Companies Act 2013 Presentation Summary

Companies Act 2013
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This Presentation is the
property of
Pooja Gupta and no part of
it can be copied,
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in any manner

2
Presented by CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)

Companies Act 2013
Directors

Corporate Governance and
CSR

Board Composition

Independent Directors

Duties of Directors

Relatives

Key Managerial Personnel (KMP)

Corporate Social Responsibility

Board Committees

SFIO

3

Companies Act 2013
Details

Companies Act, 1956

Companies Act, 2013

Parts/ Chapter

13

29

Sections

658

470*

Schedules

15

7

No. of Clauses in Section 2
(Definitions)

67

95

*

98 Sections notified effective from 12-September-2013

• GOI decided to enforce the provisions of the Act in phases
• The provisions which require statutory or regulatory consultation or functioning of new
bodies or prescription of relevant rules and forms will be brought in force after
preparatory action is completed
4

Companies Act 2013
Directors

Each company will need to have minimum 1 (one) director who stayed in India for
at least 182 days in the previous calendar year

Prescribed class of companies to have at least 1 (one) woman director on the
board.
Existing companies will be given a one-year transition period to comply with this
requirement
Listed company may have 1 (one) director elected by small shareholders ~ holding
shares of nominal value not > INR 20,000 or such sum as may be prescribed.
Earlier, a public company either with (a) paid-up capital of 5 crore or more, or (b)
1,000 or more small shareholders, may have a director elected by the small
shareholders

5

Companies Act 2013
Maximum
Number of
Directorship

Limits on maximum number of directors in a company increased
from 12 to 15. It can further be increased by passing a special
resolution. No approval from Central Government required
A person will be able to become a director in 20 companies.
However, out of this, not more than 10 companies can be public
companies.
Shareholders may specify lesser number of companies in which a
director of the company may act as a director.
Transition period to comply with the limit on directorship – 1 year
from the commencement of 2013 Act

6

Companies Act 2013
Duties of Director
A director of the company will:
i.

act in accordance with the articles of the company

ii.

act in good faith to promote the objects of the company

iii. exercise his duties with due and reasonable care, skill and diligence and independent
judgement
iv. not get involved in a situation in which he may have a direct or with the interest of the
company
v.

avoid any undue gain or advantage either to himself or to his relatives, partners, or
associates (if found guilty, he may be required to pay an amount equal to such gain back
to the company)

vi. not to assign his office, such assignment being void
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Companies Act 2013
Meetings of BOD
First meeting of the BOD must be held within 30 days of its incorporation
• Minimum 4 meetings of the BOD to be held each year
• Gap between 2 consecutive meetings not exceeding 120 days
• CG may be notification provide different requirement or modify the requirement for specific class of
companies

Participation in board meeting through prescribed video conferencing (VC) or
other audio visual means recognized.
CG may provide a list of businesses where meeting by means VC will not be
recognized
At least 7 days notice for board meeting shall be given
Shorter notice to transact urgent business, if at least 1 ID is present at such
meeting.
Decision taken at such meeting in absence of an ID is final only on ratification
thereof by at least one ID
8

Companies Act 2013
Loans to Directors
A company cannot directly or indirectly:
• Advance any loan to any director or any other person in whom the director is interested; or
• Give guarantee or provide security in connection with the loan taken by its director or such other
person

The above provision is not applicable to:
• Loan to MD/ WTD as a part of contract of services extended to all its employees or pursuant to the
scheme approved by members by special resolution
• A company which in the ordinary course of its business provides loan, guarantee or security for due
repayment of any loan and charges interest thereon not being less than bank rate declared by RBI

All the above provisions made applicable to private companies

9

Companies Act 2013
Key Managerial Personnel (KMP)
• In relation to a company, KMP means:
–
–
–
–
–

CEO or MD or Manager;
Company Secretary;
Whole time Director (WTD);
Chief Financial Officer (CFO); and
Such other officer as may be prescribed

• CFO to be whole time KMP for prescribed class of companies
• CFO made responsible and liable for penalty and/ or prosecution for
compliance with various provisions such as – maintenance of books of
accounts, preparation & filing of annual accounts, disclosure of financial
information in offer document, risk management, internal control, etc.
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Companies Act 2013
Board Committees
Audit
Committee

Mandatory for listed companies and other prescribed classes of
companies
Minimum 3 directors with majority comprising of Independent
Directors

Chairperson and majority of directors shall be persons with ability
to read and understand financial statements
Listed companies and prescribed companies to have vigil
mechanism for directors and employees to report genuine concern
in prescribed manner
11

Companies Act 2013
Board Committees
Nomination
and
Remuneration
Committee

Mandatory for listed companies and other
prescribed classes of companies

3 or more Non-Executive directors (NED) of which
at least ½ shall be Independent Directors (IDs)
Chairperson of the company can be a member of
the committee but cannot be a chairperson of the
committee
12

Companies Act 2013
Board Committees
Nomination
and
Remuneration
Committee

The committee shall amongst other:
Identify persons who are qualified to be directors and who can
be appointed in senior management
Recommend to the BOD, policy relating to remuneration to
directors, KMP and other employees keeping in mind
appropriate performance benchmark; striking a balance
between fixed and incentive pay, etc.
Be responsible for evaluation of every director of BOD

13

Companies Act 2013
Board Committees
Stakeholders
Relationship
Committee

Mandatory where total number of shareholders, deposit
holders, debenture holders and other security holder
exceeds 1,000 at any time during the financial year (FY)
Chairperson shall be NED and such other number of
directors as determined by the BOD
To consider and resolve the grievances of the security
holders of the company

14

Companies Act 2013
Board Committees
Corporate
Social
Responsibility
Committee
(CSRC)

Mandatory where the company is required to contribute to CSR if it meets with the
net worth, turnover or net profit criteria

Minimum 3 directors of which at least 1 shall be Independent Director (ID)

This committee shall amongst other:
Formulate and recommend to BOD, a CSR policy
Recommend the amount of expenditure to be incurred on CSR activities
Monitor the CSR policy
15

Companies Act 2013
Independent Listed companies to have at least 1/3rd of its total number of
directors as IDs
Directors
(IDs)
ID is not liable to retire by rotation and is not included in total
number of directors liable to retire by rotation

ID shall be appointed for a term of 5 consecutive years and are
eligible for re-appointment subject to compliance with conditions
including performance evaluation by BOD and approval by
members through special resolution
16

Companies Act 2013
Independent Once 2 consecutive terms are completed, the ID shall be
eligible for appointment after the cooling period of 3 years,
Directors
provided he is not associated with the company during this 3
(IDs)
years period in any capacity, either directly or indirectly

ID may be selected from the data bank maintained by notified
institute or association having expertise in creation and
maintenance of such data bank
IDs is not entitled to stock options but may receive remuneration
by way of sitting fees, reimbursement of expenses for
participation in meetings, profit related commission as approved
by the members of the company
17

Companies Act 2013
Independent
Directors
(IDs)

ID and NED (not being promoter or KMP), shall be held liable only for such
acts by a company which had occurred with his knowledge, attributable
through Board processes, and with his consent or connivance or where he
had not acted diligently
Detailed code of conduct to be followed by companies and their IDS have
been included in the Act

At the 1st meeting of the Board in which he participates as a director and
thereafter the 1st meeting of the Board in every financial year or whenever
there is a change in circumstances, which may affect his status as an ID,
will have to give a declaration that he meets the criteria of independence

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Companies Act 2013
Independent Director - Meaning
“Independent Director” in the Companies Act, 2013 contains most of the
attributes prescribed in the listing agreement. The Act however, contains
certain additional criteria:
a. An independent director should be a person of integrity and
possess relevant expertise and experience
b. ID should not have any pecuniary relationship / transactions with
the company, its promoters, its directors or its holding company, its
subsidiaries and associates, which will affect independence of the
director, either in the current FY or immediately preceding two
years.
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Companies Act 2013
Independent Directors
c. A person cannot be appointed as ID if the person and/ or his relative is/ was a partner/
executive in statutory audit firm, internal audit firm, legal firm, and or consulting firm(s),
which have association with the company.
d. Under the Companies Act, 2013, the CG may prescribe additional qualifications for an
“independent director.”

e. The Companies Act, 2013, however, states that an ID will be a director other than the
nominee director appointed by an institution, which has invested in or lent to the
company
g. An ID should not be a Chief Executive or director, by whatever name called, of any
non- profit organisation, which receives 25% or more of its receipts from the company,
any of its promoters, directors or its holding, subsidiary or associate or that holds 2%
or more of the total voting power of the company.
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Companies Act 2013
Independent Directors – Impact
• The SEBI may need to amend the listing agreement to bring it in line with the Companies Act,
2013. Till such time, listed companies will need to follow the requirement of the stringent.
• Considering additional criteria prescribed in the Companies Act, 2013, many listed companies
may need to revisit appointment of their independent directors.
• The Companies Act, 2013 lays down various restrictions, on the person as well as its
relatives, for being eligible to be appointed as independent director. If the government
prescribes a long list of relations, the company, the person who is or seeking to be an
independent director and the relatives of such person will have to keep track of this, to
ensure compliance on a going forward basis. For example, a company cannot appoint any
person as an independent director if that person or his relative is/ was a partner / executive in
the preceding 3 financial years in the firm of auditors of the company.
• The Companies Act, 2013 states that an independent director will not be entitled to any stock
option. The Companies Act, 2013 is not clear as to how a company will deal with stock
options granted in the past and which are outstanding at the date of its enactment. It seems
possible that a company will cancel / forfeit these stock options immediately. It may be
appropriate for the MCA to clarify this matter.
21

Companies Act 2013
Corporate Social Responsibility (CSR)

 CSR has been made mandatory for companies with a Networth of INR
500 Cr. (INR 5 Billion) or more, or a turnover of INR 1000 Cr. (INR 10
Billion) or more, or a Net Profit of INR 5 Cr. (INR 50 million) or more
during each financial year
 The board will ensure that company spends, in every financial year, at
least 2% of its average net profits during the immediately preceding 3
years, in pursuance of CSR policy.

22

Companies Act 2013
 The company will give preference to local area and areas around where it operates,
for spending the amount earmarked for CSR activities.
 The board will approve the CSR policy and disclose its contents in the board report
and place it on the company‟s website.
 If a company fails to spend such amount, the board will, in its report specify the
reasons for not spending the amount
 The MCA has issued “National Voluntary Guidelines on Social, Environmental &
Economic Responsibilities of Business,” for voluntary adoption by companies. In
addition, the SEBI has mandated that the top 100 listed entities, based on their
market capitalization at the BSE and NSE, should include business responsibility
reports as part of their Annual Reports.
23

Companies Act 2013
•

Schedule VII of the Companies Act, 2013 sets out the activities, which may be
included by companies in their CSR policies. They relate to:
• eradicating extreme hunger and poverty
• promotion of education
• promoting gender equality and empowering women
• reducing child mortality and improving maternal health
• combating HIV, AIDs, malaria and other diseases
• ensuring environmental sustainability
• employment enhancing vocational skills
• social business projects
• contribution to certain funds such as the Prime Minister‟s National Relief Fund
and
• other matters that may be prescribed.

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Companies Act 2013
Corporate Social Responsibility (CSR) - Impact
1.

The Companies Act, 2013 does not prescribe any penal provision if a company fails
to spend amount on CSR activities. The board will need to explain reasons for noncompliance in its report

2.

The Companies Act, 2013 has set threshold of INR 5 crore net profit for applicability
of CSR requirements. In comparative terms, this seems to be on lower side vis-à-vis
net-worth and turnover thresholds of INR 500 crore and INR1,000 crore,
respectively. This may result in companies getting covered under the CSR
requirements, even when they don‟t meet net worth / turnover criteria

3.

Due to determination of average profit as per section 198, actual expenditure on
CSR activities for a company may be higher/ lower than 2% of its average profits for
the last 3 years determined in accordance with the P&L.

25

Companies Act 2013
4.

Section 149 of the Act mandates only public companies whether listed or in other prescribed class to have
independent directors. In contrast, applicability of CSR requirements depends on net worth, turnover or
net profit criterion, irrespective of whether the company is is a public or private company. Every company
covered by CSR needs to constitute a CSR committee with at least one independent director. This implies
that even a private company will need to have an independent director if it is covered under CSR
requirements.

5.

It is not absolutely clear whether a company will need to create provisions in the financial statements
towards unspent if it fails to spend 2% of the amount of CSR activities in a particular year. The resolution
of this issue may depend of legal/ other consequences, which may follow, if a company fails to spend the
requisite amount in a particular year. For example, if a company can get away with an explanation in the
board‟s report and need not make good past shortfall in the future period, there may be no need to create
provision. However, if the company needs to incur the amount currently unspent in future periods legally, a
provision in accordance with AS 29 may be needed

26

Companies Act 2013
6. Although the detailed rules/ clarifications will throw light on exact
requirements, the perception is that Ministry of Corporate Affairs may
follow the National Voluntary Guidelines (NVG) for disclosure and
encourage the concept of „shared value‟ where companies are
encouraged to work on common CSR projects which would result in
win-win scenario for all participants. One may look at the existing
expenditure and evaluate whether the same can qualify as eligible
CSR expenditure.

27

Companies Act 2013
7.

Tax deductibility of CSR expenditure,. While one argument is that there is an
obligation to incur such expenses and also, from financial reporting perspective, it
will be treated as an expense, the counter argument could be that it is in the nature
of allocation of profit and therefore will not be allowed as deduction for tax purposes.

8.

As per the news report, when Sachin Pilot, the Corporate Affairs Minister, was
asked whether the companies would get any tax benefits from CSR expenditure, he
indicated that CSR expenditure is 2% of PBT and therefore a kind of benefit is
already available by way of deduction from taxable income. However, he mentioned
that he will speak to Finance Minister and see what can be done.

9.

To clear the ambiguity surrounding the deductibility of the CSR expense, industry
expects the Central Board of Direct Taxes to clarify the position on deductibility of
CSR expenditure

28

Companies Act 2013
Serious Fraud Investigation Office
• Currently, the SFIO has been set-up by the Central Government under resolution no.
45011 / 16/ 2003 – Adm-I dated 2 July 2003. Under the Companies Act, 2013, statutory
status will be conferred upon the SFIO. Till the time SFIO is established under the
Companies Act, 2013, the SFIO previously set up by the CG will be deemed to be
SFIO under the Companies Act, 2013.
• The CG may assign investigation into the affairs of a company to SFIO (i) on receipt of
a report of the registrar or inspector, (ii) on intimation of a special resolution passed by
a company that its affairs are required to be investigated, (iii) in public interest, or (iv)
on state government.
• Where any case has been assigned by the CG to SFIO for investigation, no other
investigating agency of the CG / State Govt will proceed with investigation in such
cases.
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Companies Act 2013
Serious Fraud Investigation Office
• If authorised by CG, the SFIO will have the power to arrest in respect of certain
offences, which attract the punishment for fraud. Those offences will be cognizable and
the person accused of any such stipulated conditions.
• Investigation report of SFIO filed with special court for framing of charges will be
deemed as a report filed by the police officer
• Stringent penalties are prescribed for fraud-relate offences.
• SFIO will share any information or documents, with any investigating agency, state
government, police authority or Income-tax authorities, which may be relevant or useful
for them in respect of any offence or matter being investigated by them under any other
law.
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Companies Act 2013
Directors – Recap..
TYPE OF COMPANY

INDEPENDENT DIRECTOR

WOMAN DIRECTOR

Private Company

1 Independent Director on Corporate
Social Responsibility (CSR) Committee
if CSR requirement is triggered

Required if paid-up share capital
> INR 100 crores (to be
appointed within 3 years) from
the commencement of the Act

1/3rd of the Board to be Independent if
the Company has:
Public Unlisted
Company

• Paid-up share capital of INR 100
crores or more; or
• Aggregate
outstanding
loans,
borrowings, debentures or deposits
exceeding INR 200 crores
• All listed companies to have 1/3rd of
the Board comprised of Independent
Director

Listed Company

• Requirement increases to half of the
Board if there is an executive
chairman [Clause 49, Listing
Agreement]

Required if paid-up share capital
> INR 100 crores (to be
appointed within 3 years) from
the commencement of the Act

SMALL
SHAREHOLDER
DIRECTOR

RESIDENT DIRECTOR

Section 151
Rule 11.5
Not applicable

Section 151
Rule 11.5
Not applicable

1 director required to be
resident in India for at
least 182 days in a
calendar year
Section 149(3)

Mandatory.
All listed companies to have a
woman director (to be appointed
within 1 year) from the
commencement of the Act

Suo motu; or
Request of 1/10th the number
of small shareholders or 500
small
shareholders
(whichever is lower)

31

Companies Act 2013
Board Committees – Recap..
TYPE OF
COMPANY

Private
Company

AUDIT COMMITTEE

NOMINATION &
REMUNERATION
COMMITTEE

Not applicable

Not applicable

Both committees required if the company has:
Public Unlisted
Company

• Paid-up share capital of INR 100 crores or more; or
• Aggregate outstanding loans, borrowings, debentures or
deposits exceeding INR 200 crores

CSR COMMITTEE

STAKEHOLDER
RELATIONSHIP
COMMITTEE

Not applicable
Independent Director
required on CSR
Committee if:
• Net worth ≥ INR 500
Crores

Applies if the company has
1000 or more security holders

• Turnover ≥ INR 1000
Crores
• Net profit ≥ INR 5 crores

Public Listed
Company

Applicable

Applies if the company has
1000 or more security holders

32

Companies Act 2013
Board Committees – Recap..
TYPE OF COMMITTEE

COMPOSITION

OTHER REQUIREMENTS
• Roles stipulated

Audit Committee [Section 177]

Nomination & Remuneration
Committee [Section 135]
CSR Committee [Section 178]
Stakeholder Relationship Committee
[Section 178]

• 3 Directors
• Majority Independent Directors

• Decisions no longer binding on the
Board
• Whistle-blower policy required,
providing direct access to the
chairman of the Audit Committee

• 3 Directors
• Majority Independent Directors
• 3 Directors
• 1 Independent Director
• Strength and composition determined
by the Board
• Chairman to be non-executive

• Purpose – to solve the grievances of
security holders

33

Companies Act 2013
Non Executive Director (NED) and Independent Director

Non Executive Director
Non-executive directors are the custodians of the governance process. They are
not involved in the day-to-day running of business but monitor the executive
activity and contribute to the development of strategy.

Independent Director
Are directors who do not have any pecuniary relationship or transactions with the
company, its promoters, its management or its subsidiaries, which in the
judgement of the board may affect their independence of judgement.

34

Companies Act 2013

35

Companies Act 2013

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Companies Act 2013
Presenter’s contact details
CA Pooja Gupta
capooja@yahoo.com

www.capoojagupta.blogspot.in

CA. Pooja Gupta – B.Com, FCA, LL.B, CS, Masters in Finance (Germany)

37

Companies Act 2013 Presentation Summary

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