or more such directors, together

2) We can plan accordingly and take benefit.

3) So, we can convert our existing Pvt Ltd companies to public Ltd companies and take benefits.

LOAN AND INVESTMENT BY A COMPANY(sec 186)

According to section 186 without prejudice of the provisions contained in this Act, a company shall unless otherwise prescribed, make investment through not more than two layers of investment companies;Provided that provisions of this sub-section shall not affect:

a) A company from acquiring any other company incorporated in a country outside India if such other company has investment subsidiaries beyond two layers as per the laws of such country;

b) A subsidiary company from having any investment subsidiary for the purposes of meeting the requirements under any law or under any rule or regulation framed under any law for the time being in force.


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 60% of its paid-up share capital, free reserve and securities premium account or 100% of its free reserves and securities premium account, whichever is more.

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 GM shall be necessary.

DEFINITION OF “DEPOSIT” [Sec. 2(31)] UNDER CO Act, 2013

• “Deposit” includes:• any receipt of money by way of deposit or

loan or in any other form by a company, • but does not include:• such categories of amount as may be

prescribed in consultation with the Reserve Bank of India

DEFINITION OF “DEPOSIT” UNDER deposit Rules, 2014

• “deposit” includes any receipt of money by way of deposit or loan or in any other form, by a company, but does not include –

any amount received by a company from any other company

any amount received from a person who, at the time of the receipt of the amount, was a director of the company

DEFINITION OF “DEPOSIT” UNDER CO Act, 1956[Expl. to Sec. 58A]

• “Deposit" means any deposit of money with, and includes • any amount borrowed by, a company but

shall not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India.

DEFINITION OF “DEPOSIT” UNDER Companies (Acceptance of Deposits)

Rules, 1975 • "deposit" means any deposit of money

with, and includes any amount borrowed by, a company, but does not include- • any amount received by a Company from

any other Company. • 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

SEC 73: Prohibition on acceptance of deposits from public (Similar to Section 58A of The Companies Act, 1956)

• 1) Co., except Banks, NBFC and other specified companies(Public co:100/500cr), shall not invite, accept or renew deposits from public.2) Co. may, by resolution in GM and subject to prescribed rules & conditions accept deposits from members.

• 3) If co. does not secure deposits then, the deposits shall be termed as “unsecured deposits” and shall be quoted all document related to invitation or acceptance of deposits.

SEC 73: Prohibition on acceptance of deposits from public (Similar to Section 58A of The Companies Act, 1956)

• 4) Deposits accepted shall be repaid with interest.

• 5) If co. fails to repay, depositor may apply to Tribunal for an order directing co. to pay sum due or loss incurred.

• 6) The deposit repayment reserve a/c shall only be used for repayment of deposits

SEC 74: Repayment of deposits, etc. accepted before commencement of this Act (New Provision)

1) If deposit or any interest remains unpaid on commencement of this Act, co. shall file, within 3 months, with ROC a statement(Form DPT-4) of all deposits accepted & sums remaining unpaid and repay the dues within 1 year or due date, whichever is earlier.

2) Tribunal may, on application made by co., allow further time to repay the deposit.

SEC 74: Repayment of deposits, etc. accepted before commencement of this Act (New Provision)

Penalty A) Company – shall pay deposit and interest

along with fine Rs. 1 crore to Rs. 10 crores &

B) Officer in default - Imprisonment upto 7 years or fine Rs. 25 Lakhs to Rs. 2 Crores, or both

SEC 76: Acceptance of deposits from public by certain Companies

• This new clause provides that a public company having specified net worth or turnover may accept deposits from persons other than its members subject to compliance with Sec 73(2), rules and credit rating.

Definition of Eligible co : Chapter V Rule

• “eligible company” means a public company as referred to in sub-section (1) of section 76, having a net worth of not less than 100 crore rupees or a turnover of not less than 500 crore rupees and which has obtained the prior consent of the company in general meeting by means of a special resolution and also filed the said resolution with the Registrar of Companies before making any invitation to the Public for acceptance of deposits:

• Provided that an eligible company, which is accepting deposits within the limits specified under clause (c) of sub-section (1) of section 180, may accept deposits by means of an ordinary resolution;

Deposit Rules, 2014

• No company referred to in sub-section (2) of section 73 and no eligible company shall accept or renew any deposit, which is repayable on demand or upon receiving a notice within a period of less than six months or more than thirty-six months from the date of acceptance or renewal of such deposit

REPORTING OF FRAUD TO CG [Sec. 143 (12)]

If an auditor of a company, in the course of the performance of his duties as

auditor, has reason to believe that an offence

involving fraud is being or has been committed against the company

by officers or employees of the company, he shall report the matter to the CG

Immediately or within prescribed time & manner.

NO DUTY OF CONFIDENTIALITY UNDER THE CA ACT. [SEC. 143(13)]

No duty to which an auditor of a company may be subject to (e.g. duty of confidentiality under the CA Act, 1949) shall be regarded as having been contravened by reason of his reporting the matter as above if it is done in good faith.

APPLICABLE TO COST & SECRETARIAL AUDITORS (SEC. 143(14)

Section 143(14) extends obligation cast by section 143 mutatis mutandis to: Cost Auditors appointed u/s 148 & Secretarial Auditors appointed u/s 204.

PENALTY FOR NOT-REPORTING OF FRAUD

• Fine Rs. 1,00,000/- to Rs. 25,00,000/- [Sec. 143 (15)].

REPORTING OF MATERIAL FRAUD [DRAFT RULES 10.10(1)]

For the purpose of Sec.143(12), in case: the auditor has sufficient reason and

information to believe that an offence involving fraud, is being or has been committed against the company by officers or employees of the company, such fraud is likely to materially affect the company, he shall report the matter to CG within 30 days.

REPORT TO AUDIT COMMITTEE/ BOARD ALSO IN PRESCRIBED FORM [DRAFT

RULES 10.10(1)]

Report shall be in the form of a statement as given in Form No. 10.3:

Report to be sent immediately but not later than 30 days of his knowledge or information, with a copy,

to the audit committee or in case the company has not constituted an

audit committee, to the Board.

MEANING OF MATERIALITY [DRAFT RULES 10.10(2)]

A. Fraud(s) that is or are happening frequently; or

B. Fraud(s) where the amount involved or likely to be involved is not less than:

5% of net profit or 2 % of turnover of the company for the

preceding FY.

REPORTING OF NON-MATERIAL FRAUD [DRAFT RULES 10.10(3)]

Auditors shall send a report in writing to the audit committee and Where the co. has not constituted an audit committee, to

Board.

The audit committee or the Board, as the case may be, shall reply to the auditors in writing as to steps taken by the audit committee or the Board in addressing the issues of fraud, including systemic issues.

In case the audit committee or the Board, as the case may be, is not taking action or the auditor is not satisfied with the action taken, he may report to the CG even if the fraud is not material in nature.

PENALTY FOR FRAUD (Sec. 447)

Any person guilty of fraud – Imprisonment: 6 months to 10 years; and Fine: Atleast amount involved in fraud, but may

extend to 3 times the amount involved in fraud.Where the fraud involves public interest,

imprisonment shall not be less than 3 years.

DEFINITION OF FRAUD (Sec. 447)

“Fraud” includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss.Example: Undisclosed sale

SOME ISSUES RELATING TO

ACCOUNTS

MEANING OF “FINANCIAL STATEMENT” [Sec. 2(40)]

It includes:a) Balance Sheetb) Profit & Loss statementc) Cash Flow statement (not mandatory for small companies, OPCs & Dormant companies)d) Statement of Changes in equity, if applicablee)Explanatory statement Note annexed to & forming part of Financial statements

MEANING OF “FINANCIAL STATEMENT”[Sec. 2(41)]

It means the period ending on 31st March every year and where a company has been incorporated on or after the 1st day of January of a year, the period ending on 31st March of the following year. The Companies Act, 2013 does not provide for extension of FY.

Requirements of Financial Statement (Sec. 129)

• The FS shall give a true and fair view and comply with the AS & shall be in the form as provided in Schedule III.

• The FS shall be laid in the AGM of that FY.• The holding company shall in addition, prepare

a CFS of the Company, all subsidiaries, associates & joint ventures and lay before the AGM.

Re-opening of accounts on Court’s or Tribunal’s orders (Sec. 130)

This new Section provides for provisions relating to re-opening or re-casting of the books of accounts of Company pursuant to order of Court or Tribunal on application made by CG, any Statutory Authority or any person concerned if it was found that earlier accounts were prepared in fraudulent manner or financial statements are not reliable due to mismanagement of affairs of the company. The accounts so revised or re-cast shall be final.

Voluntary revision of FS or Board’s report (Sec. 131)

The directors to prepare revised financial statement or a revised Board’s report of any of the 3 preceding financial years only once in a FY, if it appears to them that they did not comply with the requirement of Section129 or Section134 after obtaining approval of the Tribunal.

Tribunal shall take into account the representations if any, of the CG and of the IT Department.

Such revised financial statement or report shall be subject to rules prepared by CG.

Constitution of National Financial Reporting Authority (Sec. 132)

This Section provides that the CG may by notification constitute the NFRA to advice on Accounting Standards (AS) & Auditing Standards(SA), to monitor, enforce, compliance and overseeing the quality of service of associated professionals. to investigate matters of misconduct committed by any member of ICAI or any other prescribed profession and pass order which may be appealed to Appellate Authority to be constituted by CG.

CG to prescribe AS (Sec. 133)

This Section provides that the CG may, after consultation with NFRA, prescribe the Accounting Standards as recommended by the ICAI for adoption by companies.

Class of Co’s Which nfra will investigate

a) Companies Listed in or outside India;

b) Unlisted companies with net worth >= Rs. 500 crores or paid up capital >= Rs. 500 crores or annual turnover >= Rs. 1,000 crores as on 31st March of immediately preceding FY.

Class of ca firm Which nfra will investigate

a) audit of 200 companies or more in a year; or

b) audit of 20 or more listed companies; or

c) company (including listed company), having net worth >= Rs.500 crores or paid up capital >= Rs.500 crores or annual turnover >= Rs.1,000 crores as on 31st March of immediately preceding FY; or

d) company having securities listed outside India

Reference to nfra

Reference by CG or any authority: If any reference is made by CG or any regulator in public interest, no restriction of turnover or paid up capital etc. will be applicable.

Reference by CG/RD/ROC: Where any of them have any information in respect of any auditor or audit firm which is not complying with provisions of sec. 132 or rules made thereunder, he shall refer the matter to NFRA.

Copy of FS to be filed with Registrar (Sec. 137)

This Section provides that a copy of FS, auditor’s report etc shall be filled with the Registrar within 30 days.In case a company does not hold an AGM or the AGM has been adjourned in any year, a statement of facts and reasons along with FS and attachment has to be filed with the Registrar.In case the accounts are not adopted at AGM or adjourned meeting, the unadopted accounts shall be filed with ROC who shall take them in his records as provisional till final accounts are filed.One Person Co. (OPC) is required to file the FS with the Registrar within 180 days from the date of meeting.

Internal Audit (Sec. 138)

This new Section provides for conduct of internal audit of prescribed class or classes of companies(Listed co, Public co: Paid up Capital > 10 crores or Loan > 25 crores) . Manner of conducting internal audit shall be prescribed by the CG.

DEPRECIATIONDepn = (cost/wdv – residual value)/useful life

Schedule II introducedDepreciation to be based on useful life & residual

valueUseful lives of various tangible assets prescribedResidual Value not more than 5% of the original

cost of the asset From the date Schedule II becomes effective,

carrying amount of the asset shall be depreciated over the remaining useful life of the asset

SCHEDULE II (See section 123)USEFUL LIVES TO COMPUTE DEPRECIATION

PART ‘A’1. Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. The depreciable amount of an asset is the cost of an asset or other amount substituted for cost, less its residual value. “The useful life of an asset” 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.

USEFUL LIVES TO COMPUTE DEPRECIATION (Contd.)

2. For the purpose of this Schedule, the term depreciation includes amortisation.3. Without prejudice to foregoing provisions of paragraph 1,—

(i) In case of such class of companies, as may be prescribed and whose financial statements comply with the accounting standards prescribed for such class of companies under section 133 the useful life of an asset shall not normally be different from the useful life and the residual value shall not be different from that as indicated in Part C, provided that if such a company uses a useful life or residual value which is different from the useful life or residual value indicated therein, it shall “disclose the justification” for the same.


(ii) In respect of other companies the useful life of an asset shall not be longer than the useful life and the residual value shall not be higher than that prescribed in Part C.

(iii) For intangible assets, the provisions of the Accounting Standards mentioned under sub-para (i) or (ii), as applicable, shall apply.


PART ‘B’4. 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.


PART ‘C’5. Subject to Parts A and B above, the following are the useful lives of various tangible assets:Nature of assets Useful LifeI. Buildings [NESD](a) Buildings (other than factory buildings) RCC Frame Structure 60 Years(b) Buildings (other than factory buildings) other than RCC Frame Structure 30 Years(c) Factory buildings -do-(d) Fences, wells, tube wells 5 Years(e) Others (including temporary structure, etc.) 3 Years

USEFUL LIVES TO COMPUTE DEPRECIATION (Contd.)Nature of assets Useful LifeII. Bridges, culverts, bunders, etc. [NESD] 30 YearsIII. Roads [NESD](a) Carpeted roads(i) Carpeted Roads-RCC 10 Years(ii) Carpeted Roads-other than RCC 5 Years

(b) Non-carpeted roads 3 YearsIV. Plant and Machinery(i) General rate applicable to plant and machinery not covered underspecial plant and machinery(a) Plant and Machinery other than continuous process plant not covered under specific industries 15 Years(b) continuous process plant for which no special rate has been prescribed under (ii) below [NESD] 8 Years


Nature of assets Useful Life(ii) Special Plant and Machinery

(a) Plant and Machinery related to production and exhibition ofMotion Picture Films1. Cinematograph films—Machinery used in the production and exhibition of cinematograph films, recording and reproducing equipments, developing machines, printing machines, editing machines, synchronizers and studio lights except bulbs 13 Years2. Projecting equipment for exhibition of films -do-(b) Plant and Machinery used in glass manufacturing1. Plant and Machinery except direct fire glass melting. furnaces — Recuperative and regenerative glass melting furnaces 13 Years


Nature of assets Useful Life2. Plant and Machinery except direct fire glass melting furnaces — Moulds [NESD] 8 Years3. Float Glass Melting Furnaces [NESD] 10 Years

(c) Plant and Machinery used in mines and quarries—Portable underground machinery and earth moving machinery used in open cast mining [NESD] 8 Years(d) Plant and Machinery used in Telecommunications [NESD]1. Towers 18 Years2. Telecom transceivers, switching centres, transmission and other network equipment 13 Years3. Telecom—Ducts, Cables and optical fibre 18 Years4. Satellites -do-


Nature of assets Useful Life(e) Plant and Machinery used in exploration, production and refining oil and gas [NESD]1. Refineries 25 Years2. Oil and gas assets (including wells), processing plant and facilities -do-3. Petrochemical Plant -do-4. Storage tanks and related equipment -do-5. Pipelines 30 Years6. Drilling Rig -do-7. Field operations (above ground) Portable boilers, drilling tools, well-head tanks, etc. 8 Years8. Loggers -do

USEFUL LIVES TO COMPUTE DEPRECIATION (Contd.)Nature of assets Useful Life

(f ) Plant and Machinery used in generation, transmission and distribution of power [NESD]1. Thermal/ Gas/ Combined Cycle Power Generation Plant 40 Years2. Hydro Power Generation Plant -do-3. Nuclear Power Generation Plant -do-4. Transmission lines, cables and other network assets -do-5. Wind Power Generation Plant 22 Years6. Electric Distribution Plant 35 Years7. Gas Storage and Distribution Plant 30 Years8. Water Distribution Plant including pipelines -do-


Nature of assets Useful Life(g) Plant and Machinery used in manufacture of steel

1. Sinter Plant 20 Years2. Blast Furnace -do-3. Coke ovens -do-4. Rolling mill in steel plant -do-5. Basic oxygen Furnace Converter 25 Years

(h) Plant and Machinery used in manufacture of non-ferrous metals1. Metal pot line [NESD] 40 Years2. Bauxite crushing and grinding section [NESD] -do-3. Digester Section [NESD] -do-4. Turbine [NESD] -do-5. Equipments for Calcination [NESD] -do-6. Copper Smelter [NESD] -do-


Nature of assets Useful Life7. Roll Grinder 40 Years8. Soaking Pit 30 Years9. Annealing Furnace -do-10. Rolling Mills -do-11. Equipments for Scalping, Slitting , etc. [NESD] -do-12. Surface Miner, Ripper Dozer, etc., used in mines 25 Years13. Copper refining plant [NESD] -do-

(i) Plant and Machinery used in medical and surgical operations [NESD]1. Electrical Machinery, X-ray and electrotherapeutic apparatus and accessories thereto, medical, diagnostic equipments, namely, Cat-scan, Ultrasound Machines, ECG Monitors, etc. 13 Years


Nature of assets Useful Life 2. Other Equipments. 15 Years

(j) Plant and Machinery used in manufacture of pharmaceuticals and chemicals [NESD]1. Reactors 20 Years2. Distillation Columns -do-3. Drying equipments/Centrifuges and Decanters -do-4. Vessel/storage tanks -do-

USEFUL LIVES TO COMPUTE DEPRECIATION (Contd.)Nature of assets Useful Life

(k) Plant and Machinery used in civil construction1. Concreting, Crushing, Piling Equipments and Road Making Equipments 12 Years2. Heavy Lift Equipments—Cranes with capacity of more than 100 tons 20 YearsCranes with capacity of less than 100 tons 15 Years3. Transmission line, Tunneling Equipments [NESD] 10 Years4. Earth-moving equipments 9 Years5. Others including Material Handling /Pipeline/WeldingEquipments [NESD] 12 Years(l) Plant and Machinery used in salt works [NESD] 15 Years


Nature of assets Useful Life V. Furniture and fittings [NESD]

(i) General furniture and fittings 10 Years(ii) Furniture and fittings used in hotels, restaurants and boarding houses, schools, colleges and other educational institutions, libraries; welfare centres; meeting halls, cinema houses; theatres and circuses; andfurniture and fittings let out on hire for use on the occasion of marriages and similar functions. 8 Years

VI . Motor Vehicles [NESD]1. Motor cycles, scooters and other mopeds 10 Years2. Motor buses, motor lorries, motor cars and motor taxies used in a business of running them on hire 6 Years


Nature of assets Useful Life3. Motor buses, motor lorries and motor cars other than those used in a business of running them on hire 8 Years4. Motor tractors, harvesting combines and heavy vehicles -do-5. Electrically operated vehicles including battery powered or fuel cell powered vehicles 8 Years

VII. Ships [NESD]1. Ocean-going ships(i) Bulk Carriers and liner vessels 25 Years(ii) Crude tankers, product carriers and easy chemical carriers with or without conventional tank coatings. 20 Years


Nature of assets Useful Life(iii) Chemicals and Acid Carriers:(a) With Stainless steel tanks 25 Years(b) With other tanks 20 Years(iv) Liquified gas carriers 30 Years(v) Conventional large passenger vessels which are used for cruise purpose also -do-(vi) Coastal service ships of all categories -do-(vii) Offshore supply and support vessels 20 Years(viii) Catamarans and other high speed passenger for ships or boats –do-


Nature of assets Useful Life (ix) Drill ships 25 Years(x) Hovercrafts 15 Years(xi) Fishing vessels with wooden hull 10 Years(xii) Dredgers, tugs, barges, survey launches and other similar ships used mainly for dredging purposes 14 Years

2. Vessels ordinarily operating on inland waters—(i) Speed boats 13 Years(ii) Other vessels 28 Years

VIII. Aircrafts or Helicopters [NESD] 20 YearsIX. Railways sidings, locomotives, rolling stocks,

tramways and railways used by concerns, excluding railway concerns [NESD] 15 Years


Nature of assets Useful LifeX. Ropeway structures [NESD] 15 Years

XI. Office equipment [NESD] 5 Years

XII. Computers and data processing units [NESD](i) Servers and networks 6 Years(ii) End user devices, such as, desktops, laptops, etc. 3 Years

XIII. Laboratory equipment [NESD](i) General laboratory equipment 10 Years(ii) Laboratory equipments used in educational institutions 5 Years

XIV. Electrical Installations and Equipment [NESD] 10 yearsXV. Hydraulic works, pipelines and sluices [NESD] 15 Years

USEFUL LIVES TO COMPUTE DEPRECIATION (Contd.)Notes —1. "Factory buildings" does not include offices, godowns, staff quarters.2. 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.

3. The following information shall also be disclosed in the accounts, namely:—(i) depreciation methods used; and(ii) the useful lives of the assets for computing depreciation, if they are different from the life specified in the Schedule.

4. 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.


Notes (contd.)—5. Depreciable amount is the cost of an asset, or other amount substituted for cost, less its

residual value. Ordinarily, the residual value of an asset is often insignificant but it should generally be not more than 5% of the original cost of the asset.

6. The useful lives of assets working on shift basis have been specified in the Schedule based on their single shift working. Except for assets in respect of which no extra shift depreciation is permitted (indicated by NESD in Part C above), if an asset is used for any time during the year for double shift, the depreciation will increase by 50% for that period and in case of the triple shift the depreciation shall be calculated on the basis of 100% for that period.


Notes (contd.) —7. 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, shall be recognised in the opening balance of retained earnings where the remaining useful life of an asset is nil.

8. ‘‘Continuous process plant’’ means a plant which is required and designed to operate for twenty-four hours a day.


AUDIT & AUDITORS

Audit & Auditors: Some Amendments• Individual/ Audit Firm shall be appointed for a block

of 5 years.• For “Listed Co & prescribed class of companies

(under consideration)” – Compulsory rotation in 5 years (individual)/ 10 years (firm)

• In addition to accounting standards, auditing standards also being made compulsory

• Casual vacancy caused due to resignation- to be filled in 3 months by general body

• Errant auditor-removed and may not be allowed to become auditor of other Companies also for 5 years.

APPOINTMENT OF FIRST AUDITORS IN CASE OF COMPANIES OTHER THAN GOVT. CO. [SEC 139(6)]

• Appointment by Board: within 1 month of the date of registration.

• Appointment in EGM within 90 days : On failure of Board, Co. shall inform the members, who shall appoint at EGM.

• Tenure of office: Till the conclusion of the first AGM.

• No notice of appointment to ROC

• Appointment at 1st AGM: Every company shall, at the first AGM, appoint an individual or a firm as an auditor.

• Tenure of office: Till the conclusion of 6th AGM and thereafter till the conclusion of every 6th meeting.

• Ratification: The Company shall place the matter relating to such appointment of ratification by member at every Annual General Meeting.

APPOINTMENT OF subsequent AUDITORS [SEC 139(1)]

APPOINTMENT OF subs. AUDITORS [SEC 139(1)]

• Written consent: Before such appointment is made, the written consent of the auditor to such appointment shall be obtained from the auditor.

• Certificate: 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. The certificate shall also indicate whether the auditor satisfies the criteria provided in section 141.

• Notice of appointment: The Company shall inform the auditor concerned of his or its appointment, and also file a notice of such appointment with the Registrar within 15 days of the meeting in which the auditor is appointed.

CONDITIONS FOR APPOINTMENT(rule 10.2)

• Rule 10.2: For the purposes of the second proviso to sub-section (1) of section 139, the proposed appointee shall submit a certificate that

• (1) He or it is eligible for appointment and is not disqualified for appointment under the Act, the Chartered Accountants Act, 1949 and Rules and Regulations made therein

• (2) The proposed appointment is within the term allowed under the Act

• (3) The proposed appointment is within the limit laid down in the Act

INTIMATION OF APPOINTMENT to roc COMPANIES ACT, 1956

• Within 7 days of appointment by the company to the auditor

• The auditor shall within 30 days of the receipt of appointment letter, inform the ROC in Form 23B:

a. whether he has accepted

or b. whether he has refused

to accept

COMPANIES ACT, 2013• Within 15 days of

appointment by the company to the auditor

• The company shall within 15 days of appointment, inform the ROC :

a. his acceptance (not mentioning rejection

here because the consent letter is taken before)

ROTATION OF AUDITORS IN LISTED AND SPECIFIED CLASS OF COMPANIES [SEC

139(2)]

• STATUS PERIOD Individual 1 term of 5 consecutive years Audit Firm 2 terms of 5 consecutive years

• Cooling period of 5 years before next appointment

FIRM HAVING COMMON PARTNER INELIGIBLE FOR APPOINTMENT FOR NEXT

FIVE YEARS [PROVISO TO SEC. 139(2)]

As 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 financial year, shall be appointed as auditor of the same company for a period of 5 years.

TRANSITION PROVISIONS [PROVISO TO SEC. 139(2)]

Every company, existing on or before the commencement of this Act which is required to comply with provisions of this sub-section, company shall comply with the requirements of this sub-section within 3 years from the date of commencement of this Act.

ROTATION OF auditor, AUDITING PARTNER & HIS TEAM

• The CG may, by rules, prescribe the manner in which the companies shall rotate their auditors in pursuance of sub-section (2) {Sec 139(4)}.

• Members of a company may resolve to provide that -(a) in the audit firm appointed by it, the auditing partner and his team shall be rotated at such intervals as may be resolved by members; or (b) the audit shall be conducted by more than one auditor. {Sec 139(3)}

CASUAL VACANCY

• Any casual vacancy in the office of an auditor shall be filled by the Board of Directors within 30 days.

If it is because of RESIGNATION: a. At a general meeting b. Convened within 3 months of the

recommendation of the BOD c. The Auditor to hold the office till the conclusion

of the next annual general meeting

Reappointment of retiring auditor at AGM [Sec 139(9)]

A retiring auditor may be re-appointed at an AGM, if • he is not disqualified for re-appointment; • he has not given the company a notice in writing of his

unwillingness to be re-appointed; and • a Special Resolution has not been passed at that meeting

appointing some other auditor or providing expressly that he shall not be re-appointed.

• However, the above provision is subject to Sec 139(1) and the rules made thereunder. Where at any AGM, no auditor is appointed or re-appointed, the existing auditor shall continue to be the auditor of the company [Sec 139(10)].

Removal, RESIGNATION & SPECIAL NOTICE of Auditor: (Sec 140)

• REMOVAL: The auditor may be removed by special resolution after obtaining the previous approval of CG and after giving an opportunity of being heard.

• RESIGNATION: When Auditor resigns, a statement in prescribed form is to be filled with the Company and the Registrar within 30 days.

• Special notice shall be required for appointing a person as auditor other than a retiring auditor.

• The Tribunal is empowered to change auditor of a Co. in case of any fraudulent activities by auditor.

INTIMATION OF RESIGNATION

• The auditor shall file within a period of 30 days from the date of resignation, a statement in the prescribed form with (Form no.10.2):

a. the Company and b. the Registrar and c. the CAG (where applicable) indicating the reasons and other facts (for

resignation)• Non-compliance of it by the auditor: Penalty – Fine Rs.50,000 to Rs.5 lakhs

Eligibility, Qualifications of Auditors (Sec 141)

• A CA within the meaning of the CA Act, 1949 may be appointed as an auditor. Only a CA holding a CP can be appointed as an auditor.

• A firm whereof all the partners practicing in India are qualified for appointment may be appointed by its firm name to be the auditor of a company.

• Where a firm including a LLP is appointed as an auditor of a company, only the partners who are CA shall be authorised to act and sign on behalf of firm.

DISQUALIFICATIONS OF AUDITORS (SEC 141)

A body corporate other than a LLP:An officer or employee of the company. A person who is a partner, or who is in the employment,

of an officer or employee of the companyA person who, or his relative or partner—• is holding any security of or interest (beneficial owner)

in the company or its subsidiary, or of its holding or associate co. or a subsidiary of such holding co.However, the relative may hold security or interest in the company of face value not exceeding Rs. 1,000 or such sum as may be prescribed (1 Lakh) ;


• is indebted to the co., or its subsidiary, or its holding or associate co. or a subsidiary of such holding co., in excess of such amount as may be prescribed (1 Lakh); or

• has given a guarantee or provided any security in connection with the indebtedness of any third person to the co., or its subsidiary, or its holding or associate co. or a subsidiary of such holding co., for such amount as may be prescribed (1 Lakh);

• a person or a firm who, whether directly or indirectly, has business relationship with co., or its subsidiary, or its holding or associate co. or subsidiary of such holding co. or associate co. of prescribed nature;


• a person whose relative is a director or is in employment of the co. as a director or KMP;

• a person who is in full time employment elsewhere or a person or a partner of a firm holding appointment as its auditor, if such person or partner is at the date of such appointment or reappointment holding appointment as auditor of more than 20 companies (Exclusions expected: Paid up Capital less than 25 crores ;

• a person who has been convicted by a court of an offence involving fraud and a period of 10 years has not elapsed from the date of such conviction;

• any person whose subsidiary or associate co. or any other form of entity, is engaged as on the date of appointment in consulting and specialized services as provided in sec. 144.

Remuneration of Auditors (Sec 142)

This Section provides for remuneration of auditors of the company. It further defines the term “remuneration”. The remuneration is to be fixed generally in the general meeting.

Meaning of ‘remuneration’ [Sec 142(2)]

The remuneration under sub-section (1) shall, in addition to the fee payable to an auditor, include the expenses, if any, incurred by the auditor in connection with the audit of the company and any facility extended to him but does not include any remuneration paid to him for any other service rendered by him at the request of the company.


PRIVATE PLACEMENT

REASON FOR SUCH STRINGENT PROVISION:SAHARA INDIA

1. Recent case of Sahara India Real Estate Corp. Ltd vs. SEBI (Civil Appeal No. 9813 of 2011) provides basis of this section.

2. Section 42 of the Companies Act, 2013 has introduced a new provision regarding private placement of securities.

3. The Companies Act, 1956 is silent on this issue

Private placement [Sec 42]

Applicability - This sec. is also applicable for Private Ltd. Co. also.

Offer Letter - Co. may make private placement through issue of a private placement offer letter.

No. of persons - Offer of securities can be made to maximum of 50 persons or higher no. as may be prescribed(200)in a FY.

Exclusions - It excludes QIB and employees under a scheme of ESOP.

Private placement [Sec 42]Deemed Public Offer – 1)If offer is made to more than prescribed limits, then offer shall be deemed to be public offer. 2) Any offer not in compliance with provision of this sec. shall be treated as public offer.No fresh offer - No fresh offer can be made unless allotment of earlier offer either completed or withdrawn.

Cash Not Allowed - All monies for subscription shall be paid through banking channels but not by cash.

Separate Bank A/c - Application money shall be kept in a separate bank a/c in a scheduled bank.


Utilisation of Application Money - Money shall not be utilised for any purpose other than for adjustment against allotment of securities; or for the repayment of monies where the company is unable to allot securities. Allotment Period- Allotment shall be made within 60 days. Consequences of Failure - If co. do not allot within 60 days, it shall repay the application money within 15 days. If co. fails to repay, co. shall pay interest @12% p.a. from the expiry of 60 days.


Intimation of offer to ROC - Complete information about offer shall be filed with ROC within 30 days of circulation of offer letter.

Return of allotment - Return of allotment shall be filed with ROC in prescribed manner

Penalty – Co., Promoters & directors - amount involved in offer or Rs. 2 crore, whichever is higher. Co. shall refund all monies to subscribers within 30 days of order imposing penalty.

THANK YOUCA. NITESH MORE

SEMINAR ON COMPANY LAW ORGANISED BY DTPA STUDY CIRCLE, ICAI

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Transcript of SEMINAR ON COMPANY LAW ORGANISED BY DTPA STUDY CIRCLE, ICAI