New Companies Act

1
New Companies Act

• Salient Features of importance to the Industry
  and Opportunities / Critical Risks to the
  Chartered Accountants

2
Salient features
3
Salient Features

• New Concepts
• Business Structures
• Board and Management
• Business Friendly
• Accounts
• Audit and Auditors
• Dispute Resolution
• CSR
• Cross Border Mergers
• Others

4
New Concepts

• One person Company
• Concept of Small Company and Dormant Company
• Provisions of entrenchment in AOA
• National Financial Reporting Authority (NFRA)
  from NACAS
• More than advisory Charged with monitoring and
  enforcement
• Investigate into professional or other misconduct
• CSR obligations on companies
• Covered company to spend 2 of its average NP for
  3 years
• Provision for cross border mergers
• Registered Valuers
• CG empowered to prescribe restrictions on layers
  of subsidiaries
• New Act is highly rule driven

5
Business structures
6
Structuring Advisory
Chapter I Sec. 2 (62), 2 (85), 455

• New formats of business
• One Person Company (OPC)
• Dormant Companies
• Small Company
• Option to use these formats for business
• Especially, potential to convert proprietorship
  into OPC
• Number of members enhanced from 50 to 200 for
  private limited companies
• Effect on control and management
• Potential to advice on structuring revolving
  around terms an conditions to be placed on members

7
New Structures
Chapter I Sec. 2 (62), 2 (85), 455

• ICAI could take up measures to develop
• Simplified format for financials
• Accounting Standards for small companies
• Simplified format of Audit report including CARO
  requirements
• ICAI could also help provide support in terms of
  prescribing process for registration, monitoring
  etc., of these type of companies
• Especially, considering the experience India has
  had with a huge lot of vanishing companies!

8
Restriction on layer of subsidiaries
Chapter XII Sec. 186 (1)

• Step down subsidiaries restricted to two layers
  going forward
• Scope for advisory to groups which have
  significant number of subsidiaries across
  multiple layers

9
Directors and Management

• A person can be a director in 20 companies (incl.
  10 public companies)
• Duties and liabilities of directors has been
  prescribed
• Max. Directors 15 (more through special
  resolution)
• At least one woman director mandatory for certain
  class of companies
• Every company to have at least one director who
  has stayed in India for over 182 days in the PY
• Independent Directors prescribed for class of
  companies
• Also tenure (10 years) and liability codified
• Nominee director cannot be an independent
  director
• Stringent requirements for independence
• Statutory recognition to audit committee,
  remuneration committee and stakeholders
  relationship committee as well as CEO, CFO and CS
  as KMP

10
Directors and Management

• Shares cannot be issued at a discount
• Use of securities premium
• Inter corporate loans will include loans to and
  investment into any person
• Minimum interest on ICD to be G Sec rates
• More disclosures on related party transactions

11
Business Friendly - Process

• Speedy incorporation process
• Private limited members limit enhanced to 200
• Simpler and single forum approval for MA
• Simple and short process for holding and WOS or
  small companies
• Concept of deemed approval in some cases
• Squeeze out provisions purchase of minority
  shareholding when 90 holding reached
• Simplified process for voluntary removal of name
  from register

12
Business Friendly - E-enable

• Voting through electronic means by members at
  meeting
• Board meetings can be held by video conferencing
  / electronic means
• Such participation will count for quorum too
• Maintenance and allowing inspection of documents
  by companies in electronics form

13
Business Friendly Deleted

• Certificate of Incorporation is the conclusive
  evidence
• Provisions relating to certificate of
  commencement of business
• Statement in lieu of prospectus
• Statutory meeting and statutory report
• Share warrants
• Public trustee
• Payment of interest out of capital
• Transfer to general reserve for declaration of
  dividend
• Special audit
• Share qualification
• Restrictions on appointment and remuneration of
  sole selling / sole-purchasing agents
• Employees Security and PF amounts
• Receivers and Managers

14
Accounts

• Consolidated Financials made mandatory
• Companys financial year made standard 1st
  April to 31st March (except for exceptional
  cases)
• No need to attach full annual reports of
  subsidiaries
• Provision for revision of accounts
• On being ordered by the authority
• Voluntary revision
• Internal audit by members of professional body
  being made mandatory
• Mandatory secretarial audit for bigger companies
  including listed companies

15
Audit and auditors
16
NFRA
Chapter IX Sec. 132

• New oversight body for the accounting and
  auditing profession
• Functions hitherto with NACAS will also move over
  to NFRA
• NFRA will deal with
• Prescribing Standards based on ICAIs standard
  setting Accounting as well as Auditing
• Monitor compliance with the accounting and
  auditing standards
• For prescribed class of companies / auditors deal
  with disciplinary mechanism

17
Audit Rotation
Chapter X Sec. 139 (2)

• Rotation of auditors after 5 / 10 years for CA /
  firm
• Rotation of team and partner if the members so
  resolve
• 5 year tenure for auditors appointed in AGM
• Automatic reappointment in AGM where no auditor
  is appointed / reappointed
• Scope to move into Statutory Audits for more
  firms
• Opportunity to specialise in specific industries
  by firms to become the automatic choice for such
  rotation

18
Onerous Responsibility
Chapter X and XVI Sec. 245, 143

• 245 (1) (g) (ii) and 245 (2) Class Action suits
  a major area of concern for CA professionals
• 143 (3) (i) to be limited to internal financial
  controls that would materially impact the
  financial statements (like ICOFAR under SoX)

19
Audit Execution and Reporting
Chapter X Sec. 143

• 143 (3) (a) Details of
• How audit to be performed to be left to Auditing
  Standards
• Discretion on reporting issues to Auditors
  judgement

20
Fraud and Auditors Responsibility
Chapter X Sec. 143

• 143 (12) and 143 (15) To be limited to fraud,
  if identified in the course of the audit
• Audit is only seeking reasonable assurance
• Primary responsibility to protect from fraud and
  error lies with Management and TCWG
• Audit procedures
• May be effective to identify material errors
• But not to identify all frauds

21
Auditors Eligibility and Disqualifications
Chapter X Sec. 141

• 141 (1) - Firms / LLP with majority partners
  being Chartered Accountants can be auditors
• Could lead to non professionals and foreign
  entities taking advantage
• Only multi disciplinary firms under CA Act to be
  permitted
• 141 (3) (d) Relatives to be redefined as
  financially dependent relatives
• 141 (3) (e) Arms length transactions in the
  ordinary course of business to be permitted
• 141 (3) (e) - Business relationship should
  exclude permitted professional services

22
Audit and Auditor

• Tribunal can direct change of auditors if it is
  satisfied that the auditors have colluded in a
  fraud
• LLPs may be appointed as auditors
• Auditing Standards to be made mandatory

23
Prohibited Services
Chapter X Sec. 144

• Differentiate public interest entities and
  others
• Can provide for safeguards where applicable (like
  ICAI code of conduct)
• Clarity needed on its application on services
  rendered outside India
• Services prohibited to be specifically defined
  for their meaning
• Over stringent norms could lead to services
  slipping away from CA professionals to other
  professionals

24
Dispute Resolution

• Class Action Suits
• Disgorgement provisions in such cases
• Resigning directors to also notify ROC with
  detailed reasons
• Investigation into the affairs by SFIO
• Vigil mechanism (whistle blowing)
• Mediation and Conciliation Panel
• Prohibition of insider trading
• Personal and unlimited liability on directors,
  promoters, experts etc., in case of fraudulent
  purpose
• Special court to deal with offences under the Act

25
CSR

• Companies requiring to constitute a CSR committee
• Networth of Rs.500 crore or more
• Turnover of Rs.1,000 crore or more
• Net profit of Rs.5 crore or more in any financial
  year
• CSR committee to have
• Three or more directors
• At least one is to be an independent director
• CSR committee will
• Formulate CSR policy and recommend to board
• Recommend the amount of expenditure to be
  incurred
• Monitor CSR policy from time to time
• Schedule VII lists out the activities which can
  be considered
• Company to give preference to local areas / areas
  around which it operates

26
Cross Border Mergers
Chapter XV Sec. 234

• Critical look required into the following
  aspects
• India shareholders interest
• Implications of FEMA and other such regulations
• Indian worker interest
• Dual listing
• Implication to Indian tax revenue scenario

27
Others

• Revival and Rehabilitation Provisions for Sick
  Companies
• Sickness to be determined not based on negative
  networth but based on ability to repay debts
• Stringent control over Not for profit companies
• Companies which can raise public deposits
  restricted
• Dividend claim not extinguished after 7 years

28
Others

• Relaxation that association / partnerships could
  have up to 100 persons
• No ceiling on partners / members in case of
  associations of persons / partnerships for
  professionals regulated by special acts

29
AS vs. Companies Act
Chapter I Sec. 2 (6), 2 (27), 2 (76), 2 (87)

• The definitions in Bill different from Accounting
  Standard
• Control
• Associate
• Subsidiary
• Related Party
• Recommend
• For preparation of CFS, definition as per AS will
  prevail and
• For regulatory purposes definition as per Act
  will apply

30
New opportunities
31
Valuation Registered Valuers
Chapter XVII Sec. 247

• Introduction of registered valuer
• CA in practice could take benefit of this
  requirement
• Also, to look into more areas where such
  registered valuer services could be made mandatory

32
Serious Fraud Investigation Office
Chapter XIV Sec. 211

• ICAI could work with SFIO
• Opportunities to work on forensic investigations
• Development of early warning systems for being
  implemented for online monitoring and tracking
• SFIO being viewed as a large employment provider
  for CA professionals

33
Uniform Financial Year
Chapter I Sec. 2 (41)

• Help companies with the transition
• Identify feasibility of a different financial
  year where scope exists and the company would
  find it beneficial

34
Consolidated Financial Statement
Chapter IX Sec. 129 (3)

• Requirement to file consolidated financial
  statements extended to more companies
• Opportunity to advice groups into a relook at
  their structures and implications
• Automatic requirement for more professional
  services in view of this

35
Independent Directors
Chapter XI Sec. 149 (4)

• More opportunities for independent directors
• Need to create a database and panel as a
  professional development initiative
• Focused training sessions to make CAs as the
  choice for independent directors