India Tax & Regulatory For private circulation only

Regulatory Alert Tracking Change

Volume: RA/8/2014 11 April 2014 In this issue:

Background Key highlights Conclusion Contacts

Government of India notifies Rules for implementing the Companies Act, 2013
Background
Companies Act, 2013 (2013 Act) is to replace the Companies Act, 1956 (1956 Act). Under the 2013 Act, the Government of India (GOI) has the powers to decide a date from which a particular provision of the 2013 Act can be made effective. GOI has made effective several sections of the 2013 Act. The 2013 Act is a delegated legislation which delinks the procedural aspects from the substantive law. The procedural aspects are to be elaborated through the Rules which are to be issued by GOI. The GOI had issued Draft Rules in 6 phases to solicit views of stakeholders. Having considered the views and suggestions received from the stakeholders, the GOI has now issued final Rules. The final Rules are available on the website of the Ministry of Corporate Affiars (MCA) viz. www.mca.gov.in This Alert summarises some of the significant provisions of the Rules. The list of Rules announced by MCA are given at Annexure. To be enforceable under 2013 Act, the Rules are required to be notified in the Official Gazette. Till 10 April 2014, the GOI has notified 3 Rules. It is therefore necessary that the stakeholders consider provisions of the 2013 Act in conjunction with the notified Rules. The Rules announced provides the thinking of GOI but one has to await the notified Rules for taking steps to be compliant.

Key highlights of the Rules announced

Definitions and incorporation

For the purposes of definitions of associate company and subsidiary, total share capital would mean aggregate of
paid-up equity share capital; and convertible preference share capital

Amounts received as share application money by a company will not be available for use until shares are allotted Only a natural person who is an Indian citizen and resident in India can incorporate a One Person Company
(OPC). An individual cannot incorporate more than 1 OPC or become nominee in more than 1 OPC

Acceptance of Deposits

From members
Detailed elaborate procedure to be followed by a company for accepting deposits from its members including acceptance of deposits from members by a private company. A company cannot accept or renew any deposit from its members, if the amount of deposits together with the amount of other deposits outstanding as on the date of acceptance or renewal of such deposits exceeds 25% of the aggregate of the paid-up share capital and free reserves of the company

Share application money not used for allotment of shares within 60 days or not refunded within 15 days after
completion of 60 days will be treated as deposit. Refund must be actual and not by way of any adjustment for any other purpose

Non-interest bearing security deposit from employee exceeding annual salary will be treated as deposit Public companies meeting the following criteria are eligible to accept deposits from public:
net worth of not less than ` 1 billion or turnover of not less than ` 5 billion

Share capital and Debentures

Company to make private placement of securities with prior approval of shareholders by a special resolution Additional matters and report to be disclosed in prospectus such as sources of promoters contribution, details of
acts of material frauds committed against the company in the last 5 years, if any, and if so, the action taken by the company etc.

Provisions relating to issue of shares with differential rights (SDR) is also applicable to private companies. An SDR
issue cannot exceed 26% of the total post-issue paid up equity share capital of a company

Preferential allotment provisions are applicable to issue of equity shares, fully convertible debentures, partly
convertible debentures or any other securities, which are convertible / exchanged with equity shares

Specific provisions for Employee Stock Option Scheme laid down for unlisted public companies

 Issue of preference shares will have to be authorized by a special resolution. The issuer company should not have
any subsisting default in the redemption of preference shares or in payment of dividend due on any preference shares

A company engaged in the setting up and dealing with infrastructural projects may issue preference shares for a
period not exceeding 30 years

Any instrument evidencing debt is debenture. Hence, it will include commercial papers, inter-company loans,
financial loans, exempt deposits etc.

Term of secured Debentures not to exceed 10 years or when issued by infrastructure companies, 30 years Debenture Redemption Reserve (DRR) to be created out of profits @ 50% of Debentures raised before redemption
commences

Minimum 15% of the debentures maturing during the FY to be deposited / invested in specified securities on or
before 30 April of that FY
th

Audit and auditors

Mandatory audit rotation applicable for following companies:

Every listed company Unlisted public companies having paid up share capital of ` 100 million or more Private limited companies having paid up share capital of ` 200 million or more Companies having public borrowings from financial institutions, banks or public deposits of ` 500 million or more

Commercial transactions of the auditor with the company which are in the ordinary course of business of the
company and at arms length price will not be considered as business relationship and accordingly a person will not be disqualified from acting as auditor Internal audit

Following companies are required to appoint an internal auditor who shall be CA or cost accountant or such other
professional as may be decided by the BOD: Listed company Unlisted public company having: paid-up share capital of ` 500 million or more during the preceding FY; or turnover of ` 2 billion or more during the preceding FY; or outstanding loans or borrowings from banks or public financial institutions exceeding ` 1 billion or more at any point of time during the preceding FY; or outstanding deposits of ` 250 million or more at any point of time during the preceding FY

Private company having:

turnover of ` 2 billion or more during the preceding FY; or outstanding loans or borrowings from banks or public financial institutions exceeding ` 1 billion or more at any point of time during the preceding FY

Transitory provision - Existing companies fulfilling any of the above criteria need to appoint an internal auditor within 6 months from 1 April 2014

Management, administration and corporate governance Directors and KMP

Every listed company and every public company having paid-up share capital of ` 100 million or more to appoint
whole-time KMP

Executive Director to be regarded as a whole-time director The following class of companies to have at least 1 woman director:
Listed companies Public companies with a paid up capital of ` 1 billion or more Public companies with a turnover of ` 3 billion or more

Transitory provisions Existing companies fulfilling any of the above criteria need to appoint women director within 1 year from 1 April 2014. Companies incorporated under the 2013 Act are required to comply with the above, if applicable, within 6 months of incorporation.

In addition to listed companies, which are required to have at least 1/3rd of its total number of directors as
independent directors. Public companies meeting the following criteria are required to have at least 2 independent directors: paid up share capital of ` 100 million or more turnover of ` 1 billion or more aggregate, outstanding loans, debentures and deposits exceeding ` 500 million

In case of companies covered under the above and required to appoint a higher number of IDs due to composition of their audit committee, such higher number of independent directors will be applicable to it

Board and Committees

Meetings of the Board through video conferencing or other audio visual means not recognized for certain matters
like approval of the annual financial statements, Boards report, prospectus etc.

Certain powers are to be mandatorily exercised by the Board of Directors at its meeting list prescribed which
include appointing internal auditors, appointing KMP etc.

 Maximum sitting fees that can be paid to a director of a company is ` 100,000 per meeting of the Board or
Committee. Independent directors and woman directors cannot be paid sitting fees less than what is paid to other directors

Following companies to constitute Audit committee and Nomination and Remuneration Committee
Listed companies Public companies with: i. Paid up capital of ` 100 million or more ii. Turnover of ` 1 billion or more iii. aggregate, outstanding loans or borrowings or debentures or deposits of ` 500 million or more

Following companies to establish of vigil mechanism:

Listed companies Companies which accept deposits from public

Companies which have borrowed money from banks or public financial institutions exceeding ` 500 million

General Meetings

EGM to be held in India only List of items to be compulsorily passed through postal ballot of members for companies other than OPC or
companies with less than 200 members prescribed. The prescribed list includes buy-back of shares, issue of SDRs, variation of rights attached to any class of shares or debentures or other securities, etc.

Mandatory e-voting facility for listed companies and companies with 1,000 or more shareholders Any member of a company entitled to attend and vote at a meeting of the company may appoint another person as
a proxy to attend and vote at the meeting on his behalf provided that such person is also a member of the company

Listed Company to file change in shareholding (either increase or decrease by 2% or more in shareholding) of the
each of the promoters or each of the top 10 shareholders of the Company with ROC, within 15 days of such change

Unlisted companies other than subsidiaries of listed company can pay remuneration to its managerial personnel in
the event of no profit or inadequacy of profit subject to certain conditions

Secretarial audit mandatory for following companies:

Listed companies public companies having a paid-up share capital of ` 500 million or more; or public companies having a turnover of ` 2.5 billion or more

Loan to Directors Following loan / guarantee given by the holding company to its subsidiary should not attract restrictions of Section 185 of the 2013 Act. The exemption is subject to the condition that loans are utilised by the subsidiary company for

its principle business activities. Accordingly, restrictions of Section 185 is also not applicable in case of the following: Loan made by a holding company to its wholly owned subsidiary company or guarantee given or security provided by the holding company in respect of any loan made to its wholly owned subsidiary company; and Guarantee given or security provided by the holding company in respect of loan made by any bank or financial institution to a subsidiary company

Inter corporate loans / investments The following exemptions from provisions of Section 186 of 2013 Act which deals with loan and investment by a company have been provided: Loan given or guarantee or security provided by a company to its wholly owned subsidiary or a joint venture company Acquisition of shares / securities of its wholly owned subsidiary made by a holding company

Related Party transactions

The term related party shall be deemed to include a director or KMP of the holding company or his relative with
reference to a company

Related party transactions by a company having paid-up capital of ` 100 million or exceeding value of transaction
as mentioned in the following table, will require prior approval of members by special resolution if such transaction: (i) (ii) is in the ordinary course of business but not on an arms length basis; or is not in the ordinary course of business Transaction value Exceeding 25% of annual turnover

Nature of transaction Sale, purchase or supply of any goods or materials directly or through appointment of agents Buying, selling or disposing of property of any kind directly or through appointment of agents Leasing of any kind of property Availing or rendering of any services directly or through appointment of agents Appointment to any office or place of profit in the company, its subsidiary company or associate company Remuneration for underwriting the subscription of any securities in or derivatives thereof

Exceeding 10% of net worth Exceeding 10% of net worth or 10% of turnover Exceeding 10% of net worth Monthly remuneration exceeding ` 250,000 Exceeding 10% of net worth

 Related party who is a member of the company cannot vote on such special resolution. However, in case of wholly
owned subsidiary, the special resolution passed by the holding company will suffice for the purpose of entering into the transactions between wholly owned subsidiary and holding company

Conclusion
With the Rules being issued by GOI for various sections stakeholders would need to assess the impact and take effective measures to implement the 2013 Act.

Source: Rules issued by MCA from 27 March 2014 to 31 March 2014 and as notified in Official Gazette upto 10 April 2014.

Annexure
Sr. No. 1. Chapter of the 2013 Act Chapter I Date of becoming effective 1 April 2014 Status of Notification in the Official Gazette Notified

Rule The Companies (Specification of definitions details) Rules, 2014 The Companies (Incorporation) Rules, 2014 The Companies (Prospectus and Allotment of Securities) Rules, 2014 Companies (Issue of Global Depository Receipts) Rules, 2014 The Companies (Share Capital and Debentures) Rules, 2014 The Companies (Acceptance of Deposits) Rules, 2014 The Companies (Registration of Charges) Rules, 2014 The Companies (Management and Administration) Rules, 2014 The Companies (Declaration and Payment of Dividend) Rules, 2014 The Companies (Accounts) Rules, 2014 The Companies (Corporate Social Responsibility Policy) Rules, 2014 The Companies (Audit and Auditors) Rules, 2014 The Companies (Appointment and

2.

Chapter II

1 April 2014

Not notified

3.

Chapter III

1 April 2014

Not notified

4.

Chapter III

1 April 2014

Not notified

5.

Chapter IV

Date of publication in the Official Gazette 1 April 2014

Not notified

6.

Chapter V

Not notified

7.

Chapter VI

Date of publication in the Official Gazette Date of publication in the Official Gazette 1 April 2014

Not notified

8.

Chapter VII

Not notified

9.

Chapter VIII

Notified

10.

Chapter IX

1 April 2014

Not notified

11.

Chapter IX

1 April 2014

Notified

12.

Chapter X

1 April 2014

Not notified

1 April 2014

Not notified

13.

Chapte XI

Qualification of Directors) Rules, 2014.

14.

Chapter XII

The Companies (Meetings of Board and its Powers) Rules, 2014 The Companies (Appointment and

Date of publication in the Official Gazette 1 April 2014

Not notified

Not notified

15.

Chapter XIII

Remuneration of Managerial Personnel) Rules, 2014

16.

Chapter XIV

The Companies (Inspection,

1 April 2014

Notified

Investigation and Inquiry) Rules, 2014 17. Chapter XXI The Companies (Authorised to Registered) Rules, 2014 The Companies (Registration of Foreign Companies) Rules, 2014 The Companies (Registration Offices and Fees) Rules, 2014 Nidhi Rules, 2014 National Company Law Tribunal Chapter XXVIII (Salary, Allowances and other Terms and Conditions of Service of President and other Members) Rules, 2013 National Company Law Appellate Chapter XXVIII Tribunal (Salaries, Allowances and other terms and conditions of service of the Chairperson and other Members) Rules, 2014 23. Chapter XXIX The Companies (Adjudication of Penalties) Rules, 2014 The Companies (Miscellaneous) Rules, 2014 Date of publication in the Official Gazette Date of publication in the Official Gazette Not notified Not notified Date of publication in the Official Gazette Not notified Date of publication in the Official Gazette Date of publication in the Official Gazette Not notified Not notified Date of publication in the Official Gazette 1 April 2014 Not notified Not notified 1 April 2014 Not notified

18.

Chapter XXII

19.

Chapter XXIV

20.

Chapter XXVI

21.

22.

24.

Chapter XXIX

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