30 September 2013

HIGHLIGHTS | COMPANIES ACT 2013

A.

BACKGROUND AND INTRODUCTION

1.

After a run of around 56 years, the (Indian) Companies Act, 1956 (1956 Act) is now in the
process of being substituted by a new law.

2.

The new Companies Bill 2012 (Bill) was approved by the Lok Sabha (the lower house of
India) on 18 December 2012 and by the Rajya Sabha (the upper house of India) on 9 August
2013. The Bill received presidential assent on 29 August 2013 to become law i.e. (Indian)
Companies Act, 2013 (2013 Act). Recently, the Ministry of Corporate Affairs (MCA) has
notified a list of provisions (around 98 Sections) of the 2013 Act that came into force with
effect from 12 September 2013.

3.

2013 Act has 470 Sections and 7 Schedules as against 658 Section and 15 Schedules in 1956
Act. 2013 Act seems to be logically rearranged unlike 1956 Act wherein the provision were
scattered all across the statute. However, substantial part of 2013 Act is governed via
company rules (Rules) which are in process of being drafted and notified in due course.

4.

This update is our endeavor to provide you with our analyses of the key highlights of 2013
Act. We hope it is helpful to you for understanding the significant changes and potential
implications of 2013 Act.

B.

KEY HIGHLIGHTS

1.

NEW CONCEPTS AND DEFINITIONS

2013 Act has introduced several new concepts and definitions. Few of them which we
believe to be the most crucial are analyzed below:

1.1.

Companies
1.1.1.

One Person Company: 2013 Act now allows one person to form a company vis-vis the earlier position where a minimum of two persons were required to form a
company (private). This new concept will be beneficial as entrepreneurs will be
able to singly set up a corporate entity, restrict the liability of business and
reduce compliances. Further, it will now be easier for foreign companies to set up
wholly owned private subsidiaries in India, as it will not require divesting any part
of stake in such subsidiaries to its group or subsidiary companies unlike under the
1956 Act wherein such divestment was required to meet the minimum two
person rule to set up a company. [Section 2(62) and Section 3(1) (c)]

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1.2.

1.1.2.

Small Company: 2013 Act introduces this new concept of a small company, which
means a company other than a public company having paid up share capital not
exceeding INR 50,00,000 (or such higher amount as may be prescribed which
shall not be more than INR 5,00,00,000) or turnover of which as per its last profit
and loss account does not exceed INR 2,00,00,000 (or such higher amount as may
be prescribed which shall not be more than INR 20,00,00,000). However, this
section of small company will not be applicable to (a) holding or subsidiary
company; (b) company registered under Section 8 of 2013 Act (i.e. companies
form with the charitable object); or (c) company or a body corporate formed
under the special act. [Section 2(85)]

1.1.3.

Dormant Company: 2013 Act now allows a company to be formed and classified
as a dormant company for holding assets or intellectual property subject to the
company not having any significant accounting transaction. Further, an inactive
company can also make an application to the Registrar in such manner as may be
prescribed for obtaining the status of a dormant company. [Section 455]

1.1.4.

Associate Company: 2013 Act now defines the much controversial Associate
Company to mean a company which has Significant Influence over the other
company and which is not a subsidiary company but includes a joint venture
company. Further it has been explained that Significant Influence shall mean
control of at least having 20% of total share capital or control of the business
decision under an agreement. [Section 2(6)]

1.1.5.

Private Company: 2013 Act has now increased the total limit of number of
members / shareholders in private company from 50 to 200. [Section 2(68)(ii)]

1.1.6.

Investments Companies: 2013 Act provides that any company (unless otherwise
prescribed) shall not make investment through more than two layers of
investment companies. However, this section has not been made applicable to a
company acquiring any other company incorporated outside India, if such other
company has investment subsidiaries beyond two layers as per the laws of such
country. This Section may considerably restrict the flexibility of Indian companies
in structuring their transactions. [Section 186]

Object Clause: 1956 Act required the object clause (which is stated in the memorandum of
association of a company) to be classified into (a) main object; (b) objects incidental or
ancillary to the attainment of the main objects; and (c) other objects of the company. The
reason for having such classification in the object clause was to restrict the company from
commencing any other business unless it complies with certain requirements. However,
this requirement of such classification has been done away with by the 2013 Act, i.e. all
objects will now be the main objects of the company. [Section 4(1)]

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1.3.

Key Managerial Personal (KMP): KMP is commonly used in investment agreements and
now finds a place in the 2013 Act. KMP includes (a) Managing Director (MD) or Chief
Executive Officers (CEO); (b) Whole time director; (c) Chief Financial Officer (CFO); (d)
Company Secretary (CS) and; (e) such other officer as may be prescribed. 2013 Act requires
certain companies to appoint KMPs which will be notified in the Rules. [Section 2(51)]

1.4.

Promoter: The term Promoter was not defined in the 1956 Act. However it was extensively
used through company law. 2013 Act now specifically defines Promoter, which includes (a)
a person who has been named as such in the prospectus or is identified as such in the
annual return; or (b) who has control over the affairs of the company (other than in a
professional capacity), as a shareholder or a director or otherwise; or (c) in accordance
with whose advice or directions the Board is accustomed to act. [Section 2(69)]

1.5.

Class Action Suits: 2013 Act introduces the western concept of class action suits which
allows requisite number of members, depositors or any class of them file a suit against the
company, its directors, auditors and/or other experts or consultants or advisors, if they
believe that affairs of the company are conducted in a manner prejudice to the company or
its members or depositors. [Section 245]

1.6.

Buy back of Securities: 2013 Act provides that no buy back will be done by a company
within one year from date of closure of previous buy back. Based on this provision, each
company will now require having a cooling off period of one year between the two buy
backs. Further, if a company has defaulted in repayment of its loans, deposits or interests
payable then the company shall compulsorily have to wait for a period of three years after
repayment of all such outstanding amount and rectifying such breach. [Section 68]

2.

MANAGEMENT AND ADMINISTRATION

2013 Act provides detailed role of the management by incorporating sections enunciating
powers, duties and responsibilities of board of directors, KMP, etc. Following are some of
the important changes in the 2013 Act vis--vis 1956 Act:

2.1.

Directors
2.1.1.

Maximum Number of Directors: The maximum number of directors for a public

company has been increased from 12 to 15. In case the company desires to
further increase the board size, it may do so by passing a special resolution. The
requirement of taking permission of the Central Government as provided in 1956
Act is done away with in 2013 Act. [Section 149(1)]

2.1.2.

Number of Directorships: A person cannot be a director (including alternate

director) in more than 20 companies out of which he or she cannot be a director
of more than 10 public companies. 2013 Act now restricts over all directorship of
any individual as compared to 1956 Act which allowed 15 directorships of any

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person in a public company and any number of directorships in a private

company. [Section 165]
2.1.3.

Resident Director: At least one director of the company is required to fulfill the
residency test i.e. stay for not less than 182 days in India in the previous calendar
year. [Section 149(3)]

2.1.4.

Woman Director: Certain class of the companies (which will be notified in the
Rules) must have at least one woman director on the board. [Section 149(1)]

2.1.5.

Small Shareholder Director: A listed company may have one director elected by
small shareholders. Small shareholder means a shareholder holding shares of
nominal value of not more than INR 20,000 or such other sum as may be
prescribed.

2.1.6.

Independent Directors: To align the company law with Clause 49 of Equity Listing
Agreement (Clause 49), 2013 Act has introduced the concept of Independent
Directors. In this respect, few of our general observations are as follows:
The term independent director has been defined with certain prescribed
qualification and disqualification. [Section 149(6)]
Every listed company is required to have at-least one-third of the total number of
directors as independent directors. Independent directors shall be entitled to
sitting fees, commission from the profit and reimbursement of expenses.
However, they will not be entitled to stock options. [Section 149(9)]
The appointment of the independent director shall be approved by the members
in a general meeting and they will not be required to retire by rotation. [Section
149(13)]
An independent director can hold the office for consecutive two terms of five
years each following which there should be three years break before he or she is
reappointed as an independent director. [Section 149(11)]
Nominee director shall not be considered as an independent director. [Section
149(6)]
While the intention of 2013 Act is to align itself with Clause 49, there are few
aspects which are different. All listed companies will now have to comply with
Clause 49 and 2013 Act which will make the compliance process more
cumbersome.
Independent director shall only be liable for such act of omission, commission by
a company which had occurred with his or her knowledge, attributable through
Board processes, and with his/ her consent or connivance or where he or she had
not acted diligently. [Section 149(12)]

(a)
(b)

(c)

(d)

(e)
(f)

(g)

2.1.7.

Duties of the Director: 2013 Act attempts to codify the duties of directors,
including but not limited to the following, they are required to (a) act in good
faith and in the best interest of the company; (b) not to have direct or indirect

30 September 2013

conflict of interest with the interest of the company; and (c) exercise duties with
diligence and reasonable care and declares that it would be punishable offence to
commit a breach of those duties. The liability of the director in default for
contravention, for which no specific penalty is prescribed, has been increased
from INR 50,000 to INR 500,000. [Section 166)]
2.2.

Board Meetings:
2.2.1.

The first board meeting is required to be held within 30 days of incorporation of a

company and a minimum of four meetings are required to be held every year in
such a manner that there are not more than 120 days between two meetings.
[Section 173 (1)]

2.2.2.

A notice of minimum seven days is required to be given for convening a board

meeting. The company can hold board meetings at a shorter notice to transact
urgent business subject an independent director, if any shall be present in the
meeting. In case of absence of independent directors from such a meeting, the
decisions taken at such a meeting shall be circulated to all the directors and shall
be final only upon the ratification thereof by at least one independent director, if
any. [Section 173 (3)]

2.2.3.

The board meeting can be attended by the directors through video conferencing
or other audio-visual modes, and such presence will be counted as quorum for
the meeting, subject to the condition that they can be recorded and stored.
[Section 173 (2)]

2.3.

Committees: Besides the Audit Committee, the 2013 Act requires listed and such other
class of companies as may be prescribed to form Nomination and Remuneration
Committee, Corporate Social Responsibility Committee and Stakeholders Relationship
Committee. [Section 178]

3.

CORPORATE SOCIAL RESPONSIBILITY (CSR):

The Ministry of Corporate Affair had introduced CSR Voluntary Guidelines in 2009. These
guidelines are now part of the 2013 Act and mandates following companies with the CSR
activities:

3.1.

Every company having net worth of INR 500,00,00,000 or more, or turnover of INR
1000,00,00,000 or more or a net profit of INR 5,00,00,000 or more during any financial year
shall constitute a CSR Committee of the Board consisting of three or more directors, out of
which at least one director shall be an independent director.

3.2.

CSR Committee shall formulate the policy for activities specified in Schedule VII of the 2013
Act which broadly includes (a) eradicating extreme hunger and poverty; (b) promotion of

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education; (c) promoting gender equality and empowering women; (d) reducing child
mortality and improving maternal health; (e) combating human immunodeficiency virus,
acquired immune deficiency syndrome, malaria and other diseases; (e) ensuring
environmental sustainability; (f) employment enhancing vocational skills; (g) social
business projects; (g) contribution to the Prime Ministers National Relief Fund or any other
fund set up by the Central Government or the State Governments for socio-economic
development and relief and funds for the welfare of the Scheduled Castes, the Scheduled
Tribes, other backward classes, minorities and women; (h) such other matters as may be
prescribed.
3.3.

2013 Act mandates companies to spent atleast two percent of the average net-profits of
immediately preceding three years on CSR activities, and if not spent, an explanation with
the reasons thereof shall be required to be given in the Directors Report. [Section 135]

4.

SHAREHOLDERS MEETING

4.1.

Notice: A notice of clear 21 days is required to be given to each shareholder. 2013 Act now
permits notice to be sent through electronic mode and should also be given to all the
directors.

4.2.

Quorum: 2013 Act has revised the quorum requirement for a general meeting of public
company. The new requirements are broadly linked to the total number of shareholders of
the particular company. Quorum for the meeting will be as follows:
4.2.1.
(a)
(b)
(c)

4.2.2.

Public Company
Five members personally present shall be the quorum for the meeting, if the total
number of members does not exceed 1000;
15 members personally present shall be the quorum for the meeting, if the total
number of members are up to 5000; and
30 members personally present shall be the quorum for the meeting, if the total
number of members exceeds 5000. [Section 103]
Private Company: Two members personally present shall form the quorum for
the meeting.

4.3.

Electronic Voting: Central Government shall prescribe class or classes of companies and
the manner in which members may exercise his / her rights to vote by electronic means.
[Section 108]

4.4.

Demand for Poll: A member having not less than 1/10th of the total voting power or
holding shares of an aggregate of not less than INR 500,000 can demand poll. Further, 2013
Act removes the distinction between the private or public company in terms of eligibility of
members for making demand for poll. [Section 109]

4.5.

Postal Ballot: Unlike 1956 Act wherein postal ballot was only applicable to listed
companies, it appears that 2013 Act has extended postal ballot requirement to all the
companies which includes pubic unlisted and private companies as well. Central

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Government has yet to provide what specific items would require members resolutions
passed through postal ballot. [Section 110]
5.

MERGERS AND AMALGAMATION

2013 Act introduces some new provisions with regard to mergers and acquisitions, apart
from incorporating changes to the existing provisions in the 1956 Act. The objective of
bringing these changes is to simplify the procedures involved and ensure higher standards
of accountability. Some of the key new provisions in this respect are:

5.1.

Holding and subsidiary: A fast track procedure has been introduced for merger and
amalgamation of holding company and its fully owned subsidiary. An approval of the court
is not required as long as the Registrar of Companies (ROC) and official liquidator have no
objection and the Central Government has granted its consent. [Section 233]

5.2.

Cross Border Mergers: 1956 Act did not permit Indian companies to merge with foreign
companies. 2013 Act now allows Indian companies to merge with foreign companies
subject to an approval of the Reserve Bank of India and foreign company being
incorporated in the jurisdiction notified by Central Government. [Section 234]

5.3.

Listed to Unlisted: In the event of an arrangement between a listed transferor company

and an unlisted transferee company, 2013 Act now permits for the (subject to consent of
the tribunal) unlisted company to stay unlisted until it becomes listed. Further, if the
shareholders of the transferor company decide to exit, the exit price cannot be less than
the price as provided under Securities Exchange Board of India Regulations.

5.4.

Squeeze out of minority shareholding: 2013 Act now allows 90% majority shareholders of
a company to squeeze out the minority shareholders at a price determined on the bases of
value determined by the registered valuer. [Section 236]

6.

AUDIT AND AUDITORS

With the background of Satyam corporate scandal in India, 2013 Act extensively enhances
accountability of the auditors. The key changes in this respect are as follows:

6.1.

Appointment of Auditors: Auditors will now be appointed for a term of five years.
However, their term will be ratified at each annual general meeting. [Section 139(1)]

6.2.

Mandatory Rotation: Auditors for listed companies (and other class(es) of companies as
may be prescribed) are now required to mandatorily rotate their auditors every five years
in case of the appointment of an individual as auditor and every 10 years in case of
appointment of an audit firm with a uniform cooling off period of five years in both cases.
Further, firms with common partners in the outgoing audit firm will also be ineligible for
appointment as auditor during the cooling off period. [Section 139(3)]

6.3.

Non Audit Service: Any services to be rendered by an auditor of a company should be

approved by the Audit Committee or the board of the company. Additionally, the auditor is
restricted directly or indirectly from providing certain specific services, which include a)
accounting and book keeping services; b) internal audit; c) design and implementation of

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any financial information system; d) actuarial services; e) investment advisory services; f)

investment banking services; g) rendering of outsourced financial services; h) management
services, and any other services which may be prescribed. [Section 144].
6.4.

Secretarial Audit: 2013 Act provides for a mandatory requirement to have secretarial audit
which is required to form a part of the directors report for all listed companies and other
classes of companies that may be prescribed. [Section 204]

7.

FINANCIAL STATEMENT AND DIVIDEND

7.1.

Financial Year: Under the 1956 Act, companies were permitted to decide their own
financial year. 2013 Act has taken away this liberty and requires all the companies to have
a financial year ending as on the 31st of March. If any company desires to follow a different
financial year because the holding company or subsidiary company requires following of
different financial year for consolidation of its accounts, it will have to make an application
to Tribunal. Tribunal, if satisfied, shall grant such an exemption. [Section 2(41)]

7.2.

Consolidated Statement: 2013 Act requires consolidation of certain financial statements of

any company having subsidiary, associate or joint venture company to prepare and present
in addition to stand alone financial statements.

7.3.

Dividend: Unlike the 1956 Act, the 2013 Act does not require certain percentage of profit
to be transferred to the reserves before declaring the dividend. Further, a company which
has incurred any loss during the current financial year upto to the end of the quarter
immediately preceding the date of declaration of interim dividend, shall not be required to
declared such interim dividend at a rate higher than the average dividends declared by the
company during the immediately preceding three financial years. [Section 123]

8.

REGULATORS

8.1.

National Company Law Tribunal (NCLT or Tribunal): 2013 Act provides for constitution of
Tribunal and Appellate Tribunal with the objective of facilitating expeditious disposal of
proceedings. All the matters, issues and disputes falling within the ambit of 2013 Act will
now be referred to NCLT. Appeal would lie before the Appellate Tribunal and thereafter
can be challenged before the Supreme Court. High Courts will now have no jurisdiction in
matters related to company law. [Section 407 to 434]

8.2.

National Financial Reporting Authority (NFRA): 2013 Act also provides for constitution of
NFRA which will substitute the National Advisory Committee on Accounting and Auditing
Standards. NFRA will supervise and regulate the activities of auditors and companies and
see that they are in compliance with accounting and auditing standards. [Section 132]

8.3.

Serious Fraud Investigation Office (SFIO): SFIO is an expert body established by Central
Government in 2003 as a special organization to examine serious cases of fraud and scams
received from MCA. The body was formed to carry out investigations under the provisions
of the 1956 Act and was formed in light of the rise in white collar crimes and stock market
scams. 2013 Act now itself incorporates within its folds the mandate for setting up an
investigative body and recognizes the already existing SFIO as the investigative body.
[Section 211]

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9.

REVIVAL AND REHABILITATION OF SICK COMPANY

9.1.

The existing provisions for revival and rehabilitation of sick companies have been
substantially altered. 2013 Act now permits any company and not just an industrial
company to be declared as sick company and avail benefits of this scheme.

9.2.

The determination of whether a company is a sick company or not has moved from the
concept of erosion of net worth to inability to pay debt. If a company fails to repay its
debt within 30 days from receipt of a demand from the secured creditor representing 50%
or more in value of the outstanding debt of the company, the company would be
considered as a sick company.

9.3.

A secured creditor whose debt has not been repaid can apply to the Tribunal for
declaration of the company to be sick. If the said company is unable to provide a scheme to
the Tribunal for its revival, an interim administrator may be appointed by the Tribunal to
take over the management of the sick company. The Tribunal may consider various options
for the revival of the sick company including its acquisition by a solvent company,
restructuring of its assets, etc. If the Tribunal is satisfied that revival is not possible, it will
pass an order for winding up of the company. [Chapter XIX]

10.

WINDING-UP

10.1.

1956 Act provided three modes of winding-up of a company i.e. (a) Compulsory WindingUp ordered by the court; (b) Voluntary Winding-Up by members; and (c) Winding-Up under
supervision of the court. 2013 Act now prescribes only two modes i.e. a) Winding-Up by
the Tribunal and b) Voluntary Winding-Up. Further, 2013 Act does not acknowledge the
distinction between member voluntary winding up and creditor voluntary winding up vis-vis the position in the 1956 Act.

10.2.

2013 Act adds following new grounds for winding-up of a company by NCLT:
10.2.1.

If the company has acted against the interests of the sovereignty and integrity of
India, the security of the State, friendly relations with foreign States, public order,
decency or morality;

10.2.2.

If order has been made by NCTL under Chapter XIX (Revival and Rehabilitation of
Sick Companies);

10.2.3.

If on an application made by the ROC or any other person authorised by the

Central Government by notification under 2013 Act and NCLT is of the opinion
that the affairs of a company have been conducted in a fraudulent manner or the
company was formed for fraudulent and unlawful purpose or the persons
concerned in the formation or management of its affairs have been guilty of
fraud, misfeasance or misconduct in connection therewith and that it is proper
that the company be wound up;

10.2.4.

If the company has made a default in filing with the ROC its financial statements
or annual returns for immediately preceding five consecutive financial years; or

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10.2.5.

C.

If NCLT is of the opinion that it is just and equitable that the company should be
wound up. [Section 270 to 365]

OUR OBSERVATIONS
We believe the changes in the 2013 Act have far reaching implications and are all set to
considerably change the manner in which the companies operate in India. The most
important challenge it poses is transition of the companies to comply with the provisions of
2013 Act from the accustomed 1956 Act. One can only hope the government provides
appropriate mechanism for such transition and 2013 Act is able to bring better corporate
governance among the corporates which will act as stimulant for growth of the Indian
economy.

(The views expressed in this update are personal and should not be construed as any legal advice. Please
contact us directly on +91 22 40565252 or contact@mhcolaw.com for any assistance.)