Specific Issues under Companies Act, 2013

Specific Issues under Companies Act, 2013 By: CA Kamal Garg [B Com (H), FCA, DISA (ICAI), LLB] Part I Borrowing Powers of the Company under Companies Act, 2013 Borrowing Powers of Company [Section 180(1)(c)] • If: Borrowings [Present (+) Proposed] > [Paid-up Share Capital (+) Free Reserves]; • Then: SR Approval required (words used in Section are “exercise the powers only with the consent by SR”) • Companies Covered: Public as well as Private; • Borrowings Exclusion: Temporary Loans obtained from Companies Bankers in ordinary course of Business Case Study Particulars Case I (Rs In Cr.) Case (Rs In Cr.) Case (Rs In Cr.) Case (Rs In Cr.) Equity Share Capital 100 100 100 100 Pref Share Capital 50 50 50 50 Free Reserves 20 20 20 20 Total 170 170 170 170 Present Borrowings 120 120 120 120 Proposed Borrowings 30 40 50 60 Total 150 160 170 180 Resolutions BOD BOD BOD BOD (+) SR Particulars Case I (Rs In Cr.) Case (Rs In Cr.) Case (Rs In Cr.) Case (Rs In Cr.) Paid up Capital 150 150 150 150 Free Reserves 20 20 20 20 Total 170 170 170 170 Working Capital loan (repayable on demand Existing) from GE Capital Ltd 50 50 50 50 CC from PNB (repayable on demand - Existing) 120 120 120 120 Months loan for Plant & Mach from PNB (Proposed) 30 40 50 60 24 Months loan for Plant & Mach from PNB (Proposed) 10 20 30 40 Total 210 230 250 270 Eligible Borrowings 90 110 130 150 BOD BOD BOD BOD Resolutions Part II Debt Due from Directors under Companies Act, 2013 Debt due from Director [Section 180(1)(d)] SR Approval required to: • Remit; or • Give time for the repayment of any debt due from a director Part III Contribution to charitable funds, etc under Companies Act, 2013 Contribution to charitable funds, etc [Section 181] • If: contribution to charitable & other funds > 5% [Past years’ average profits]; • Then: Prior SR Approval required • Companies Covered: Public as well as Private; • Exclusion: NIL; Unlike 1956 Act, now donations to charitable and other funds directly relating to the business of the company or the welfare of its employees are not excluded; • CSR Contributions: Covered by this Section, hence SR (Prior) Approval Required [Section 181 read with Section 135] Part IV Loans to Directors, etc under Companies Act, 2013 The provisions relating to related party transactions not apply in certain situations • Any transactions entered into by the company in its ordinary course of business, other than transactions which are not on an arm's length basis - Third proviso to section 188(1) of the 2013 Act; Disclosure in Board's report of related party transactions • Every contract or arrangement entered into under section 188(1) shall be referred to in the Board's report to the shareholders along with the justification for entering into such contract or arrangement - Section 188(2) of the 2013 Act Consequences if contract or arrangement is not ratified by board/general meeting • Such contract or arrangement shall be voidable at the option of the Board; • The directors concerned shall indemnify the company against any loss incurred by it; • Company can recover losses from director or other employee; • A director is disqualified for appointment, if he has been convicted of the offence dealing with related party transactions under section 188 at any time during the last preceding five years Disclosures • Companies to maintain register for: contracts or arrangements which directors are interested; related party transactions • Loans and advances from and to related parties shall be disclosed - General Instructions for Preparation of Balance Sheet - Schedule III of the 2013 Act; • Disclosures as per AS 18 also required Part VI Auditors Liabilities under Companies Act, 2013 Services which auditor should not provide to the auditee company • Statutory auditor shall not directly or indirectly provide any of the prescribed "other services“ to the: auditee-company; or its holding company; or subsidiary company [Section 144] Services which auditor should not provide to the auditee company….contd • Prescribed Other Services: 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; management services; and any other kind of services as may be prescribed Requirement of highlighting certain comments in audit report in thick type or italics omitted • Section 143(3)(f) omits requirement to highlight comments in thick type or italics; • Section 143(3)(f) redrafts the requirement to provide that auditor's report shall state the observations or comments of the auditors on financial transactions or matters which have any adverse effect on the functioning of the company; • Section 143(i) of the 2013 Act requires the auditor's report to state whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls Auditor's duty to AGM • Section 146 provides that the auditor shall attend any general meeting: by himself, or through his authorised representative who is qualified to be an auditor • Such attendance is compulsory unless otherwise exempted by the company Auditor's liabilities Section 147(2) provides as under: • If an auditor of a company contravenes any of the provisions relating to: – appointment of auditors (section 139), – contents of audit report (section 143), – compliance with auditing standards (section 143), – rendering prohibited services (section 144), and – signing of audit report (section 145), • the auditor shall be punishable with fine which shall not be less than Rs 25,000 but which may extend to Rs 5,00,000 Auditor's liabilities….contd • If an auditor has contravened such provisions knowingly or wilfully with the intention to deceive: the company, or its shareholders; or creditors; or tax authorities, he shall be punishable with: imprisonment for a term which may extend to one year; and with fine which shall not be less than Rs 1,00,000 lakh but which may extend to Rs 25,00,000 [proviso to section 147(2)] Auditor's liabilities….contd • Section 147(3) provides that where an auditor has been convicted of an offence as above, he shall be liable to1 Refund the remuneration received by him to the company; and Pay for damages: to the company, to the statutory bodies or authorities, to any other persons for loss arising out of incorrect or misleading statements of particulars made in his audit report Part VII Immediate Action Points under Companies Act, 2013 • • • • • • • • • • • • • Stationery requirements; Appointment of a woman director; Appointment of KMP; Uniform Financial year; Financial Statements (SFS and CFS); Audit committee and Nomination & Remuneration committee; Auditors report requirements; Internal Audit; Number of directorships; CSR; Increased powers of ROC; Deposits; Share Application Money KGMA KG Management Advisors LLP IFRS│Audit & Assurance│FEMA│Valuation│Corporate Advisory cakamalgarg@gmail.com, www.kgma.in M: 9811054015 ... with Section 135] Part IV Loans to Directors, etc under Companies Act, 2013 Loans to Directors, etc [Section 185] Save as otherwise provided in this Act, • Prohibition to advance any loan: a company... rate; Under section 295 imprisonment could be avoided by fully repaying the loan Section 185 does not contain such a provision Part IV Loans and Investments by Company under Companies Act, 2013. .. repayment of any debt due from a director Part III Contribution to charitable funds, etc under Companies Act, 2013 Contribution to charitable funds, etc [Section 181] • If: contribution to charitable