Monthly Archives: March 2014

Companies Act, 2013 – Board of Directors – sections 152 to 164

Some major changes have been highlighted below:

Section 152(3) – No person can be appointed as a Director unless he has been allotted a Director Identification Number. 

Previously he could be appointed a Director upon his making an application for DIN. Now his appointment can be taken by the Board only if he has a valid DIN. 

Section 152(4) & (5) – Every director is required to give a declaration that he is not disqualified to become a Director under the Act alongwith his DIN and also give his consent for appointment as Director. The consent has to be filed with the ROC within 30 days from the date of his appointment. 

Previously consent letter was required only for public companies. Now it is required for all companies. 

In case of an independent director there should be a statement in the explanatory statement attached to the notice of his appointment that in the opinion of the Board he fulfills the condition specified in the Act for his appointment as an independent director. 

This is a rigorous compliance requirement necessitating the Board to give its opinion on the suitability of the person to be appointed as an independent director. Not only should the director fit the criteria for being an independent director, but also the qualifications required under the Rules. 

Section 152 (6) – retirement of directors by rotation not applicable to private companies which are subsidiaries of public companies which was hitherto covered by the Act. 

For the purpose of calculation of two thirds of “total number of directors” independent directors shall not included in the “total number of directors”

Section 160  – The notice under section 257 of the Companies Act, 1956 which was hitherto not required for private companies by virtue of section 257(2) thereof, is now required for all companies. The notice is also required to given with a deposit of Rs.1.00 lakh (earlier Rs.500/-) which shall be refunded if candidate gets elected as a Director or gets at least 25% of the votes in his favor either by show of hands or by poll. 

Therefore private companies also have to comply with this requirement both in terms of notice u/s 160 as also cash deposit of Rs.1.00 lakh from the director/ member proposing his name. 

Section 161(2) – Alternate Director is for period of absence “from India” for not less than 3 months.

Earlier it was “absence from the state”

Alternate Director cannot be appointed for an independent director unless the alternate is also qualified to be appointed as an Independent Director.  

Section 164 deals with disqualification of Directors.

Section 164 (1) (a) – A person will be disqualified for appointment as director if he is of unsound mind and stands so declared by a competent court. The earlier clause was “he has been found to be of unsound mind by a court of competent jurisdiction and the finding is in force”  

Which means that if a person ceases to be of unsound mind, he should get a declaration to that effect by a competent court in order to be eligible for appointment as a Director. 

Section 164(1)(d) – he has been convicted by a court of any offence “whether involving moral turpitude or otherwise”. The earlier clause was restricted only to moral turpitude. 

So now he gets disqualified regardless of the nature of the offence. 

Further the sub-section goes on to state in the Proviso that “if a person becomes convicted of any offence and sentenced to an imprisonment of 7 years or more, then he shall not be appointed as a Director in any company.

So this becomes a permanent bar to the person becoming a Director if he is convicted and sentenced to a term of 7 years and more. 

Section 164(1)(e) – an order disqualifying him from appointment has been passed by a Court or Tribunal and the order is in force.

Previously the order of Court should have been passed in pursuance to section 203 of Companies Act, 1956. Now it is just an order by a court or tribunal disqualifying him from being appointed as a Director. 

Section 164(1)(g) – new clause has been added whereby Director gets disqualified if he has been convicted of an offence involving related party transactions at any time during the last 5 years. 

Section 164(1)(h) – another new clause added whereby Director gets disqualified if he has not obtained a DIN. 

This obviously applies to existing Directors who have not yet obtained a DIN because any new Director after the commencement of the Act cannot be appointed unless he has a DIN in place. 

Section 164(2) – the old section 274(1)(g) has been moved to this sub-section. It applies to all companies, not only public companies as erstwhile. Further the disqualification is attracted where the company in which he is a Director fails to file the financial statements OR annual returns for any three consecutive financial year. Earlier it was failure to file both financial statements AND annual returns. The disqualification is that he cannot be re-appointed in that company or appointed as a Director in any other company for a period of 5 years from the date on which company fails to do the filings.  

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Section 149 of Companies Act, 2013 – Board of Directors

Section 149 of the Companies Act, 2013 brings out the following changes regarding Board of Directors of a company. 

WOMEN DIRECTORS

1) Every listed  company and every public company having a paid up share capital of Rs.100 crores or more OR turnover of Rs.300 crores or more shall mandatorily appoint one Woman Director. 

Rule 3 of Companies (Appointment & Qualification of Directors) Rules, 2014 states as follows:

Provided that a company, which has been incorporated under the Act and is covered under provisions of second proviso to sub-section (1) of section 149 shall comply with such provisions within a period of six months from the date of its incorporation:

Second proviso to sub-section (1) of section 149 covers appointment of women directors in specified class of companies. The wording of this proviso to Rule 3 is wrong as it should be “within a period of six months from the date of the commencement of the Act”, not date of incorporation. 

There is no uniformity regarding giving time limits for compliances. Sub-section (5) gives a time of one year for compliance of sub-section (4) which is regarding appointment of independent directors, whereas woman directors have to be appointed within six months of the notification. 

Any intermittent vacancy in the Woman Directors should be filled up immediately but not latter than three months from the date of such vacancy or the next Board meeting whichever is latter. 

All listed companies are required to mandatorily appoint woman directors on their Board. Whether the woman directors have to be carved out of the independent directors quota is not clear as also whether the woman director can be part of the promoters. If the latter is true then we will see a lot of wives, daughters, etc. entering into Board positions. 

There is also no provision regarding a registry of woman directors just like the case of independent directors. 

RESIDENT DIRECTOR

Section 149 (3) provides that there should be at least one Director who should have stayed in India for a period of not less than 182 days during the previous calendar year. 

This provision will hit select companies who have entirely non resident Board of Directors all of whom are stationed abroad. The provision regarding requiring at least one Director to be resident in India is salutary but time limit for compliance should have been given for this sub-section just like sub-section (2) gives one year for compliance of sub-section (1) and sub-section (5) similarly gives one year for compliance of sub-section (4).

 INDEPENDENT DIRECTORS

1) Every listed company shall have at least one third of the total number of directors as independent directors. This is at variance with the listing agreement which specifies different levels of independent directors (i.e. either one third or half) depending upon whether the Chairman is an Executive Director or Non-Executive Director and whether the Non-executive Chairman is a promoter or not. Would it not have been better to have specified that “every listed company shall have independent directors as are specified in listing agreement’ 

2) Every public company having paid up share capital of Rs.10 crores or more OR turnover of Rs.100 crores or more OR aggregate outstanding loans, debentures and deposits exceeding Rs.50 crores are required to appoint TWO independent directors on their Board. 

Existing companies hit by the aforesaid provision have a one year period within which they should comply with the requirement to appoint independent directors on their Board. (Section 149(5))

The intermittent vacancy of independent directors should be filled up within a period of three months from the date of such vacancy or immediate next Board meeting, whichever is latter.

The third proviso to Rule 4(iii) of  Companies (Appointment & Qualification of Directors) Rules, 2014 states that 

where the company ceases to fulfill any of the three conditions i.e. paid up share capital, turnover or outstanding debts, FOR THREE CONSECUTIVE YEARS, then it shall not be required to appoint the independent directors. 

This provision and Rule regarding appointment of independent directors in public companies above certain limits is Huge. 

The detailed criteria for being an independent director is given in sub-section (6), Every independent director shall at the first Board meeting after his appointment and in the first meeting of every financial year or any change in his status as an independent director give a declaration that he meets the criteria of independence as per the sub-section. 

The format of this declaration is unfortunately not given in the Rules. 

The company and the independent directors are required to comply with and abide with the Code of Conduct as enumerated in Schedule IV. 

An independent director cannot be remunerated by way of stock option, but can receive sitting fees and profit related commission, which is required to be approved by the members. 

An independent director can be appointed for a term of 5 consecutive years but can be re-appointed for another term of 5 consecutive years upon approval by members by way of special resolution. After two terms of 5 years each, he has to vacate office but can be considered for appointment as an independent director after a three year hiatus during which period, he should not be associated with the company in any manner. 

The liability of an independent director and also a Non Executive Director not being a promoter or key managerial personnel shall be restricted only to acts which had occurred with his knowledge, attributable to Board processes and with his consent or connivance or where he has not acted diligently. 

Independent directors are not liable to retire by rotation. 

 

 

 

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One Person company under Companies Act, 2013

One Person Company

The Companies Act, 2013 introduces a new concept of “One person company”. This is the first time such a concept is being introduced in India. Basically it is giving legal corporate status of Proprietorship form of doing business. Salient features of this new concept are explained below:

DEFINITION:

Section 2(62) defines a “One Person Company” means a company which has only one person as a member.

INCORPORATION:

Section 3(1)(c ) – OPC can be formed only as a private company.

In the subscription clause of the memorandum of association of an OPC, the member will state that he is subscribing to all the shares in the capital of the company.

The Table F which is the model Articles of Association of a company limited by shares incorporates provisions of an OPC especially regarding membership, nominees, annual general meetings and board meetings.  The relevant clauses are clause 27, 48 and 76 respectively.

Rule 3 of Companies (Incorporation) Rules provides that

–      only a natural person who is an Indian citizen and resident in India shall be eligible to incorporate a OPC and to become a nominee for the sole member of the OPC

(so body corporates, foreigners cannot incorporate an OPC);

–      a person cannot incorporate more than one OPC or become a nominee in more than one OPC; (But he can be a member of one OPC and nominee of another OPC)

–      Where a member of an OPC becomes a member of another OPC by virtue of his nomination in that second OPC, he shall opt out of either one within a period of 180 days;

–      A minor cannot become a member or nominee of OPC or holds shares with beneficial interest;

–      An OPC cannot be incorporated or converted into a company under section 8 of the Act, which is the erstwhile section 25 companies or not for profit companies;

–      An OPC cannot carry out NBFC activities including investment in securities of any body corporate;

–      An OPC cannot convert itself voluntarily into any kind of company for a period of two years from the date of its incorporation unless within that period its paid up share capital increases to more than Rs.50 lakhs OR average annual turnover during the relevant period exceeds Rs.2 crores;

Section 12(3) second proviso states that the words “One Person Company” shall be mentioned in brackets below the name of such company wherever it is printed, affixed or engraved.  So it should be mentioned as follows:

ABC Private Limited (OPC)

CONVERSION OF OPC INTO PRIVATE/ PUBLIC COMPANIES

Rule 6 of the Companies (Incorporation) Rules, provides that where the paid-up share capital of an OPC exceeds Rs.50 lakhs or its average annual turnover during the relevant period exceeds Rs.2 crores then within 6 months from the date on which its paid up share capital increased as above or the last day of the relevant period for the turnover purposes, it shall convert itself into either a private company or a public company. “Relevant period” means a period of three immediately preceding consecutive financial years.

An OPC can however voluntarily convert itself into a private company or a public company by increasing its members but only after 2 years from the date of its incorporation.

CONVERSION OF PRIVATE COMPANY INTO OPC;

An existing private company other than a section 8 company (i.e. not for profit company) having paid up share capital of Rs.50 lakhs or less OR average annual turnover during the relevant period of Rs.2 crores or less can convert itself into an OPC by passing a special resolution in the general meeting;

Before passing such special resolution, the private company should obtain No Objection to conversion in writing from members and creditors;

The private company can then start the procedure for conversion by submitting the relevant documents to the ROC.

A public limited company cannot obviously convert itself into an OPC.

 NOMINATION:

The memorandum of OPC  shall indicate the name of the other person who has given his consent in the prescribed form to be so named and who shall, in the event of the member becoming incapacitated due to death or incapacity to contract, become the member of the company. The written consent of such other person shall also be filed alongwith the incorporation documents while forming OPC;

The memorandum of the company shall state the name of the person who in the event of the death of the subscriber shall become the member of the company.

The member has powers at any time to change the name of the nominee by giving notice in the prescribed form. The new nominee should also give his consent to his name so appearing and any change in the nominee shall require amendment in the memorandum of association.

Rule 4 of the Companies (Incorporation) Rules deals with nomination process:

The nominee can withdraw his nomination by giving his consent to the member and also the OPC. In that case, the member shall nominate another person within 15 days of the notice of withdrawal after obtaining his written consent and send intimation of such nomination to the company. The OPC is required to file the notice of withdrawal of consent and fresh nomination within a period of 30 days from the notice of withdrawal.

ANNUAL RETURNS AND FINANCIAL STATEMENTS:

Section 92 provides that the annual return of an OPC should be signed by the company secretary or where there is no company secretary by a director.  This is a very queer kind of provisions because it fails to reason why an OPC should appoint a Company Secretary in its rolls since the provisions regarding mandatory appointment of KMP is way beyond the life of an OPC as per the Act. It should have been better if the requirement was that the annual return be signed by a Company Secretary in Practice.

Section 134(1)  states that the financial statement(s) of the OPC shall be signed by one Director on behalf of the OPC before they are given to the Auditors for their Report thereon. Section 2(40) excludes the cash flow statement from the definition of financial statement in case of OPC.

The Board report of the OPC need not contain the detailed disclosures as are enumerated in section 134(3) but should contain explanations or comments on every qualification, reservation or adverse remark made by the auditor in his audit report.

The Third Proviso to section 137(1) gives leeway to an OPC to file its financial statement along with other documents that are required to be filed/ attached with it, with the Registrar within 180 days from the closure of the financial year. Here since there is no concept of annual general meeting for OPC, it is 180 days from the closure of the financial year. So basically OPCs have six months to file its annual financial statements with the Registrar.

GENERAL MEETINGS AND BOARD MEETINGS

Section 96 provides that an OPC is not required to hold the mandatory annual general meeting.

Section 98 regarding power of tribunal to call meetings of members is not applicable to OPC.

Sections 100 to 111 is also not applicable to OPCs.

Section 100 – convening of extra-ordinary general meetings;

Section 101 – notice of general meeting

Section 102 – explanatory statement

Section 103 – quorum for general meetings

Section 104 – chairman of meetings

Section 105 – proxies

Section 106 – restriction on voting rights

Section 107 – voting by show of hands

Section 108 – voting through electronic means

Section 109 – demand for poll

Section 110 – postal ballot

Section 111 – circulation of members’ resolutions

Since the provisions of general meetings are being excluded for an OPC, the question remains how the matters that are generally decided upon at the general meetings in case of normal companies are dealt with in OPCs. This question has been answered in section 122 (3) as follows:

122 (3) For the purposes of section 114, any business which is required to be transacted at an annual general meeting or other general meeting of a company by means of an ordinary or special resolution, it shall be sufficient if, in case of One Person Company, the resolution is communicated by the member to the company and entered in the minutes-book required to be maintained under section 118 and signed and dated by the member and such date shall be deemed to be the date of the meeting for all the purposes under this Act.

Even in case of Board meetings of OPCs, section 122(4) gives the answer:

122(4) Notwithstanding anything in this Act, where there is only one director on the

Board of Director of a One Person Company, any business which is required to be transacted at the meeting of the Board of Directors of a company, it shall be sufficient if, in case of such One Person Company, the resolution by such director is entered in the minutes-book required to be maintained under section 118 and signed and dated by such director and such date shall be deemed to be the date of the meeting of the Board of Directors for all the purposes under this Act.

What this means is that where there is more than one Director in the Board of Directors of the OPC, then they should convene and hold Board meetings as are done by normal companies and the procedure and practices to be followed by normal companies in such cases should be followed by the said OPC.

Section 173(5) provides that OPCs shall be required to convene only one meeting in each half of a calendar year provided however that the gap between two Board meetings is not less than 90 days.  This is a peculiar provision which says that the gap between two Board meetings of an OPC should be not less than 90 days between each meeting. What will happen if an urgent Board meeting is required to be convened before 90 days from the conclusion of the first Board meeting. I thought the wording should have read as “not more than 90 days”

Again this provision is not applicable where the Board of Director of OPC comprises of only one Director. In that case of course the  provisions of section 122(4) applies.

Section 174 is regarding quorum of meetings of Board of Directors. This section will not apply to an OPC which has only one Director in its Board of Directors.

DIRECTORS:

Section 149(1)(a) provides that minimum one director should be appointed in an OPC. There is no restriction to appointing more than one director in an OPC, but maximum no. of directors that can be appointed is 15 as per section 149(1)(b).

Section 152(1) provides that the subscriber to the memorandum shall be deemed to be the first director of the company until director(s) are duly appointed by the member in accordance with the provisions of the section.

RELATED PARTY TRANSACTIONS:

Section 193 is important regarding related party contracts by OPC. It says:

193. (1) Where One Person Company limited by shares or by guarantee enters into a

contract with the sole member of the company who is also the director of the company, the company shall, unless the contract is in writing, ensure that the terms of the contract or offer are contained in a memorandum or are recorded in the minutes of the first meeting of the Board of Directors of the company held next after entering into contract:

 Provided that nothing in this sub-section shall apply to contracts entered into by the company in the ordinary course of its business.

 (2) The company shall inform the Registrar about every contract entered into by the company and recorded in the minutes of the meeting of its Board of Directors under sub-section (1) within a period of fifteen days of the date of approval by the Board of

So related party contracts with the sole member who is also the Director of the company are required to be entered in the memorandum or minutes and also communicated to the Registrar within 15 days of the Board meeting where the contract is approved.

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Corporate Identification Number in letter heads

Section 12(3)(c ) of the Companies Act, 2013 which comes into effect from 1st April, 2014 provides that 

(3) Every company shall—

(c) get its name, address of its registered office and the Corporate Identity Number along with telephone number, fax number, if any, e-mail and website addresses, if any, printed in all its business letters, billheads, letter papers and in all its notices and other official publications; and (d) have its name printed on hundies, promissory notes, bills of exchange and such other documents as may be prescribed:
Provided that where a company has changed its name or names during the last two years, it shall paint or affix or print, as the case may be, along with its name, the former name or names so changed during the last two years as required under clauses (a) and (c):

Important Changes

The Corporate Identity Number which is a 21 digit number allotted by the Ministry of Corporate Affairs – this needs to be now printed in the company letter heads/ invoices and any other official documents of the company. 

Where there is a change in the name of the company during the last two years then the former name shall also be mentioned along with the current name. It can be mentioned as “erstwhile XYZ Private Limited” in brackets under the new name. The period for which the old name should be mentioned is not specifically stated, but from the language one would infer that it is a requirement for two years. 

The old name should also be mentioned in the name plates which is required to be prominently affixed outside the registered office of the company. 

So all companies are requested to please start complying with this new requirement from 1st April, 2014 onwards. 

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Companies Act, 2014 – some more sections notified

The Ministry of Corporate Affairs has vide its notification dated 26th March 2014 notified some more sections of the Companies Act, 2014. All these sections are notified to come into effect from 1st April, 2014. Almost all the substantive sections of the Act has been notified. 

Click to access CompaniesActNotification26March2014.PDF

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Service tax – mandatory electronic payment of tax

The Service Tax department has vide its notification no. 16/2013 dated 22nd November 2013 reduced the threshold limits beyond which service tax has to be paid through internet banking system. 

Hitherto Rule 6(2) of the Service Tax Rules 1994 provided that “where an assessee has paid a total service tax of Rs.10 lakhs or more including the amount paid by utilisation of Cenvat Credit in the preceding financial year, then he shall deposit the service tax liable to be paid by him electronically through internet banking”

This limit of Rs.10 lakhs has been reduced to Rs. 1 lakh vide the 2013 notification cited above. The amendment in the threshold limits apply with effect from 1st January 2014. Which means where in financial year 2012-13, the assessee has paid service tax of more than Rs.1 lakh then for all service tax payments on or after 1st January 2014, the payment has to be done by way of internet banking system. 

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