Paradigm Shift – Companies Amendment Act 2013 Key Features

After years of debate, India has its first update of the country’s corporate law in more than 50 years with a view to modernize India’s corporate governance rules. The amendments have been made keeping in view the present day needs of businesses and are likely to improve the terms of doing business in India and also attract foreign investments into the Country.

Corporate governance and risk management:

  1. Composition of the Board. Companies Act 2013 introduced siginificant changes to the composition of Board of Directors. Under the 2013 Act, directors are categorised into two classes, viz., Executive Directors and Non Executive Directors. Non Executive Directors have been further categorised into Independent Directors and others. The 2013 Act recoginses the concept of Executive Directors, Independent Directors and Non- Executie Directors however it is only with respect to Independent Directors that the Act prescribes a minimum number.
  2. Women Directors: The 2013 Companies Act requires that a prescribed class of companied to have at least one woman director on the board. In accordance with Act, existing companies meeting the prescribed criteria need to comply with the requirement within one year. The Director’s Appointment Rules also require that:
    • A newly incorporate company, which meets the prescribed criteria, needs to appoint a woman director within six months from the date of its incorporation
    • The board needs to fill- up any intermittent vanacny of woman director at the earliest but not later than the immediate next board meeting or three months from the date of such vacancy, whichever is later.
    • All listed companies need to have atleast one woman director on board on or before 1 October 2014.
    • All non- listed public companies meeting the prescribed criteria will need to appoint woman director within one year from the date of enactment of the 2013 Act, i.e. they need to appoint woman director by 31.03.2015
    • For non- listed public companies the criteria is Public companies having paid-up share capital of over 100 Crores or more and a turnover of 300 Crores or more.
  3. Independent Directors: The Act states that every listed company will have atleast one- third of total number of directors as independent directors, with any fraction to be rounded off as one. In addition to this the 2013 Act empowers Central Government to prescribe minimum number of Independent Directors for other class of public companies. In the case of non- listed Public Companies the Company needs to have two independent Directors where either Paid-Up Share Capital is over Rs.10 Crores or more OR turnover is over Rs.100 Crores or more. Under the Directors Appointment Rules it also requires that:
    • That the board needs to fill- up any intermittent vacancy of an independent director at the earlist but not later than the immediate next Board meeting or three months from the date of such vacancy, which ever is later.
    • A director appointed by small shareholders will be treated as Independent Director provided that such Director meets the criteria for being independent Director and gives requisite declaration.
  4. Audit Committee: The Act requires each listed company and such other class of companies, as may be prescribed, to constitute the Audit Committee. In the case of non- listed public companies the requirement of Audit Committee is subject to the company fulfilling either of the three criteria’s i. Paid up share capital of Rs.10 Crores or more ii. Turnover of Rs.100 Crores or more OR (iii) Aggregate outstanding loans, or borrowings, or debentures or deposits of Rs.50 Crores or more.
  5. Nomination and Remuneration Committee: The Act prescribes all listed companies to constitute Nomination and Remuneration Committee. In the case of non- listed public companies the requirement of Nomination and Remuneration Committee is subject to the company fulfilling either of the three criteria’s i. Paid up share capital of Rs.10 Crores or more ii. Turnover of Rs.100 Crores or more OR (iii) Aggregate outstanding loans, or borrowings, or debentures or deposits of Rs.50 Crores or more.
  6. Subsidiary Companies: The amendments are as follows
    • At least one Independent Director on the Board of Directors of the holding company shall be a director on the Board of Directors of the non- listed Indian Subsidiary Company
    • The Audit committee of the Listed Company shall review the financial statements of the non-listed subsidiary company.
    • The Company will formulate a policy for determining ‘material’ subsidiaries and such policy will be disclosed to the stock exchange and in the Annual Report
    • A Listed Company will not dispose of shares in its material subsidiary which will reduce its sharehildong (eit6her on its own or together with other subsidiaries) to less than 50% or cease the exercise of control over the subsidiary without passing a special resolution in its general meeting
    • A subsidiary shall be considered as material if the investment of the Company in the subsidiary exceeds twenty per cent of its consolidated net- worth as per the audited balance sheet of the previous financial year or if the subsidiary has generated twenty per cent of the consolidated income of the company during the previous financial year.
    • The minutes of the Board meetings of the unlisted subsidiary company shall be placed at the Board Meeting of the listed holding Company. The management shall periodically bring to the attention of the Board of Directors of the holding company y, a statement of all significant transactions and arrangements entered into by the unlisted subsidiary company.
    • Selling, disposing and leasing of assets amounting to more than twenty per cent of assets of the material subsidiary shall require prior approval of share holders by way of special resolution.
    • With respect to the term “siginificant transaction or arrangement” shall mean any individual transaction or arrangement that exceeds or is likely to exceed 10% of the total revenues or total expenses or total assets or total liabilities, as the case many of the material unlisted subsidiary for the immediately preceding accounting year.
    • Where a listed holding company has a listed subsidiary company which is itself a holding company, the above provisions shall apply to the listed subsidiaries in so far as its subsidiaries are concerned.
  7. Internal Auditor: The Act requires companies to appoint internal auditors to conduct audit of the functions and activites of the company. A company may either engage external agency or have internal resources to conduct audit. A firm not registered with Institute of Chartered Accountants of India may also be appointed as an Internal Auditor. Private companies with a turn over Rs.200 Crores or more OR with outstanding loan/ borrowing from bank or public financial institutions at any time during the preceding financial year of over Rs.100 crores or more need to fulfil the criteria for having internal audit.
  8. Serious Fraud Investigation office (SFIO): Despite having been in existence for over 10 years now the SFIO did not have enough power to deal with issues of frauds. However the 2013 Act has given SFIO power to carry out arrests, raids and seizure in respect of certain offences of the Act which attract the punishment for fraud.

Corporate Social Responsibility:

The act requires that companies set up a CSR board committee, which must consist of at least three directors, one of whom must be independent. That committee must ensure that the company spends “at least 2 percent of the average net profits of the company made during the three immediately preceding financial years” on “CSR” activities. If the company fails to spend this amount on CSR, the board must disclose why in its annual report. The requirement will apply to any company that is incorporated in India, whether it is domestic or a subsidiary of a foreign company, and which has (1) net worth of Rs. 500 Crore or more, (2) turnover of Rs. 1,000 Crore or more, or (3) net profit of Rs. 5 Crore or more during any of the previous three financial years.

One Person Company:

The Companies Act, 2013 has introduced a new form of business, i.e. One Person Company, thereby enabling Entrepreneur’s carrying on the business in the Sole- Proprietor form of business to enter into the Corporate Framework. However essentially only natural person, who is an Indian Citizen and resident in India will be eligible to incorporate a One Person Company. OPC provides a whole new bracket of opportunities for those who look forward to start their own ventures with a structure of organised business. Important features of One Person Company can be enumerated as below:

  • OPC has only one person as a member/ shareholder.
  • OPC can be registered only as a Private Company.
  • OPC may be either a company limited by share or a company limited by guarantee or an unlimited company.
  • An OPC limited by shares shall comply with following requirements:
    • Shall have minimum paid up capital of INR 1 lac
    • Restricts the right to transfer its shares
    • Prohibits any invitations to public to subscribe for the securities of the company
  • An OPC is required to give a legal identity by specifying a name under which the activities of the business could be carried on.
  • Terms and Restrictions of OPC
    • A person shall not be eligible to incorporate more than a One Person Company or become nominee in more than one such company.
    • An OPC cannot carry out Non- Banking Financial Investment activities including investment in securities of anybody corporate.
    • An OPC cannot be incorporated or converted into a company under Section 8 of the Act.
    • A private company other than a company registered under section 8 of the Act having paid up share capital of Rs.50 lacs or less or average annual turnover during the relevant period is Rs.2 Crores or less may convert itself into a one person company by passing a special resolution in the general meeting
    • Under the Companies (Incorporation) Rules 2014, POC’s are mandatorily required to convert themselves into either a private company or a public company within 6 months from either the date of increase of its paid up capital i.e. exceeding 50 lacs OR last day of the relevant period during which its average annual turnover exceeds Rs.2 Crores.
    • The annual return in case of OPC shall be signed by the Company Secretary or where there is no company secretary, by the director of the OPC.
    • The provisions relating to holding of AGM is not mandatory for a OPC. However at least one board meeting must be held in each half of the calendar year and the gap between the two meetings should not be less than ninety days.
    • There are various advantages to forming a OPC
      • Separate Legal Entity i.e. the one person company and the shareholders are separated persons. In case of legal disputes action can be taken against only the company and not its owner.
      • Personal assets of the Owner or shareholders are protected in case of credit default
      • Liabilities of the shareholders or directors are limited up to their share capital contribution in to the OPC
      • OPC can have one director up to a maximum 15 directors
      • It can also use the name of Private Limited at the end of its name




Prohibiting public inspection of Board Resolutions

Protect confidentiality and privacy of ideas and commercial information

Thresholds for fraud reporting

Only significant fraud need to be reported

Omit the requirement of min. paid up share capital of Rs.1 lac. For private companies and Rs.5 lac for public companies

Improve ease of doing business

Cases related to winding up to be heard by two member bench

Another measure to improve business

Special Courts to try only offences carrying imprisonment of two years or more

Very severe offences to go to special courts ensuring that these courts are not swamped with routine work

Audit panel can give omnibus nod for related party transaction

Align Companies Act with listing agreements

Ordinary resolution instead of special resolution for approval of Related party transaction

To improve ease of doing business

Special punishment for deposits accepted under the new Act

The amendment to the law is aimed at ensuring severe punishment to those accepting illegal payments from the public.

Proposed changes to Companies Act 2013 as per Companies Amendment Bill 2014 passed in Lok Sabha this December 2014 is yet to be passed in Rajya Sabha.