Entries Tagged 'Corporate Law' ↓

Loans & Deposits in a private limited company

The Companies Act 2013 has heralded a new era in governance and compliance. A critical portion of many of the private limited companies was raising funds from friends and relatives as loans or deposits, which was allowed under the earlier Companies Act, 1956 but disallowed under the new act.

Companies and their promoters had been given one year till 31st March 2015 to repay these loans and deposits, while of course was difficult given that the funds were already invested in the business, and at many times a significant multiple to the equity capital of the company.

The fine, on the company, for not repaying these was Rs1 crore to Rs10 crore, irrespective of the amount of loan or deposit. Further, the directors were personally liable for fines from Rs25 lakhs to Rs2 crores and imprisonment of upto 7 years!

The only two options were to either repay the deposits / loans or apply to the Company Law Board (CLB) for an extension, which was anyways unlikely to grant it.

To the relief of all these companies and promoters, the Ministry of Corporate Affairs (MCA) has clarified that if any amount was not considered a deposit under the Companies Act, 1956 the same status would continue, i.e. it will not be considered as a deposit under the new Act. Do that for this to apply the amount should have been received prior to 1st April 2014 (i.e. on or before 31st March 2014).

Additional conditions for disclosure have been laid down in respect of such loans / deposits. The company will have to disclose the notes in its financial statement the figure of such amounts and the accounting head in which such amounts have been shown.

While this news came very late in the year, it is nevertheless a welcome clarification.

Link to the MCA Circluar: General Cicular 5/2015

Audit & Auditors under Companies Act 2013

For your company, the impact on the different operational areas are highlighted below:

Appointmnet / Re-appointment:

  1. Appoint your auditor for a period of 5 years (unlike the earlier 1 year); however each year at the AGM the appointment will have to be reconfirmed
  2. You need to take a certificate from auditor prior to appointment/reappointment that his/her appointment/re-appointment, if made, would be in accordance with law
  3. Inform the auditor of his/her appointment/reappointment after the AGM
  4. Within 15 days of the AGM, file with the RoC the appointment/re-appointment of the auditor
  5. In some cases, individual auditor cannot be re-appointed after 1 term of 5 years, and a firm of auditors cannot be re-appointed after 2 terms of 5 years (10 years)*
  6. Cooling period (min. gap) of 5 years after 1 or 2 terms (as above) before same auditor can be re-appointed

* applicable only to (a) listed companies, (b) unlisted public companies with Share Capital > Rs10 crore, (c) private limited companies with Share Capital > Rs20 crore, (d) all companies with loans/borrowings >Rs 50 crore. You will have a transition period of 3 years, to manage this change in auditor/s. This thus will NOT be applicable to One Person Companies and Small Companies (a relief, isn’t it!!!).

Resignation / Change of Auditor

  1. In case of resignation of auditor, the board of directors is required to recommend name of new auditor within 30 days and required to call for an EGM within 3 months of recommendation of board of directors
  2. Auditor can be removed before expiry of term after obtaining prior approval of Central Government and then passing a special resolution at an EGM
  3. An auditor who has resigned is required to submit a statement giving reasons and other relevant facts to the company and the RoC within 30 days – Auditor to be fined min. Rs50,000 and max Rs5 lakhs if he/she does not comply with this
  4. Special resolutioin required to appoint new auditor, and special notice sent to shareholders’ to include a representation from the retiring auditor

A person / firm cannot be auditors of your company if he/she:

  1. is an employee / officer of the company
  2. is a partner of an employee / officer or relative of director / key management person of the company
  3. is already an auditor of 20 companies
  4. holds any security / interest in your company* >Rs1,000
  5. has direct or indirect business relationship with your company*
  6. or his/her related entity provides any of the following services to your company*: accounting and book keeping services, internal audit, design and implementation of any financial information system, actuarial services, investment advisory services, investment banking services, rendering of outsourced financial services, or any management services
  7. or his/her relative owes the company* >Rs5 lakhs
  8. has a relative who a security of face value > Rs1 lakh of your company

* also includes associate company, holding company or subsidiary company

Rights of your auditor:

  1. Access, at all times, to the books of account and vouchers
  2. To ask any of the officers of the company to give information and explanation required for audit
  3. In case of a holding company, the auditor shall also have access to all books of account of all the subsidiary company, even if a different statutory auditor is appointed
  4. To receive AGM/EGM notices

Duties of your auditor:

  1. Make a report on the accounts and financial statements and give a true and fair view of the state of your’s company’s affairs
  2. The Auditor’s Report is required to state: whether he/she sought and obtained all the required information and explanations, whether proper books of account have been kept, whether the financial statements comply with the accounting standards, whether there are adequate internal financial control systems,
  3. The Auditor is also required to mention whether any director is disqualified!
  4. To comply with all the auditing standards
  5. To report to the Central Government – within 60 days – if he/she believes any employee / officer is committing any fraud agains the company. What is interesting is that the auditor is required to report this to the Central Government; but first has to forward a report to the company’s board of directors and the board is bound to send a written reply within 45 days, leaving the auditor with 15 days to file his report to the Central Government. And if the auditor does not fulfill this duty he/she will be fined a min. of Rs1 lakh and a max. of Rs25 lakhs!!!

Penalties on the company:From Rs25,000 to Rs5 lakhs

Penalties on each responsible officer / director of the company: Rs10,000 to Rs1 lakh

Some companies required to conduct Cost Audit, in addition to financial / statutory audit. This is to be done by a practicing Cost Accountant.

Internal Audit mandatory for

  1. all listed companies
  2. unlisted public companies if: (a) share capital > Rs50 crores -or- (b) Turnover > Rs200 crores -or- (c) Loans/Borrowings >Rs100 crore -or- (d) Outstanding deposits >Rs25 crores
  3. private company has (a) Turnover >Rs200 crore -or- (b) Loans/Borrowings > Rs100 crore

Thus appointment of auditor and accepting an audit it is going to be a long-term committment from both sides. We suggest you speak to your auditor “now” and confirm his ability and willingness to accept your audit, especially given the new limit of only 20 audits for each practising CA.

CIN Mandatory on Official Communications

The new Companies Act 2013 requires companies to have the following information on all their communications.

  1. Name of Company
  2. Registered Office Address
  3. Corporate Identity Number
  4. Telephone Number
  5. Fax Number, if any
  6. Website Address
  7. eMail Address

All communications refers to:

  1. Business Letters
  2. BIlls [Invoices]
  3. Letter Papers (Letter Heads)
  4. Notices
  5. Other Official Publications
  6. Hundies / Promissory Notes, BIlls of Exchange, etc.

Thus, it would be advisable to have these details in all your official communications including purchase orders, invoices and all other information flow.

We would suggest to have it on the contact us (or equivalent page) on your website and even as a part of your official email signatures / footers as under the new law electronic communications are included as official and legally valid.

In case the company has changed its name, the old name needs also needs to be mentioned for the next two years.

There is no exception for One Person Companies, Small Companies or any other company.

Penalty: Rs1,000 per day, upto a maximum of Rs1 lakh.

CSR Rules under Companies Act 2013

Section 135 (s.135) and Schedule VII (Sch VII) of the Companies Act 2013 notified. These cover the Corporate Social Responsibility under the new Companies Act 2013 and will be applicable from 1st April 2014.

Applicability:

  1. Both Listed and Unlisted Companies, including private limited companies and foreign companies
  2. Revenue >= Rs1,000 crores OR Net Worth >= Rs500 crores OR Net Profit >= Rs5 crores

Hence, these rules will be applicable to a company even if it’s net profit is Rs5 crores or more; but revenues are below Rs1,000 crores and Net Worth is less than Rs500 crores.

Net Profit does not include

  • profits from foreign operations / branches
  • dividends received from companies to whom CSR Rules are applicable [this also implies that dividends from other companies will be included and increase the net profit to that extent]
  • the surplus arising out from the CSR activities

CSR Committee

Composition:

  1. 3 or more directors
  2. at least 1 independent director
  3. exception: private companies with only 2 directors

Duties:

  1. put in place a transparent monitoring mechanism for implementation
  2. recommend the amount of expenditure to be incurred
  3. formulate, recommend & monitor CSR Policy (within framework of Sch VII)

Board of Directors (BoD) Duties & Responsibilities

  • While it is the CSR Committee’s duty to formulate and recommend the CSR Policy, it is clear that it is the responsibility of the BoD’s to approve, implement and disclose the same
  • CSR Policy contents to be displayed on the company’s website
  • Ensuring that the required 2% of net profits is spent in line with the CSR Policy
  • BoD to report in the Annual Report:
  1. the composition of the CSR Committee
  2. activities undertaken and expenditure, in specified format

CSR Policy

CSR Policy needs to be formulated and recommended by the CSR Committee and should include:

  • list of activities to be undertaken as CSR (can be only from CSR Activities below)
  • has to specify the execution modalities of the CSR Activities, and need to include the implementation schedule, and
  • process of monitoring and reporting of the CSR Activities

The CSR activities cannot include activities normally undertaken by the company for its business, e.g. related for the benefits of the employees of the company / group.

CSR Activities (Sch VII)

There are specified activities (also called projects or programs) which are permissible. These are, in brief:

  1. eradicating hunger, poverty and malnutrition, promoting preventive health care and sanitation and making available safe drinking water;
  2. promoting education, including special education and employment enhancing vocation skills especially among children, women, elderly, and the differently abled and livelihood enhancement projects;
  3. promoting gender equality, empowering women, setting up homes and hostels for women and orphans,; setting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups;
  4. ensuring environment sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining quality of soil, air and water;
  5. protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional arts and handicrafts;
  6. measures for benefit of armed forces veterans, war widows and their dependents;
  7. training to promote rural sports, nationally recognised sports, paralympic sports and Olympic sports;
  8. contribution to Prime Minister’s National Relief Fund or any other fund set up by the Central Government for socio-economic development and relief and welfare of the Schedules Castes, the Scheduled Tribes, other backward classes, minorities and women;
  9. contribution or funds provided to technology incubators located within academic institutions which are approved by the Central Government;
  10. rural development projects.

Other Points:

  • CSR expenditure can include contributions to corpus
  • Only activities carried out in India are considered for eligible expenditure.
  • The company can spend to increase their CSR capacities; but such expenditure cannot be more than 5% of the CSR expenditure
  • Contribution, directly or indirectly, to any political party is specifically excluded from CSR activity
  • CSR Activities can be undertaken either through registered trust / registered society / company established by it or by its holding / subsidiary / associate entity.
  • In case the activities are being undertaken by any other entity it needs to have a 3 year track record of having undertaken similar activities.

 

Below are links to the notifications (pdf format | will open in new page):

Notification 1 of 2014 – for enabling s.135

Notification 2 of 2014 – CSR Rules [Officially: Companies (Corporate Social Responsibility Policy) Rules, 2014

Notification 3 of 2014 – for modifying Schedule VII [list of eligible activities]

Notifications on Electronic Filing of Documents

Two notifications dated 14th Sept., 2006 cover the electronic filing of forms and documetns that has become mandatory from 16th Sept., 2006.
 
The first notification, GSR 556(E) is the Companies (Third Amendment) Regulations, 2006 amends regulations 25 and 31 of the Companies Regulations, 1956 with effect from 14th Sept., 2006
 
The new regulation 25 & 31 allow a person to inspect documents, both physical and electronic documents, after payment of the prescribed fees.
 
Full Text (pdf) of Notification GSR 556(E)
 
Notification GSR 557(E) brings into force the  Companies (Electronic Filing and Authentication of Documents) Rules, 2006 from 16th Sept., 2006
 
Section 2 defines a Certifying Authority, Digital Signature, Digital Signature Certificate, e-form, electronic record, electronic registry, electronic mail (e-mail), etc.
 
Section 3 specifies that every e-form / application / document / declaration required to be filed under the Companies Act are to filed in pdf format with the digital signature of specified persons (managing director, director, secretary or other person specified in the Companies Act). Documents that are required to be filed on Non-Judicial Stamp Paper are to be submitted in both physical and electronic form.
 
The digital signatures of the person filing documents, etc in electronic format should be of Class II or Class III.
 
The central government will maintain a website for providing access to the electronic registry and maintaing it securely. It is also required to maintain Registry Front Offices for various purposes such as viewing and inspection of public documents.
 
All documents, etc required to be signed by the Registrar / central government officer shall be digitally signed. The registrar or the central government can send any communication to the company or the specified persons of the company in electronic format for which the company is required to maintain a valid e-mail id.
 
he Registrar or the CG shall issue certificate, license, receipt, approval, or communicate endorsement or acknowledgement in the electronic format. In case it cannot do so it can issue such document in the physical form under manual signature affixing seal of his office.
 
Full Tex (pdf) of Notification 557(E)