Dear Member
We are in the process of compilation of the suggestions/amendments of Companies Act,2013 to be presented to New Corporate Affairs Minister Mr Arun Jiately at New Delhi in the 2nd week of June,2014
We have compiled some of the Suggestions of the Members which are as below.Please give your suggestion/feedback which will be added in this compilation:
1. Section 2(47)
Definition of Independent Director- To be read with Section 149(5).No definition in Section 149(5), to be found in Section 149(6).
2. Section 135 and CSR Rules
Issued u/s 135 and 469(2)
Section 469(4)ordains that Rules notified be placed in parliament.
Rule 2(f) defines Net profit and has two significant Exclusions.
Section 135 –Explanation directs determination of Net profit per Section 198.Exclusions in Rule 2(f) not covered u/s 135.Can Rules have exclusions not covered under Mother law
Settled principle-Sub-ordinate law cannot Override mother statute
• Rule 5 clarifies that private company need not have ID in Committee.
• Section 135 speaks about Requirement of ID for Every Company covered. How Can Rules make an Exclusion.
• SR Rules issued under Section 469.Power to Exclude any class of companies, in public interest exercisable only u/s 462
• As per Section 462 notification draft to be placed in parliament and to be approved before issue. For Balance of convenience-Rule issued u/s 469.Raises doubt on sustainability of Rule
3. Section 141 (3) (g): No of limit of Audit to Twenty:
The plain reading of Section says if on the date of appointment the auditor is auditing more than 20 Companies,then appointment cannot take place.Hence if Auditor is auditing only 20 companies then appointment can be made. Hence this limit of 21 should exclude Private Limited Companies.
4. Section 164
Disqualification for holding office upon conviction for any offence involving imprisonment- six months or more and period of five years has not elapsed from conviction.Disqualification to be held in abeyance during pendency of appeal and seven days after adjudication of Appeal.
5. Section 165
Number of Directorships-Sub section (2) to Section 165:“Subject to provisions of Sub-section (1), the members of a company, may by special resolution, specify any lesser number of Companies in which a director of a company may act as Directors” .“S” after director should go.
Rule 35(5) in Chapter II; Definition of “courier’-Rule 35(5) in Chapter II means” a document sent through a courier which provides proof of delivery” is akward in itself and should be amended.
6. Section 167
Vacation of office once there is conviction. Will apply even if there is appeal. Contradiction also exists in 1956 Act in Sections 267, 274 and 283.
7. Section 177 and 188
Related Party Transactions
Redundancy in procedure and apparent disconnect between Section 177 and 188.
Section 177 (4)(iv) says Audit Committee to approve every related party transaction and subsequent modifications in terms . SEBI provides for prior approval.
8. Section 178:
Nomination and Remuneration and Stake holders Committees-
No time frame prescribed for setting up the Committees. Need appears immediate.
No structure suggested for Stake holders Committee.
Chairman to be non-executive and composition to be decided by Board.
Paradox-considering objectives of Committee.
9. Section 179 (Issue of Securities)
Section 179 empowers Board to issue Securities including Debentures whether in India or out side. No fetter on Board power apparently.
Rule 14(2) requires previous approval of members by special resolution even for private placement of Debentures. Rule contains stipulations not contemplated by Section.
10. Section 181
Contribution to bona fide and charitable funds: Members’ prior approval needed for contributing to such funds, amounts in excess of 5% of average net profits of last three years.Proviso silent on whether prior approval shall be ordinary resolution or special resolution. View can be taken that ordinary Resolution shall suffice.
11.Section 184
Disclosure of Interest by Director
Disclosure applies:-
(a) Where contract is with body corporate in which Director by himself or with another holds directly or indirectly 2% or more of shareholding in other company or
(b) If he is promoter, manager, CEO of other company or where contract is with firm or other entity of which Director is partner, owner or member as the case may be-
Director to disclose interest and not participate in meeting.
Section 184(5)
Nothing in this Section shall apply: Clause (b) Except where interest is by way of shareholding of 2% or more in other company
Inference: No disclosure required except in case of shareholding of 2% or more.
Illogical conclusion?
12. Section 185
A complete re-look at this Section is required considering the unequal distribution of Wealth in a Country like ours and Capital support is very much required to the marginalized section of the society and the restriction as specified in this Section has to be re-looked.
Clarification on Sec 185 on 14.02.2014 not tenable
Circular indicates incorrectly that Section 185 prohibits:
Issue of guarantee by Holding Company to Subsidiary.
Circular also states that exemption will apply if loans are exclusively used for the principal business activities.
Section 186 nowhere contemplates that guarantees issued by holding company should be used by Subsidiary for its principal business purposes.
Circular travels beyond both Sections 185 and 186.
13. Section 188
Board authorisation for type of transaction specified
Specified under (a) to (g) of 188(1).Non- Applicability if : transaction in the ordinary course of business and is on arms’ length basis.
Shareholders’ approval when:
• Where paid up capital exceeds Rs. 10 crore or
• Value of transaction exceeds individually or
• collectively 25% of turnover or 10% of Net Worth.
• For sale of property where value exceeds 10% of Net worth
• For provision of services –where value exceeds 10%.
• For leasing where value exceeds 10% of turnover/Networth
Approval also for:
(a) For appointment of Related Party to any place of profit in Company, Subsidiary or Associate- Remuneration exceeds Rs 2.5 lacs per month.
(b) For underwriting Agreements – where Remuneration exceeds 1% of net worth.
Special Resolution not to involve Member who is Related Party will lead to procedural issues during voting.
14. Section 194
Prohibition of forward dealings in securities of Company: Sub–section (1)- Directors or Key Managerial Personnel restricted from forward dealing in securities of Company, its Holding Company, Subsidiary or Associate Company.
Explanation in Section speaks differently-
Applicability to whole time Directors or KMPs only.Non-Executive Directors not covered. “Relevant Securities” refers to shares/debentures of Company, it’s Holding
Company and Subsidiary Company.No reference to “Associate Companies”.
15.Section 195
Prohibition on insider trading
Applicability to every company including unlisted public/private co.
• How can Section apply to unlisted Entities?
• Section applies to persons including, Directors or KMPs of Company Applicability not restricted only to above persons.Inference- Applies to all. Other types of persons to be specified.
Definition of Price Sensitive Information-
Partial lift off from Insider Trading Regulations.Explanation in SEBI Regulations omitted from definition.Inexplicable Exclusion as Explanation identifies various events which are price sensitive !
16.Miscellaneous:
Shareholders cannot vote at AGM by show of Hands!
Rule 20 in Chapter VII provides for e-voting platform for listed and unlisted Companies with 1000 members or more.
SEBI circular directs that facility of postal ballot be provided to those who do not have access to e-voting.
Section 107 states that where voting is through e-platform or when poll demanded voting by show of hands not possible.
Extension of definition of “Related Party”
Section 2(76)Provides definition of Related party.
Rule 2 in Chapter XII Restricts Definition of RP.
Folly realized and definition omitted in Gazette Copy.Are Rules analogous to a household grocery list!
Impractical requirements regarding issue of duplicate certificates
Rule 6 in Chapter IV provides that duplicates after approval by Board shall be issued within 15 days of submission of complete documents.
Rule does not envisage delegation of this power to Board committee.Rule also provides for signature on Certificates by CS only where Company has one.
Rule 13 in Chapter VII-Return of changes in shareholding of promoters and top ten holders
Requirement to file MGT.10 for reporting either increase or decrease of 2% or more in promoters/top ten holding.
Redundancy in procedure and steep increase in cost of compliance.
Please mail you suggestions by the return of this mail before 8th of June,2014.We are in the process of taking an appointment with the Minister.
CA Ranjeet Kumar Agarwal
9830140211/ ranjeet.airan @ gmail.com
CAclubindia
