Procedures and Compliances - A Practical Approach to the Companies Act, 2013 (Second Edition)

Contents at a glance Foreword to the first edition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v About the author. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix Table of contents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii Chapter 1

Companies Act, 2013: Key Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Chapter 2

Financial Reporting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159

Chapter 3

Accounting, reporting and filing requirements . . . . . . . . . . . . . . . . . . 297

Chapter 4

Financial statements and related implementation issues. . . . . . . . . . . 311

Chapter 5

Declaration and payment of dividend . . . . . . . . . . . . . . . . . . . . . . . . . 465

Chapter 6

Presentation of financial statements at Annual general meeting. . . . . 485

Chapter 7

Annual return. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 489

Chapter 8

Re-opening of accounts on court’s or tribunal’s orders and voluntary revision of financial statements or board’s report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 509

Chapter 9

Constitution of National Financial Reporting Authority. . . . . . . . . . . 583

Chapter 10

Approval of financial statements and provisions related to board’s report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 599

Chapter 11

Corporate Social Responsibility (CSR). . . . . . . . . . . . . . . . . . . . . . . . 649

Chapter 12

Right of member to copies of audited financial statement. . . . . . . . . . 715

Chapter 13

Copy of financial statement to be filed with registrar . . . . . . . . . . . . . 733

Chapter 14

Internal audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 781

Chapter 14A Disclosure checklist related to financial reporting provisions under the Companies Act, 2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 789 Chapter 14B Loans and investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 821 Chapter 14C Related party transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 873 Chapter 15

Appointment of auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 905

Chapter 16

Removal, resignation of auditor and giving of special notice. . . . . . . 963

Chapter 17

Eligibility, qualifications and disqualifications of auditors. . . . . . . . . 983

Chapter 18

Remuneration of auditors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1005

Chapter 19

Power and duties of auditors and standards on auditing. . . . . . . . . . 1009

Chapter 20

Fraud reporting by auditor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1299 xi

Financial Reporting Requirements and Auditor’s Responsibilities, 2e

Chapter 21

Auditor’s reporting requirements under Companies (Auditor’s Report) Order, 2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1333

Chapter 22

Auditor not to render certain services . . . . . . . . . . . . . . . . . . . . . . . . 1383

Chapter 23

Signing of audit reports, etc. by the auditor. . . . . . . . . . . . . . . . . . . . 1391

Chapter 24

Auditors to attend annual general meeting . . . . . . . . . . . . . . . . . . . . 1399

Chapter 25

Punishment for non-compliance with Chapter X. . . . . . . . . . . . . . . . 1403

Chapter 26

Cost audit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1409

xii

Table of contents Foreword to the first edition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v About the author. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix Contents at a glance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi Companies Act, 2013: Key Highlights. . . . . . . . . . . . . . . . . . . . . . . . . 1 Chapter 1 1.1 Historical background. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.2 The 2013 Act: objectives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.3 Highlights of the 2013 Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Overview of the 2013 Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.3.1 1.3.2 New types of companies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 1.3.3 Larger partnerships permitted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1.3.4 Incorporation and capital raising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 1.3.5 New Committees and amended provisions related to board of directors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 1.3.6 Management and administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1.3.7 Financial statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1.3.8 Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 1.3.9 Directors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 1.3.10 Loans and investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 1.3.11 Related party transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 1.3.12 Prohibition on forward dealing and insider trading. . . . . . . . . . . . . . 12 1.3.13 Merger and amalgamation of companies. . . . . . . . . . . . . . . . . . . . . . 12 1.3.14 Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 1.4 Report of the Companies Law Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 1.5 Companies (Amendment) Bill, 2016 introduced in Lok Sabha . . . . . . . . . . . . . 19 1.6 Report of Standing Committee on Finance on Companies (Amendment) Bill, 2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Annexures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Financial Reporting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159 Chapter 2 2.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160 2.2 ICAI conceptual framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161 2.3 Financial reporting in India for companies. . . . . . . . . . . . . . . . . . . . . . . . . . . . 162 2.4 Key regulators. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164 2.4.1 The Institute of Chartered Accountants of India (ICAI). . . . . . . . . . 164 2.4.2 The Ministry of Corporate Affairs (MCA). . . . . . . . . . . . . . . . . . . . 164 xiii

Financial Reporting Requirements and Auditor’s Responsibilities, 2e

2.4.3 SEBI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165 2.4.4 Reserve Bank of India (RBI) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166 2.4.5 Insurance Regulatory and Development Authority of India (IRDAI) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167 2.5 Regulatory mechanism for monitoring financial reporting practices in India. . 167 2.6 Annual report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169 2.7 Way forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170 2.7.1 Convergence with IFRS in India . . . . . . . . . . . . . . . . . . . . . . . . . . . 170 2.7.2 Roadmap for banks, NBFCs and insurance companies. . . . . . . . . . 185 2.7.3 RBI recommends a roadmap for implementation of Ind AS for banks and NBFCs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185 2.7.4 IRDAI issued a road map on convergence to Ind AS in the insurance sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187 2.7.5 Report of the Implementation Group of Ind AS in insurance sector in India. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187 2.7.6 Impact of the roadmap prescribed by RBI and IRDAI. . . . . . . . . . . 189 2.7.7 Companies (Indian Accounting Standards) (Amendment) Rules, 2016 and Roadmap for NBFCs. . . . . . . . . . . . . . . . . . . . . . . 190 2.7.8 Rule 4 of The Companies (Indian Accounting Standards) Rules, 2015 has been amended. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190 2.7.9 Implementation of Ind AS by select All-India Term Lending and Refinancing Institutions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192 2.7.10 Transition to Ind AS not a mere accounting change. . . . . . . . . . . . . 193 2.8 Framework proposed by the MAT-Ind AS Committee for computation of book profits for Ind AS compliant companies. . . . . . . . . . . . . . . . . . . . . . . . 197 2.8.1 Background. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198 2.8.2 Overview of the framework. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198 2.8.3 Recommendations of the Committee. . . . . . . . . . . . . . . . . . . . . . . . 198 2.8.4 Revised report of the Committee to lower MAT liability on Ind AS adoption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199 Annexures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202 Accounting, reporting and filing requirements. . . . . . . . . . . . . . . . 297 Chapter 3 3.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 298 3.2 Section 128 – Books of account, etc., to be kept by the company . . . . . . . . . . 298 3.3 Extracts from notes on clauses, Companies Bill, 2011 containing the brief summary of the section. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300 3.4 Guidance on specific areas including implementation issues. . . . . . . . . . . . . . 300 3.4.1 Books of account to be kept by a company . . . . . . . . . . . . . . . . . . . 300 3.4.2 Companies or class of companies specified under section 148 . . . . 301 3.4.3 Maintenance of books of accounts in electronic form. . . . . . . . . . . . . . . 302 xiv

Table of contents

3.4.4 3.4.5 3.4.6 3.4.7 3.4.8 3.4.9 3.4.10

Maintenance of server outside India. . . . . . . . . . . . . . . . . . . . . . . . . 303 True and fair view of the state of affairs of the company. . . . . . . . . 304 Accrual basis of Accounting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 305 Inspection of books of account by director . . . . . . . . . . . . . . . . . . . 306 Place to maintain the book of account and other document. . . . . . . 306 Period of maintaining books of account. . . . . . . . . . . . . . . . . . . . . . 307 Penalty in case of non-compliance with provisions of section 128. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307 3.5 Summary of difference between the section of 2013 Act vis-à-vis 1956 Act . . . 308 Annexures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308 Financial statements and related implementation issues. . . . . . . . 311 Chapter 4 4.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 312 4.2 Section 129 – Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 314 4.3 Extracts from notes on clauses, Companies Bill, 2011 containing the brief summary of the section. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 316 4.4 Guidance on specific areas including implementation issues. . . . . . . . . . . . . . 316 4.4.1 Accounting Standards (AS) notified under section 133 of the Companies Act, 2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 316 4.4.2 Law to prevail over AS or vice-versa. . . . . . . . . . . . . . . . . . . . . . . . 317 4.4.3 Shares held in fiduciary capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . 321 4.4.4 Schedule III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 322 4.4.5 Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . 322 4.4.6 Whether comparatives are required to be presented for CFS. . . . . . 323 4.4.7 MCA issued circulars and clarifications on implementation issues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 323 4.4.8 Requirement to attach a separate statement containing salient features of financial statements of subsidiaries (Section 129(5) of the Companies Act, 2013) . . . . . . . . . . . . . . . . . 327 4.4.9 Extension of financial year by the companies . . . . . . . . . . . . . . . . . 328 4.5 Summary of difference between the section of 2013 Act vis-à-vis 1956 Act . . . 328 4.5.1 Definition of ‘financial statements’. . . . . . . . . . . . . . . . . . . . . . . . . . 328 4.5.2 Holding of AGM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 329 4.5.3 Financial statements of the subsidiary company . . . . . . . . . . . . . . . 329 4.6 Schedule II - Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 329 4.7 Comparison between existing Accounting Standards and Accounting Standards as per the Companies (Accounting Standards) Amendment Rules, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 346 Annexures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 362

xv

Financial Reporting Requirements and Auditor’s Responsibilities, 2e

Chapter 5 Declaration and payment of dividend . . . . . . . . . . . . . . . . . . . . . . . 465 5.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 466 5.2 Section 123 - Declaration of dividend. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 466 5.3 Extracts from notes on clauses, Companies Bill, 2011 containing the brief summary of the section. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 467 5.4 Guidance on specific areas including implementation issues. . . . . . . . . . . . . . 468 Sources of dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 468 5.4.1 5.4.2 Definition of ‘profits’. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 468 5.4.3 Whether transfer to reserves is required under Companies Act, 2013?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 469 5.4.4 Whether dividend can be declared out of reserves created out of past years’ profits?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 469 5.4.5 Free reserve as defined in 2013 Act. . . . . . . . . . . . . . . . . . . . . . . . . 470 5.4.6 Set-off of past losses or depreciation before declaration of dividend – mandatory or not?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 470 5.4.7 Interim dividend. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 471 5.4.8 Transfer of unpaid or unclaimed dividends to special bank account/IEPF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 471 5.4.9 Mode of payment of dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 472 5.5 Summary of difference between the section of 2013 Act vis-à-vis 1956 Act . . . 473 5.6 Examples - Computation of profits for declaration of dividend. . . . . . . . . . . . 473 Annexures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 477 Chapter 6 Presentation of financial statements at Annual general meeting. . 485 6.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 485 6.2 Section 96 - AGM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 486 6.3 Extracts from notes on clauses, Companies Bill, 2011 containing the brief summary of the section. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 486 6.4 Guidance on specific areas including implementation issues. . . . . . . . . . . . . . 487 6.4.1 Holding of an AGM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 487 6.4.2 Extension of time limit by registrar for holding AGM. . . . . . . . . . . 487 6.4.3 Time and place of holding of AGM. . . . . . . . . . . . . . . . . . . . . . . . . 487 6.4.4 Validity of acts carried out at a delayed AGM. . . . . . . . . . . . . . . . . 488 6.4.5 Presentation of financial statements of the subsidiary companies . . . 488 6.5 Summary of difference between the section of 2013 Act vis-à-vis 1956 Act . . . 488 Chapter 7 Annual return. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 489 7.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 489 7.2 Section 92 - Annual return. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 490 7.3 Extracts from notes on clauses, Companies Bill, 2011 containing the brief summary of the section. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 491 xvi

Table of contents

7.4

Guidance on specific areas including implementation issues. . . . . . . . . . . . . . 492 7.4.1 Contents of annual return. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 492 7.4.2 Certification of annual return. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 492 7.4.3 Filing of annual return in electronic form . . . . . . . . . . . . . . . . . . . . 493 7.4.4 Guidance on Annual Return. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 493 7.5 Summary of difference between the section of 2013 Act vis-à-vis 1956 Act . . . 493 Annexures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 494 Re-opening of accounts on court’s or tribunal’s orders and voluntary revision of financial statements or board’s report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 509 8.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 510 8.2 Section 130 - Re-opening of accounts on court’s or tribunal’s orders. . . . . . . . 510 8.3 Extracts from notes on clauses, Companies Bill, 2011 containing the brief summary of the section. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 511 8.4 Guidance on specific areas of section 130. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 511 Circumstances in which revision is permissible. . . . . . . . . . . . . . . . 511 8.4.1 Period upto which reopening of financial statements can be 8.4.2 carried out. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 512 8.5 Section 131 -Voluntary revision of financial statements or board’s report. . . . 515 8.6 Extracts from notes on clauses, Companies Bill, 2011 containing the brief summary of the section. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 516 8.7 Constitution of the NCLT and NCLAT and notification of related provisions of the Companies Act, 2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 516 8.8 Guidance on specific areas of section 131. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 517 8.8.1 Voluntary revisions to the financial statements or board’s report. . . 517 8.8.2 Restatement not permitted under existing Companies (Accounting Standards) Rules, 2006 . . . . . . . . . . . . . . . . . . . . . . . . 517 8.8.3 Ind AS 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 518 8.8.4 Restriction on revision of financial statements. . . . . . . . . . . . . . . . . 518 8.8.5 Central government empowered to make rules . . . . . . . . . . . . . . . . 518 8.8.6 SA 560 (Revised), Subsequent Events issued by the ICAI . . . . . . . 518 8.8.7 Relevant rules issued under the Companies Act, 2013. . . . . . . . . . . 520 8.8.8 ICAI guidance note on auditor’s report on revised accounts of companies before circulation to shareholders . . . . . . . . . . . . . . . 522 8.9 Summary of difference between the section of 2013 Act vis-à-vis 1956 Act . . . 522 Annexures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 524 Chapter 8

Constitution of National Financial Reporting Authority. . . . . . . . 583 Chapter 9 9.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 583 9.2 Section 132 - Constitution of NFRA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 584 xvii

Financial Reporting Requirements and Auditor’s Responsibilities, 2e

9.2A Section 133 – Central government to prescribe Accounting Standards . . . . . . 587 9.3 Extracts from notes on clauses, Companies Bill, 2011 containing the brief summary of the section. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 587 9.4 Guidance on specific areas including implementation issues. . . . . . . . . . . . . . 588 9.4.1 Wider powers of NFRA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 588 9.4.2 Appeals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 589 Books of accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 589 9.4.3 9.4.4 Composition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 589 9.4.5 Transitional provisions with respect to AS. . . . . . . . . . . . . . . . . . . . 590 9.5 Summary of difference between the section of 2013 Act vis-à-vis 1956 Act . . . 592 Annexures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 592 Approval of financial statements and provisions related to board’s report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 599 10.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600 10.2 Section 134 -financial statement, board’s report, etc. . . . . . . . . . . . . . . . . . . . . 600 10.3 Extracts from notes on clauses, Companies Bill, 2011 containing the brief summary of the section. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 603 10.4 Guidance on specific areas including implementation issues. . . . . . . . . . . . . . 603 10.4.1 Authentication of financial statements. . . . . . . . . . . . . . . . . . . . . . . 603 10.4.2 Financial statements to be approved by board of directors before authentication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 605 10.4.3 Report by board of directors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 605 10.4.4 Report of the board of directors in case of OPC. . . . . . . . . . . . . . . . 621 10.4.5 Directors’ responsibility statement. . . . . . . . . . . . . . . . . . . . . . . . . . 621 10.4.6 Applicability of reporting in the case of unlisted companies . . . . . 624 10.4.7 Criteria for internal financial controls over financial reporting. . . 625 10.4.8 IFC reporting on interim financial statements . . . . . . . . . . . . . . . . . 626 10.4.9 IFC reporting on CFS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 626 10.4.10 Directors to devise proper systems to ensure compliance with the provisions of all applicable laws [Section 134(5)(f)]. . . . . 626 10.4.11 Authorisation of board’s report [Section 134(6)]. . . . . . . . . . . . . . . 626 10.4.12 Circulation of copies of financial statements [Section 134(7)] . . . . 627 10.4.13 Penalties for contravention of this section. . . . . . . . . . . . . . . . . . . . 627 10.5 Overview of key changes and summary of difference between the section of 2013 Act vis-à-vis 1956 Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 628 10.6 Amendments proposed in Companies (Amendment) Bill, 2016 and recommendations of the Standing Committee on Finance. . . . . . . . . . . . . . . . 640 Annexures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 642 Chapter 10

xviii

Table of contents

Chapter 11 Corporate Social Responsibility (CSR). . . . . . . . . . . . . . . . . . . . . . 649 11.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 650 11.2 Section 135 –CSR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 650 11.3 Extracts from notes on clauses, Companies Bill, 2011 containing the brief summary of the section. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 651 11.4 Guidance on specific areas including implementation issues. . . . . . . . . . . . . . 651 Applicability of CSR provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . 651 11.4.1 11.4.2 Constitution of CSR Committee. . . . . . . . . . . . . . . . . . . . . . . . . . . . 653 11.4.3 Composition of CSR Committee. . . . . . . . . . . . . . . . . . . . . . . . . . . 653 11.4.4 Role of CSR committee. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 653 11.4.5 Meaning of the term ‘net profits’. . . . . . . . . . . . . . . . . . . . . . . . . . . 654 11.4.6 Whether PBT or PAT is to be considered for applicability of CSR provisions?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 655 11.4.7 Expenditure on CSR activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 656 11.4.8 ICAI Guidance Note on Accounting for Expenditure on CSR Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 656 11.5 CSR (Policy) Amendment Rules, 2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 660 11.6 Recommendations of Standing Committee on Finance on proposed amendments to Section 136(1) in Companies (Amendment) Bill, 2016. . . . . . 662 11.7 Summary of difference between the section of 2013 Act vis-à-vis 1956 Act . . . 663 Annexures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 668 Chapter 12 Right of member to copies of audited financial statement. . . . . . . 715 12.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 716 12.2 Section 136 - Right of member to copies of audited financial statement . . . . . 716 12.3 Extracts from notes on clauses to Companies Bill, 2011 containing a brief summary of the section. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 717 12.4 Guidance on specific areas including implementation issues. . . . . . . . . . . . . . 718 12.4.1 Applicability of section . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 718 12.4.2 Persons entitled to receive by electronic mode . . . . . . . . . . . . . . . . 718 12.4.3 Persons entitled to inspect documents at registered office. . . . . . . . 719 12.4.4 Audited accounts of subsidiary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 720 12.4.5 Whether financial statements of the subsidiaries should be prepared as per Indian GAAP and audited in accordance with the Standards on Auditing issued by the ICAI. . . . . . . . . . . . . 720 12.4.6 Abridged financial statements in case of listed companies . . . . . . . 721 12.5 Changes proposed by Companies (Amendment) Bill, 2016. . . . . . . . . . . . . . . 721 12.6 Recommendations of Standing Committee on Finance on proposed amendments to Section 136(1) in Companies (Amendment) Bill, 2016. . . . . . 722

xix

Financial Reporting Requirements and Auditor’s Responsibilities, 2e

12.7 Summary of difference between the section of Companies Act, 2013 Act vis-à-vis Companies Act, 1956. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 722 Annexures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 723 Chapter 13 Copy of financial statement to be filed with registrar. . . . . . . . . . . 733 13.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 734 13.2 Section 137 - Copy of financial statement to be filed with registrar. . . . . . . . . 734 13.3 Extracts from notes on clauses to the Companies Bill, 2011 containing a brief summary of the section . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 735 13.4 Guidance on specific areas including implementation issues. . . . . . . . . . . . . . 736 13.4.1 CFS also to be filed with the registrar . . . . . . . . . . . . . . . . . . . . . . . 736 13.4.2 Filing of un-adopted financial statements with the registrar . . . . . . 736 13.4.3 Filing of un-adopted financial statements where AGM has not been held. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 737 13.4.4 Filing of accounts of foreign subsidiaries. . . . . . . . . . . . . . . . . . . . . 738 13.4.5 Filing of financial statements by an OPC. . . . . . . . . . . . . . . . . . . . . 738 13.4.6 Penalties for contravention of the section. . . . . . . . . . . . . . . . . . . . . 738 13.4.7 Relevant rules issued under the Companies Act, 2013. . . . . . . . . . . 739 13.4.8 Filing in Extensible Business Reporting Language (XBRL). . . . . . 740 13.5 Changes proposed by Companies (Amendment) Bill, 2016. . . . . . . . . . . . . . . 742 13.6 Recommendations of Standing Committee on Finance on proposed amendments to Section 137 in Companies (Amendment) Bill, 2016. . . . . . . . 742 13.7 Brief summary of difference between the section of Companies Act, 2013 vis-à-vis Companies Act, 1956. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 743 Annexures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 744 Chapter 14 Internal audit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 781 14.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 781 14.2 Section 138- Internal audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 782 14.3 Extracts from Notes on Clauses, Companies Bill, 2011 containing the brief summary of the Section. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 782 14.4 Guidance on specific areas including implementation issues. . . . . . . . . . . . . . 782 14.4.1 Definition of internal audit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 782 14.4.2 Mandatory appointment of internal auditor – Another step towards strengthening of corporate governance. . . . . . . . . . . . . . . . 783 14.4.3 Whether an employee can be appointed as internal auditor?. . . . . . 784 Internal audit requirements under Companies Act, 1956. . . . . . . . . 785 14.4.4 14.4.5 CARO, 2003 vis-à-vis current reporting requirements . . . . . . . . . . 785 14.4.6 The Internal Audit Standards Board of the ICAI has issued Knowledge Booklet Series 1- Enhancing governance through internal audit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 786 xx

Table of contents

14.4.7 14.4.8

Standards on Internal Audits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 787 ICAI has issued SA 610 (Revised), ‘Using the Work of Internal Auditors’. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 787

Chapter 14A Disclosure checklist related to financial reporting provisions under the Companies Act, 2013. . . . . . . . . . . . . . . . . . . 789 Chapter 14B Loans and investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 821 14B.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 821 14B.2 Section 185 – Loans to directors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 822 14B.3 Extracts from notes on clauses, Companies Bill, 2011 containing the brief summary of the section. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 824 14B.4 Exemptions from applicability of sec 185. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 824 14B.5 Section 186 – Loan and investment by company.. . . . . . . . . . . . . . . . . . . . . . . 825 14B.6 Exemptions from applicability of sec 186. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 827 14B.7 Extracts from notes on clauses, Companies Bill, 2011 containing the brief summary of the section. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 829 14B.8 Guidance on specific areas including implementation issues. . . . . . . . . . . . . . 829 14B.8.1 Applicability of Section 185 and 186. . . . . . . . . . . . . . . . . . . . . . . . 829 14B.8.2 Applicability of Section 185 to lenders . . . . . . . . . . . . . . . . . . . . . . 830 14B.8.3 Applicability of sec 185 - loan represented by a book debt. . . . . . . 831 14B.8.4 Determination of ‘Accustomed to act according to the directions or instructions of’ for applicability of sec 185. . . . . . . . . 831 14B.8.5 Grandfathering of loans granted under Companies Act, 1956. . . . . 832 14B.8.6 Loans given to subsidiary companies by a holding company . . . . . 833 14B.8.7 Applicability of loans granted in a group (e.g. by a fellow subsidiary to another fellow subsidiary). . . . . . . . . . . . . . . . . . . . . . 835 14B.8.8 Disclosure requirements under Section 186. . . . . . . . . . . . . . . . . . . 836 14B.8.9 Punishment for contravention. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 836 14B.9 Amendments proposed in Companies (Amendment) Bill, 2016. . . . . . . . . . . . 836 14B.10 Summary of differences between the section of 2013 Act vis-à-vis 1956 Act. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 840 Annexures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 843 Chapter 14C Related party transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 873 14C.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 874 14C.2 Section 188 – Related party transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 874 14C.3 Extracts from notes on clauses, Companies Bill, 2011 containing the brief summary of the section. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 877 14C.4 Guidance on specific areas including implementation issues. . . . . . . . . . . . . . 877 14C.4.1 Definition of ‘Related party’. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 877 xxi

Financial Reporting Requirements and Auditor’s Responsibilities, 2e

14C.4.2 Whether a joint venture company be covered as related party under section 2(76)? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 879 14C.4.3 Related party transactions – whether transaction relating to moveable property also covered?. . . . . . . . . . . . . . . . . . . . . . . . . . . 879 14C.4.4 Interested shareholder. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 880 14C.4.5 Office or place of profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 880 14C.4.6 Determination of ‘arm’s length’ basis. . . . . . . . . . . . . . . . . . . . . . . . 881 14C.4.7 Related party transactions for which approval of the Board of Directors is required. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 882 14C..4.8 Related party transactions for which approval of the shareholders is required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 883 14C.4.9 Approval of related party transactions entered in the ordinary course of business and at arm’s length. . . . . . . . . . . . . . . . 886 14C.4.10 Whether prior approval required for related party transactions?. . . 887 14C.4.11 Omnibus approval by audit committee for related party transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 887 14C.4.12 Determination of ‘material’ related party transactions. . . . . . . . . . . 889 14C.4.13 Requirements relating to maintenance of records/ disclosures relating to related party transactions. . . . . . . . . . . . . . . 890 14C.4.14 Transitional provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 890 14C.4.15 Contracts/arrangement entered into without obtaining consent of board and its consequences. . . . . . . . . . . . . . . . . . . . . . . 891 14C.5 Amendments proposed in Companies (Amendment) Bill, 2016. . . . . . . . . . . . 891 14C.6 Summary of differences between the section of 2013 Act vis-à-vis 1956 Act. . . 892 14C.6.1 Approval of Central Government for related party transactions . . . 892 14C.6.2 Applicability of related party provisions . . . . . . . . . . . . . . . . . . . . . 893 14C.6.3 Disclosure in Board’s report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 893 Annexures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 893 Chapter 15 Appointment of auditors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 905 15.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 906 15.2 Section 139 - Appointment of auditors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 907 15.3 Extracts from notes on clauses, Companies Bill 2011 containing the brief summary of the section. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 910 15.4 Guidance on specific areas including implementation issues. . . . . . . . . . . . . . 911 Appointment of first auditors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 911 15.4.1 Appointment/re-appointment and term of auditors 15.4.2 (other than government companies and other companies prescribed under sub-section (5)). . . . . . . . . . . . . . . . . . . . . . . . . . . 912 15.4.3 Appointment of LLP as auditor . . . . . . . . . . . . . . . . . . . . . . . . . . . . 912 15.4.4 Manner and procedure of selection and appointment of auditors. . . . 913 xxii

Table of contents

15.4.5

Eligibility certificate to be furnished by auditor before appointment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 915 15.4.6 Tenure of auditors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 916 15.4.7 Companies to file notice of appointment of auditor with the registrar. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 917 15.4.8 Corporate Governance Voluntary Guidelines, 2009 on auditors . . . 917 Guidance Note on Independence of Auditors, 15.4.9 dt. 21 January 2005. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 918 15.4.10 Mandatory rotation of auditors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 918 15.4.11 Transitional provisions for rotation requirements . . . . . . . . . . . . . . 923 15.4.12 Exemption from the provisions of the 2013 Act for specified IFSC private/public companies. . . . . . . . . . . . . . . . . . . . . 929 15.4.13 Non-mandatory rotation of audit partner/team and joint audit. . . . . 929 15.4.14 Casual vacancy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 929 15.4.15 Resignation of Auditor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 930 15.4.16 Re-appointment of one of joint auditors. . . . . . . . . . . . . . . . . . . . . . 931 15.4.17 Change in constitution of firm of auditors. . . . . . . . . . . . . . . . . . . . 931 15.4.18 Appointment of auditor of government companies and other specified companies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 931 15.4.19 Re-appointment of retiring auditor. . . . . . . . . . . . . . . . . . . . . . . . . . 932 15.4.20 Recommendations of Standing Committee on Finance on proposed amendments to Section 139 in Companies (Amendment) Bill, 2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 933 15.5 Summary of differences between the section of 2013 Act vis-à-vis 1956 Act. . . 934 15.5.1 Appointment of first auditors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 934 15.5.2 Appointment of subsequent auditors . . . . . . . . . . . . . . . . . . . . . . . . 934 15.5.3 Rotation of auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 935 15.5.4 Filling up of casual vacancy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 935 15.5.5 Appointment of auditor for government companies and other specified companies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 935 Annexures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 936 Chapter 16 Removal, resignation of auditor and giving of special notice. . . . . 963 16.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 964 16.2 Section 140 – Removal, resignation of auditor and giving of special notice. . . . 965 16.3 Extracts from notes on clauses, Companies Bill 2011 containing the brief summary of the section. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 967 16.4 Guidance on specific areas including implementation issues. . . . . . . . . . . . . . 967 16.4.1 Removal of the auditor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 967 16.4.2 Whether existing auditor to continue where no resolution for removing or appointing a new auditor is passed?. . . . . . . . . . . . 970 xxiii

Financial Reporting Requirements and Auditor’s Responsibilities, 2e

16.4.3 16.4.4 16.4.5 16.4.6 16.4.7 16.4.8

Right of the ‘retiring’ auditor – representation. . . . . . . . . . . . . . . . . 970 ICAI committee for unjustified removal of auditors . . . . . . . . . . . . 971 Fraudulent act by the auditor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 972 Penalty for non-compliance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 973 Delegation of powers to Regional Directors . . . . . . . . . . . . . . . . . . 973 Exemption from the provisions of the 2013 Act for specified IFSC private/public companies. . . . . . . . . . . . . . . . . . . . . 973 16.5 Summary of differences between the section of 2013 Act vis-à-vis 1956 Act. . . 974 16.5.1 No special notice required where term has been completed . . . . . . 974 16.5.2 Power of Tribunal to direct the removal of auditor . . . . . . . . . . . . . 974 16.5.3 Representation sent to registrar, if not members . . . . . . . . . . . . . . . 975 16.5.4 Statement of reasons in case of resignation. . . . . . . . . . . . . . . . . . . 975 16.5.5 Permission of shareholders for removal of auditor . . . . . . . . . . . . . 975 Annexures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 975 Chapter 17 Eligibility, qualifications and disqualifications of auditors . . . . . . 983 17.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 984 17.2 Section 141 - Eligibility, qualifications and disqualifications of auditors. . . . . 984 17.3 Extracts from notes on clauses, Companies Bill, 2011 containing the brief summary of the section. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 986 17.4 Guidance on specific areas including implementation issues. . . . . . . . . . . . . . 986 17.4.1 Timing of issuance of consent letter and eligibility certificate by auditor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 986 17.4.2 Auditor’s qualifications under the 2013 Act. . . . . . . . . . . . . . . . . . . 987 17.4.3 Persons not qualified for appointment as auditor. . . . . . . . . . . . . . . 987 17.4.4 Definition of security – whether all securities are to be considered. . . 989 17.4.5 Disqualification in case of indebtedness and holding of securities – extended to relatives . . . . . . . . . . . . . . . . . . . . . . . . . . . 990 17.4.6 Meaning of business relationship. . . . . . . . . . . . . . . . . . . . . . . . . . . 992 17.4.7 A statutory auditor cannot be appointed as internal auditor. . . . . . . 993 17.4.8 Additional disqualifications under the Chartered Accountants Act, 1949. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 993 17.4.9 Penalty for default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 994 17.4.10 Recommendations of Standing Committee on Finance on proposed amendments to Section 141(3) in Companies (Amendment) Bill, 2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 994 17.5 Summary of differences between the section of 2013 Act vis-à-vis 1956 Act. . . 996 17.5.1 Additional criteria for disqualification. . . . . . . . . . . . . . . . . . . . . . . 996 17.5.2 Change in criteria for disqualification . . . . . . . . . . . . . . . . . . . . . . . 997 17.5.3 Restriction on number of audits. . . . . . . . . . . . . . . . . . . . . . . . . . . . 997 Annexures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 998 xxiv

Table of contents

Chapter 18 Remuneration of auditors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1005 18.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1005 18.2 Section 142 - Remuneration of auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1005 18.3 Extracts from notes on clauses, Companies Bill, 2011 containing the brief summary of the section. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1006 18.4 Guidance on specific areas including implementation issues. . . . . . . . . . . . . 1006 Remuneration of the auditor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1006 18.4.1 18.4.2 Remuneration of auditor of Government and other specified companies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1007 18.5 Summary of differences between the section of 2013 Act vis-à-vis 1956 Act . . 1008 Chapter 19 Power and duties of auditors and standards on auditing. . . . . . . 1009 19.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1009 19.2 Section 143 - Powers and duties of auditors and auditing standards. . . . . . . . 1010 19.3 Extracts from notes on clauses, Companies Bill, 2011 containing the brief summary of the section. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1014 19.4 Guidance on specific areas including implementation issues. . . . . . . . . . . . . 1015 19.4.1 Right and duties of auditor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1015 19.4.2 Whether auditor can access records of subsidiaries under the Companies Act, 2013? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1016 19.4.3 Whether auditors can respond to individual shareholders/ bankers/third parties dealing with the company?. . . . . . . . . . . . . . 1016 19.4.4 Specific inquiries to be made by auditor under section 143(1) . . . 1017 19.4.5 Expression of true and fair opinion under section 143(2) . . . . . . . 1019 19.4.6 Recognition to Auditing Standards in the Companies Act, 2013. . . 1020 19.4.7 Auditors’ report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1020 19.4.8 Reporting on internal financial controls under section 143(3)(i). . 1026 19.4.9 Fraud reporting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1036 19.4.10 Reporting on specific matters under section 143(11). . . . . . . . . . . 1037 19.4.11 Auditor’s report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1037 19.4.12 New Standard on Auditing issued by ICAI . . . . . . . . . . . . . . . . . . 1041 19.4.13 Major amendments in auditing standards and their impact. . . . . . 1042 19.4.14 Audit of government companies and other specified companies. . 1049 19.4.15 Applicability of provisions of section 143 to cost auditor and company secretary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1050 19.5 Summary of differences between the section of 2013 Act vis-à-vis 1956 Act . . 1051 Annexures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1053

xxv

Financial Reporting Requirements and Auditor’s Responsibilities, 2e

Chapter 20 Fraud reporting by auditor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1299 20.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1300 20.2 ICAI guidance note on Reporting on Fraud under sec 143(12) of Companies Act, 2013. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1301 20.3 Implementation challenges on fraud reporting. . . . . . . . . . . . . . . . . . . . . . . . 1303 20.3.1 Issue – Definition of fraud for reporting under sec 143(12). . . . . . 1303 Issue - Frauds relating to earlier years but noticed in 20.3.2 subsequent years (e.g. during the year 2014-15 or in a later year). . . 1304 20.3.3 Issue – Reporting to the Central Government if based on the management explanations and steps taken by it, it is subsequently concluded that there was no fraud/suspected fraud. . . 1306 20.3.4 Issue –Frauds by third parties such as vendors and customers. . . . 1307 20.3.5 Issue – Fraud noted in the course of providing non-attest services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1307 20.3.6 Issue – Frauds detected by management or other persons. . . . . . . 1307 20.3.7 Issue – Fraud reporting to be on based on suspicion or reason to believe or knowledge or on determination of offence . . 1307 20.3.8 Issue – Fraud involving management. . . . . . . . . . . . . . . . . . . . . . . 1308 20.4 Fraud risk assessments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1309 20.5 Audit procedures if auditor has reasons to believe that fraud has occurred or is being carried out . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1309 20.6 Reporting to the Central Government in Form ADT – 4. . . . . . . . . . . . . . . . 1310 20.7 Evaluation of Impact on the Financial Statements, Audit Opinion on the Financial Statements and Internal Financial Controls. . . . . . . . . . . . . . . . 1311 20.8 Reporting of fraud under Companies (Auditor’s Report) Order, 2016 – Clause 3(x). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1312 20.9 Summary of differences between the section of 2013 Act vis-à-vis 1956 Act . . 1313 20.10 Way forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1313 Annexures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1314 Auditor’s reporting requirements under Companies (Auditor’s Report) Order, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1333 21.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1333 21.1.1 Applicability of CARO 2015. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1334 21.1.2 Reporting requirements under CARO, 2015 . . . . . . . . . . . . . . . . . 1334 21.1.3 ICAI announcement – Guidance on reporting under the CARO 2015 and consequential amendment to the format of the auditor’s report of a company. . . . . . . . . . . . . . . . . . . . . . . . . . 1336 21.1.4 MCA issued The Companies (Auditor’s Report) Order, 2016 – Notification dated 29 March 2016 . . . . . . . . . . . . . . . . . . . 1337 Chapter 21

xxvi

Table of contents

21.2 Overview of CARO 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1337 21.2.1 ICAI issued a guidance note on the Companies (Auditor’s Report) Order, 2016. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1338 21.3 Clause by clause analysis of CARO 2016 - Matters to be included in the auditor’s report under sec 143(11). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1339 21.4 Summary of differences between the section of 2013 Act vis-à-vis 1956 Act . . 1355 Appendix A– Illustrative reporting under various clauses of CARO 2016. . . . . . . . 1356 Annexures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1368 Chapter 22 Auditor not to render certain services. . . . . . . . . . . . . . . . . . . . . . 1383 22.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1383 22.2 Section 144 – Auditor not to render certain services. . . . . . . . . . . . . . . . . . . . 1384 22.3 Extracts from notes on clauses, Companies Bill, 2011 containing the brief summary of the section. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1385 22.4 Guidance on specific areas including implementation issues. . . . . . . . . . . . . 1385 22.4.1 Meaning of ‘directly or indirectly interested’ by the auditors . . . . 1385 22.4.2 Restriction on rendering services to company’s holding company or subsidiary company . . . . . . . . . . . . . . . . . . . . . . . . . . 1386 22.4.3 Transitional provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1386 22.4.4 Impact of section 144 on existing legally binding contracts related to prohibited services that auditor enters into with statutory audit clients. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1386 22.4.5 Consideration of materiality threshold in non-audit services. . . . . 1386 22.4.6 Definition of ‘management services’. . . . . . . . . . . . . . . . . . . . . . . 1386 22.4.7 Whether valuation services are prohibited?. . . . . . . . . . . . . . . . . . 1388 22.4.8 ICAI General Council Guidelines 2008. . . . . . . . . . . . . . . . . . . . . 1388 22.4.9 A statutory auditor cannot be appointed as internal auditor of the company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1388 22.5 Summary of differences between the section of 2013 Act vis-à-vis 1956 Act. . . 1389 Annexures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1389 Chapter 23 Signing of audit reports, etc. by the auditor . . . . . . . . . . . . . . . . . 1391 23.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1391 23.2 Section 145 - Auditor to sign audit reports, etc. . . . . . . . . . . . . . . . . . . . . . . . 1391 23.3 Extracts from notes on clauses, Companies Bill, 2011 containing the brief summary of the section. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1392 23.4 Guidance on specific areas including implementation issues. . . . . . . . . . . . . 1392 23.4.1 Who can sign the audit report?. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1392 23.4.3 Inspection of auditor’s report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1393 23.4.4 Amendment of auditor’s report . . . . . . . . . . . . . . . . . . . . . . . . . . . 1393

xxvii

Financial Reporting Requirements and Auditor’s Responsibilities, 2e

23.5 Summary of difference between the section of 2013 Act vis-à-vis 1956 Act. . . . 1393 Annexures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1394 Chapter 24 Auditors to attend annual general meeting. . . . . . . . . . . . . . . . . . 1399 24.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1399 24.2 Section 146 - Auditors to attend annual general meeting. . . . . . . . . . . . . . . . 1399 24.3 Extracts from notes on clauses, Companies Bill, 2011 containing the brief summary of the section. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1400 24.4 Guidance on specific areas including implementation issues. . . . . . . . . . . . . 1400 24.4.1 Is the auditor required to attend only the annual general meetings? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1400 24.4.2 Does this provision extend to meeting of directors? . . . . . . . . . . . 1400 24.4.3 Can auditor choose not to make any particular disclosure in his audit report by giving an explanation for the same in the annual general meeting?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1400 24.5 Summary of difference between the section of 2013 Act vis-à-vis 1956 Act. . . . 1401 Chapter 25 Punishment for non-compliance with Chapter X. . . . . . . . . . . . . 1403 25.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1403 25.2 Section 147 – Punishment for contravention. . . . . . . . . . . . . . . . . . . . . . . . . . 1404 25.3 Extracts from notes on clauses, Companies Bill, 2011 containing the brief summary of the section. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1405 25.4 Guidance on specific areas including implementation issues. . . . . . . . . . . . . 1405 25.4.1 ‘An intent to deceive’- auditing based on estimates. . . . . . . . . . . . 1405 25.4.2 Liability of auditor – can be extended to firm? . . . . . . . . . . . . . . . 1406 25.4.3 Other penalties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1407 25.5 Summary of difference between the section of 2013 Act vis-à-vis 1956 Act. . . . 1407 Chapter 26 Cost audit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1409 26.1 Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1409 26.2 Section 148 – Central government to specify audit of items of cost in respect of certain companies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1411 26.3 Extracts from notes on clauses, Companies Bill, 2011 containing the brief summary of the section. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1413 26.4 Guidance on specific areas including implementation issues. . . . . . . . . . . . . 1413 26.4.1 Does this section extend to foreign companies as well?. . . . . . . . 1413 Whether a chartered accountant can be appointed as a cost 26.4.2 auditor?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1413 26.4.3 Whether an internal auditor can also be as a cost auditor?. . . . . . . 1414 26.4.4 What is the procedure for appointment of cost auditor? . . . . . . . . 1414 26.4.5 What are the powers, duties and responsibilities of cost auditor?. . . 1414 xxviii

Table of contents

26.4.6 26.4.7 26.4.8

What is the tenure of the cost auditor?. . . . . . . . . . . . . . . . . . . . . . 1415 What is the reporting format of cost audit report?. . . . . . . . . . . . . 1415 Does the Company Law Board’s order restricting the number of cost audits to 30 still hold good?/Is there a cap on the number of cost audits?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1415 26.4.9 The Companies (Amendment) Act, 2000 specifically deleted the restriction relating to number of audits of private limited companies. What is the position now?. . . . . . . . . . 1416 26.5 Summary of difference between the section of 2013 Act vis-à -vis 1956 Act . . 1416 Annexures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1418

xxix

Chapter 1

Companies Act, 2013: Key Highlights Synopsis 1.1

Historical background .........................................................................................2

1.2

The 2013 Act: objectives .....................................................................................4

1.3

Highlights of the 2013 Act ...................................................................................5

1.3.1

Overview of the 2013 Act ..............................................................................5

1.3.2

New types of companies ...............................................................................5

1.3.3

Larger partnerships permitted ......................................................................6

1.3.4

Incorporation and capital raising...................................................................6

1.3.5

New Committees and amended provisions related to board of directors ....................................................................................................7

1.3.6

Management and administration..................................................................9

1.3.7

Financial statements .....................................................................................9

1.3.8

Auditors .......................................................................................................10

1.3.9

Directors ......................................................................................................11

1.3.10 Loans and investments ................................................................................11 1.3.11 Related party transactions ..........................................................................12 1.3.12 Prohibition on forward dealing and insider trading ....................................12 1.3.13 Merger and amalgamation of companies ...................................................12 1.3.14 Miscellaneous ..............................................................................................13 1.4

Report of the Companies Law Committee ........................................................16

1.5

Companies (Amendment) Bill, 2016 introduced in Lok Sabha..........................19

1.6

Report of Standing Committee on Finance on Companies (Amendment) Bill, 2016 ....................................................................................19

Annexures .....................................................................................................................40

1

Financial Reporting Requirements and Auditor’s Responsibilities, 2e

1.1

Chapter 1

Historical background

The Companies Act, 2013 (2013 Act) is a landmark piece of legislation and likely to have far-reaching consequences on all companies incorporated in India. The erstwhile Companies Act, 1956 (1956 Act) was in existence for well over fifty years and was lately seeming quite ineffective at handling presentday challenges of increasing globalisation and the complexities related with the growing stakeholders’ interests. There is a long history attached to the enactment of the new Act. Companies Bill, 2008 was first introduced in the Lok Sabha on 23 October 2008.

It had lapsed upon dissolution of the 14th Lok Sabha and re-introduced as Companies Bill, 2009 without any changes.

Companies Bill, 2009 was referred to the Standing Committee on Finance for its recommendations. The committee recommended more than 500 modifications.

The bill, after considering the recommendations of the standing committee (and other inputs from industry, professionals, etc.) was introduced as Companies Bill, 2011 in the Lok Sabha on 14 December 2011.Consequentially, Companies Bill, 2009 was withdrawn. Since considerable changes were made to the initial draft of the bill, it was referred again to the standing committee for its consideration and comments.

After consideration of recommendations of the Standing Committee, finally, the 2013 Act received the presidential assent on 29 August 2013 and was published in the Official Gazette of India on 30 August 2013. Thereafter, the Ministry of Corporate Affairs (MCA) has notified various sections of the 2013 Act at different dates, as specified in the table below: Notification No.

Date of notification

Number of sections notified

Effective date

The Companies Act, 2013 S.O. 2754 (E)

12 September 2013

98

12 September 2013

S.O. 582 (E)

27 February 2014

2

27 February 2014

S.O. 902 (E)

26 March 2014

202

1 April 2014

S.O. 1459 (E)

6 June 2014

1

6 June 2014

The Companies (Amendment) Act, 2015

2

S.O. 1440 (E)

29 May 2015

21

29 May 2015

S.O. 3388 (E)

14 December 2015

2

14 December

Chapter 1

Companies Act, 2013: Key highlights

2015 S.O. 125(E)

13 January 2016

1

13 January 2016

S.O.1795 (E)

18 May 2016

5

18 May 2016

S.O. 1934 (E)

1 June 2016

50

1 June 2016

S.O. 2866 (E)

5 September 2016

2

7 September 2016

S.O. 3677 (E)

7 December 2016

100

15 December 2016

S.O. 4167 (E)

26 December 2016

5

26 December 2016

On 1 June 2016, MCA published a notification regarding the constitution of the NCLT and NCLAT with effect from the date of publication. This effectively dissolved the Company Law Board as constituted under the 1956 Act from 1 June 2016. However, the provisions relating to capital reduction, winding up, compromise or arrangement (merger/demerger) and minority buy-out were not notified and continued to remain under the powers of jurisdictional High Courts.

Going forward, NCLT will have jurisdiction over these matters, which until now were within the jurisdiction of the High Courts.

MCA has notified much-awaited sections of the 2013 Act relating to the capital reduction, winding up (other than members' voluntary winding up), compromise or arrangement (merger/demerger), minority buy-out. MCA further notified the Companies (Transfer of Pending Proceedings) Rules 2016 and the Companies (Removal of Difficulties) Fourth Order, 2016. MCA has also notified rules under Companies (Compromises, Arrangements and Amalgamations) Rules, 2016.

These notifications have come into force from 15 December 2016.

Presently, the following sections are yet to be notified: • Merger or amalgamation of company with foreign company: The 2013 Act permits merger of foreign companies with Indian companies incorporated in specified jurisdictions and vice versa (to be notified). As per existing provisions of 1956 Act, a foreign company is allowed to merge with an Indian company; • Members' voluntary winding up: These sections are yet to be notified under 2013 Act and all the proceedings under voluntary winding up will continue to be under High Court jurisdiction under 1956 Act. 3

Financial Reporting Requirements and Auditor’s Responsibilities, 2e

•

•

•

•

• • •

Chapter 1

MCA has also issued Companies (Removal of Difficulties) Fourth Order, 2016 and Companies (Transfer of Pending Proceedings) Rules, 2016 to facilitate a smooth transition of the proceedings initiated under the 1956 Act and pending before any District Court or High Court to the NCLT. The following matters are transferred to NCLT with effect from 15 December 2016: All proceedings under the 1956 Act, including proceedings relating to compromises, arrangements and reconstruction, other than proceedings relating to winding up and those reserved for orders; All petitions relating to winding up of a company under Section 433 (e) of the 1956 Act on the ground of inability to pay its debts which are pending before the High Court and where the petition has not been served on the respondent.

However, all cases where opinion has been forwarded by Board for Industrial and Financial Reconstruction, for winding up of a company to a High Court and where no appeal is pending, will continue to be dealt with by such High Court in accordance with the provisions of 1956 Act; All petitions filed under Section 433(a)(f) of the 1956 Act pending before a High Court and where the petition has not been served on the respondent; All other proceedings will be dealt with in accordance with provisions of 1956 Act and the Companies (Court) Rules, 1959.

Following matter will continue to be dealt with by High Courts and will be effective from 1 April 2017: All applications and petitions relating to voluntary winding up of companies pending before a High Court on the date of commencement of this rule, shall continue to be dealt with by the High Court in accordance with provisions of the 1956 Act.

Please refer to Annexure at the end of chapter for the notifications referred to in the above table and a table containing provisions of Companies Act, 2013 as notified and corresponding provisions thereof under Companies Act, 1956 issued by the MCA.

1.2

The 2013 Act: objectives

The 1956 Act had been in force for about 57 years and amended many times.

Since then, the national and international economic scenario has undergone several changes and therefore, revision of the Act became important. The objectives of the enactment of the new Act were to: • Make changes in law to make it more adaptable and flexible.

• Reduce unnecessary regulatory approvals resulting in procedural delays.

4

Chapter 1

• • • • •

1.3 • • •

• • •

1.3.1

Companies Act, 2013: Key highlights

Harmonise requirements of corporate laws with other laws/regulations.

Further improve the interests of investors and minority shareholders.

Enhance corporate governance and Corporate Social Responsibility (CSR).

Increase auditors’ responsibility and accountability.

Strengthen transparency and disclosure norms.

Highlights of the 2013 Act The Companies Act, 2013 represents a comprehensive review of the erstwhile Act and its provisions represent a major shift in many aspects of the functioning of the companies.

The Act has 470 clauses and 7 schedules as against 658 sections and 15 schedules in the erstwhile Companies Act, 1956. The entire Act has been divided into 29 chapters.

There is a conscious effort at simplification of provisions and removal of redundant provisions.

More options and flexibility in determining structure have been introduced e.g. one person company (OPC), small company, much larger partnerships, etc.

There is an endeavour to restrict the principle Act to substantive matters with procedural matters prescribed by the central government in the form of rules.

The Act places greater emphasis on self-regulation and minimisation of regulatory approvals to be sought by a company in managing its affairs. It would achieve the overall objective of enhanced corporate governance.

Overview of the 2013 Act

Companies Act, 2013, the much-awaited legislation, has far-reaching effects and would impact all companies, auditors, stakeholders as well as other users of financial statements. The salient features of the Act are summarised below:

1.3.2 •

•

New types of companies The concept of OPC has been introduced by which company can be incorporated as a separate and distinct entity from the promoter of the company.

A small company means a company, other than a public company, − whose paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than five crore rupees; or 5

Financial Reporting Requirements and Auditor’s Responsibilities, 2e

Chapter 1

turnover of which as per its last profit and loss account does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than twenty crore rupees The above does not apply to a holding company or a subsidiary company; a company registered under sec 8 (when there is a person or an association of persons desires to incorporate a company for purposes other than commercial ones, sec 8 of the 2013 Act permits registration of such persons or association of persons as a company); or a company or body corporate governed by any special Act; Dormant company for a future project or to hold an asset or intellectual property, and having no significant accounting transaction. −

•

Thus, the new Act provides more flexibility of incorporation. Companies that are economically less significant will have a simpler compliance regime, e.g. no requirement of annual general meeting (AGM) for an OPC.

1.3.3

Larger partnerships permitted

The limit on the number of members in a partnership firm or association of persons has been increased from the present number 20 to such number, not exceeding 100, as may be prescribed. The limit would not apply to a Hindu Undivided Family carrying on any business and to association/partnerships formed by professionals governed by special Acts, such as chartered accountants.

1.3.4 • •

•

6

Incorporation and capital raising A private company can have a maximum of 200 members, which were restricted to 50 in the erstwhile 1956 Act. Like sections 85 and 86 of the Companies Act, 1956, sec 43 of the Companies Act, 2013 recognises two kinds of share capital – equity and preference. Further, like the position under the 1956 Act, equity share capital can be either with voting rights or with differential rights as to dividend, voting or otherwise in accordance with such rules as may be prescribed.

Unlike sec 79 of the Companies Act, 1956 which permits issue of shares at a discount subject to compliance with specified conditions, sec 53 of the Companies Act, 2013 prohibits the issue of shares at a discount altogether, except that sweat equity shares may be issued to directors or employees at a discount (also permitted under sec 79A of the 1956 Act).

The conditions required for issue of sweat equity shares are contained in sec 54 of the 2013 Act and are similar to those contained in sec 79A of the 1956 Act.

Chapter 1

•

•

•

•

•

•

1.3.5 •

•

Companies Act, 2013: Key highlights

The prospectus has to be more detailed as required by sec 26 of the Companies Act, 2013. The money raised through a prospectus cannot be used for dealing in equity shares of another company. If a company changes terms of the prospectus or objects for which money is raised, it shall provide dissenting shareholders an exit opportunity.

'Private placement' introduced by the Companies Act, 2013,which means any offer of securities or invitation to subscribe securities to a select group of persons by a company (other than by way of public offer) through issue of a private placement offer letter and which satisfies the conditions specified in sec 42.

Apart from existing shareholders, if the company having share capital at any time proposes to increase its subscribed capital by issue of further shares in accordance with sec 62, such shares may also be offered to employees by way of employee stock ownership plan (ESOP), subject to the approval of shareholders by way of special resolution.

Section 68 of the Companies Act, 2013 deals with buy back of shares (or other specified securities) and contains provisions similar to those contained in the corresponding sec 77A of the Companies Act, 1956.

However, one significant difference is regarding where the buyback is only pursuant to a board resolution. In such a case, the 1956 Act prohibits a further buy back within 365 days of the preceding buyback. The 2013 Act extends this to all buy-backs and no offer of buy-back can be made within one year from the date of closure of the preceding offer of buy back. Thus, buy back as per shareholders’ special resolution is also covered by the above restriction.

NBFCs not covered by the provisions relating to acceptance of deposits will be governed by notifications/directions issued by the Reserve Bank of India (RBI).

Companies can accept deposits only from its members after obtaining approval from shareholders. The acceptance of deposit is also subject to compliance with specified conditions.

New Committees and amended provisions related to board of directors The maximum number of directors that a company can appoint has been increased to 15. Further, this number can also be enhanced by special resolution without central government approval.

Nomination and remuneration committee - For listed companies and other class of companies as prescribed, it would be mandatory to set up a nomination and remuneration committee to recommend appointment and 7

Financial Reporting Requirements and Auditor’s Responsibilities, 2e

Chapter 1

removal of directors/senior management and remuneration policy and to evaluate performance of directors.

•

Stakeholders’ relationship committee – Companies having more than 1000 shareholders, debenture-holders, deposit holders or other security holders at any time during the financial year would be required to constitute a stakeholders relationship committee to resolve the grievances of security holders.

For example, if a company has 300 equity shareholders, 300 preference shareholders, 300 debenture-holders at the end of the year, but during the year 150 debentures got redeemed, which were all held by 150 separate individuals (in addition to 300 debenture-holders), and there were no other changes in the status during the year, in that case, it is appropriate to conclude that the company had 1050 stakeholders at one time during the year. Accordingly, it should create a stakeholders relationship committee. It may be noted that the provision deals with shareholders, debenture-holders, etc. and not shares, debentures, etc.

•

Audit committee – Apart from listed companies, other class of companies as prescribed would be required to constitute audit committee having a minimum of three directors with independent directors forming a majority. The role and responsibilities of the committee has been sharpened with specific responsibilities including recommending appointment of auditor and monitoring their independence and performance, approval of related party transactions, scrutiny of intercorporate loans and investments, valuation of undertaking/assets etc.

•

Listed companies or such class of companies as prescribed to establish a vigil mechanism (whistle blowing) for directors and employees to report concerns.

The office of a director would become vacant if he remains absent for all meetings of the board for a period of 12 months even where the leave of absence has been obtained.

•

8

Chapter 1

•

1.3.6 •

• •

•

1.3.7 •

• •

Companies Act, 2013: Key highlights

Disqualification of directors is extended to companies other than public companies also.

Management and administration Listed companies are required to file a return in a prescribed form with the registrar regarding any change in the number of shares held by promoters and top 10 shareholders of such company, within 15 days of such change.

Postal ballot to be applicable to all the companies, whether listed or unlisted.

Interim dividend in a current financial year cannot exceed the average rate of dividend of the preceding three years if a company has incurred loss up to the end of the quarter immediately preceding the declaration of such dividend.

Provisions for re-opening or re-casting of the books of accounts of a company have been introduced in the Act. The court or tribunal shall give notice to the specified authorities and the central government has been empowered to constitute a National Financial Reporting Authority (NFRA) to provide for matters relating to accounting and auditing standards under this Act. The said authority will have wider powers than National Advisory Committee on Accounting Standards (NACAS) constituted under erstwhile Act. It may be noted that NACAS has been constituted under 2013 Act vide notification dated 3 October 2016. The representations made by the applicant shall be considered before passing an order.

Financial statements The annual financial statements of every company (except OPC, small company or dormant company) would include a cash flow statement.

They would also include statement of changes in equity, if applicable.

The holding company is required to present consolidated financial statements (CFS) in addition to its stand-alone financial statements.

All companies are required to follow uniform financial year, running from April to March. Provided that on an application made by a company or body corporate, which is a holding company or a subsidiary of a company incorporated outside India and is required to follow a different financial year for consolidation of its accounts outside India, the tribunal may, if it is satisfied, allow any period as its financial year, whether or not that period is a year. Further, a company or body corporate existing on the commencement of this Act, should within a period of two years from such 9

Financial Reporting Requirements and Auditor’s Responsibilities, 2e

•

1.3.8 •

•

•

• •

10

Chapter 1

commencement, align its financial year, i.e. from April to March. For example, if the Indian company has its holding company situated in Germany and the latter is required to follow a financial year starting on 1 February and ending on 31 October for the purpose of its consolidated financial statements, then such different period (which is even less than one full year) may be followed by the Indian company subject to approval being obtained from tribunal in this regard.

Companies are permitted to maintain books of account or other relevant papers in electronic mode in the prescribed manner.

Auditors Every company is required at its first AGM to appoint an individual or a firm as an auditor. The auditor shall hold office from the conclusion of that meeting till the conclusion of its sixth AGM and thereafter till the conclusion of every sixth meeting. The appointment of the auditor is to be ratified at every AGM. The tenure of five consecutive years is subject to ratification by shareholders at every AGM. The new Act has made significant changes with relation to appointment of auditors which includes introduction of mandatory firm rotation of auditors and restriction on the non-audit services provided by auditors.

The specified class of companies cannot appoint an audit firm as auditor for more than two consecutive terms of five year each. There is a cooling off period of five years. In other words, after an audit firm completes two consecutive five year terms (10 years) as the auditor of a covered company, it cannot be re-appointed for a period of five years. Individual auditors are to be compulsorily rotated every five years.

A company's auditor shall not provide, directly or indirectly, the specified services to the company, its holding and subsidiary company. Specified services means accounting and book keeping service, internal audit, actuarial services, investment advisory services, investment banking services, rendering of outsourced financial services, management services, design and implementation of any financial information system etc.

The legal recognition would be given to auditing standards to be notified by central government.

A partner or partners of the audit firm and the firm shall be jointly and severally responsible for the liability, whether civil or criminal, as provided in this Act or in any other law for the time being in force. If it is proved that the partner or partners of the audit firm has or have acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or officers, then such

Chapter 1

Companies Act, 2013: Key highlights

partner or partners of the firm shall also be punishable in the manner provided in sec 447.

1.3.9 • • •

•

•

Directors Prescribed class or classes of companies as defined in sec 149 are required to appoint at least one woman director.

At least one director should be a person who has stayed in India for a total period of not less than 182 days in the previous calendar year.

At least one-third of the total number of directors of a listed public company should be independent directors. The transition period of one year has been given to existing companies to comply with the provisions.

The liability of independent directors and non-executive directors not being promoter or key managerial personnel to be limited, i.e. the liability will be limited only with respect to such acts of omission or commission by a company which has occurred with his knowledge attributable through board processes and with his consent or connivance or where he had not acted diligently.

A person can hold directorship of up to 20 companies, of which not more than 10 can be public companies.

1.3.10 Loans and investments •

•

•

No company (private and public) shall directly or indirectly, advance any loan (including any loan represented by a book debt) to any of its directors or to any other person in whom the director is interested or give any guarantee or provide any security in connection with any loan taken by him or such other person.

The provisions on inter-corporate loans and investment (governed by sec 372A of erstwhile Companies Act, 1956) extended provisions to include loan and investment to any person not exceeding the limit of 60% of its paid-up share capital, free reserves and securities premium account or 100% of its free reserves and securities premium account, whichever is more.

A company cannot, unless otherwise prescribed, make investment through more than 2 layers of investment companies. ‘Layer’ in relation to a holding company means its subsidiary or subsidiaries.

It may be noted that Companies (Amendment) Bill, 2016 proposes to: • Permit companies to advance a loan to any other person in whom director is interested subject to prior approval of the company by a special resolution. Further, loans extended to persons, including subsidiaries, 11

Financial Reporting Requirements and Auditor’s Responsibilities, 2e

Chapter 1

falling within the restrictive purview of Section 185 should be used by the subsidiary for its principal business activity only, and not for further investment or grant of loan. The amendment has been proposed to address practical challenges faced by companies.

• Omit restrictions on making investment through more than 2 years of investment companies.

1.3.11 Related party transactions •

•

Approval of the central government is no longer required for entering into any related party transactions. In other words, the Companies Act, 2013 has removed central government approvals for related party transaction which was mandatory under the Companies Act, 1956for companies having paid-up share capital of INR one crore or more.

The approval of central government is no longer required for appointment of any director or any other person to any office or place of profit in the company or its subsidiary. Only approval of board of directors given by a resolution at a meeting of the board would suffice for such appointment.

1.3.12 Prohibition on forward dealing and insider trading • •

Prohibition on forward dealings in securities of company by any director or key managerial personnel.

Prohibition on insider trading in the company. Insider trading is defined to include an act of subscribing, buying, selling, dealing or agreeing to subscribe, buy, sell or deal in any securities, by any director or key material personnel or any other officer of a company either as principal or agent if such director or key managerial personnel or any other officer of the company is reasonably expected to have access to any non-public price sensitive information in respect of securities of company.

It may be noted that Companies (Amendment) Bill, 2016 proposes to omit provisions relating to forward dealing and insider trading from the 2013 Act.

1.3.13 Merger and amalgamation of companies •

12

Creation of treasury stock/trust shares is prohibited. In other words, creation of treasury shares i.e. holding the share in its own name or in the name of the trust, whether on its own behalf or on behalf of any of its subsidiary or associated company is no longer permissible.

Treasury shares are often created when a subsidiary company merges into its holding company. For example, Reliance Industries Limited’s (RIL)

Chapter 1

Companies Act, 2013: Key highlights

treasury stock was created after its merger with Reliance Petroleum (RP) and Indian Petrochemicals. Before the merger, RIL held stake in RP as it was RIL’s subsidiary. After the merger, all RP shareholders were allotted RIL shares in accordance with the share-swap ratio. As a company cannot own shares in itself, the shares were transferred to a trust named ‘Petroleum Trust’, specially created for the purpose. The trust was issued shares of RIL in consideration of RP shares. Earlier the country did not have a law governing such treasury stock. Now, this legislative vacuum has been filled by the Companies Act, 2013 and the shares held in own name or in the name of the trust pursuant to a merger are needed to be cancelled or extinguished.

•

•

The Act makes provision for cross border amalgamations between Indian companies and companies incorporated in the jurisdictions of such countries as may be notified from time to time by the central government.

To protect the interest of members and others who would be affected by the scheme of compromise or arrangement, mergers or amalgamation, valuation for this purpose should be carried out by a registered valuer.

1.3.14 Miscellaneous •

The Act provides provisions related to corporate social responsibility (CSR). All companies having a net worth of INR five hundred crore or more, or turnover of INR one thousand crore or more or a net profit of INR five crore or more during a financial year shall constitute a CSR committee of the board consisting of three or more directors out of which 13

Financial Reporting Requirements and Auditor’s Responsibilities, 2e

Chapter 1

at least one should be an independent director. However, for unlisted public companies and private companies there is no requirement of independent director.

• The definition of the term ‘fraud’ has been enhanced. The penalties have also been enhanced.

• The definition of officer in default has been revised. It covers KMPs as well as every director, in respect of a contravention of any of the provisions of the Act, who is aware of such contravention.

• The Act provides for class action suit (which is prevalent in developed countries) by specified number of members or depositors against the company if they are of the opinion that the management or conduct of the affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members or depositors, file an application before the tribunal on behalf of the members or depositors except the banking company.

• Where any valuation is required to be made of any property, stocks, shares, debentures, securities or goodwill or any other assets or net worth of a company or its liabilities under the Act, it shall be valued by a registered valuer.

• The Act provides summary procedure of liquidation for certain classes of companies. Certain class of companies include OPCs or small companies.

• The National Company Law Appellate Tribunal (NCLAT) shall now consist of a combination of technical and judicial members not exceeding 11, instead of 2 as provided in the Companies Act, 1956.

• The central government may establish as many special courts as may be necessary to provide speedy trial of offences.

• The central government may establish a mediation and conciliation panel.

• The Act provides for specific provisions related to any act of fraud. The process for declaring a company sick and its revival and rehabilitation has been rationalised.

• The Act has prescribed mandatory secretarial audit for listed companies and other companies, as may be prescribed. Such companies will be required to annex with its board’s report a secretarial audit report to be given by a company secretary in practice.

MCA has issued a notification dated 5 June 2015 whereby it has provided various exemptions to private companies. Please refer to Annexure at the end of chapter for the text of the notification.

• MCA has also issued draft notifications stating that certain provisions of the 2013 Act will not apply or will apply with such exemptions, modifications and adaptations to an unlisted public company and private 14

Chapter 1

Companies Act, 2013: Key highlights

company which is licensed to operate by the RBI or SEBI or IRDAI from the IFSC located in an approved multi services SEZ referred as ‘specified IFSC public company’ and ‘specified IFSC private company’. These draft notifications, inter alia, provide the following provisions: − Section 2(41): The FY of the subsidiary of a foreign company may be same as the FY of holding company and approval of the NCLT is not required; − Section 3(2): A specified IFSC private/public company will be formed only as a company limited by shares; − Section 92(3): A specified IFSC private/public company is not required to present an extract of its annual return as a part of Board’s report; − Section 118(10): A specified IFSC private/public company is not required to observe secretarial standards with respect to general and board meetings specified by the ICSI, and approved by the Central Government; − Section 135: A specified IFSC private/public company is not required to comply with the provisions of Section 135 of the 2013 Act, Corporate Social Responsibility, for a period of five years from the commencement of its business; − Section 138: Provisions of sec 138, Internal audit, will be applicable if the articles of association of the company provides for the same; − All provisos to sec 139(2): All provisos to sec 139(2) of the 2013 Act related to appointment or re-appointment of auditors will not be applicable to a specified IFSC private/public company; − Section 186(1): Provisions of sec 186(1) of the 2013 Act, Loan and Investment by Company, shall not apply to a specified IFSC private/public company; − Section 197: Provisions of sec 197 of the 2013 Act, Overall maximum managerial remuneration and managerial remuneration in case of absence or inadequacy of profits, shall not apply to IFSC public company; − Sections 177 and 178: Provisions of sec 177, Audit Committee, and sec 178, Nomination and Remuneration Committee and Stakeholders Relationship Committee, shall not apply to IFSC public company.

A copy of these draft notifications have been laid before both Houses of the Parliament.

15

Financial Reporting Requirements and Auditor’s Responsibilities, 2e

1.4

Chapter 1

Report of the Companies Law Committee

The Companies Law Committee (CLC) was constituted on 4 June 2015 to examine and to make recommendations on the issues arising out of implementation of the Companies Act, 2013 and to consider recommendations received from the Bankruptcy Law Reforms Committee, the High Level Committee on Corporate Social Responsibility, the Law Commission and other agencies.

The CLC had presented a report to the Hon’ble Union Minister of Finance, Corporate Affairs and I&B to make recommendations on certain issues arising on implementation of the Act. The report has proposed several changes to the Act to address the much awaited clarifications/implementation issues; remove inconsistencies between the Companies Act, 2013 and accounting standards/SEBI requirements. As per the report, the recommendations would result in changes in 78 sections, and more than 100 changes in the Companies Act, 2013. The CLC as part of its process and deliberations studied recommendations and suggestions received from various stakeholders as well as international best practices.

Some of the key proposals included in the report are discussed below: • As per the Act, the overall managerial remuneration payable by a public company cannot exceed eleven per cent of the net profits of that company except with the approval of the shareholders and the central government.

The report recommends simpler regulatory regime by proposing removal of government approval for managerial remuneration with few additional disclosures etc. This would be in sync with international practices and reduce procedural delays.

• Removal of restrictions on layering of subsidiaries since it was likely to have a substantial bearing on the functioning, structuring and the ability of companies to raise funds. Also, companies would be permitted to make investment through more than two layers of investment companies as per the report.

• The Act specifies that an independent director must not have or had any pecuniary relationship with the company, its holding, subsidiary or associate company or their promoters or directors, during the two immediately preceding financial years or during the current financial year.

Even minor pecuniary relationships were covered due to this provision even though such transactions may not impact the independence of directors. The report proposes to introduce a threshold for pecuniary relationships in relation to qualification for an independent director. This would further ease the implementation of provision for appointment of independent director by companies.

• The definitions of various terms are proposed to be amended/clarified. A subsidiary company to be defined as a company in which holding 16

Chapter 1

•

•

•

•

•

Companies Act, 2013: Key highlights

company controls the composition of the board of directors or exercise or controls more than one-half of the total share capital. Changes have been proposed to address practical problems and replace the term ‘total share capital’ with total voting power. Similarly the term associate company would be defined to clarify that it covers a company in which another company has a significant influence i.e. control of at least twenty percent of the total voting power or control of or participation in taking business decisions under an agreement. Joint venture would be construed in the same manner as under Indian Accounting Standard 28 and would facilitate convergence.

No changes have been proposed in the auditor rotation requirements which reiterate the commitment of the legislation to promote auditor objectivity. Few proposals include - three years transition period to be counted from AGM to AGM and not from commencement of the Act; omission of provision of annual ratification by shareholders, if auditor is unwilling to continue at any stage before his term of five years, it would be treated as resignation.

Reporting obligations of auditors on internal financial controls to be with reference to financial statements only. Auditor may report on consolidated financial statements on relevant and significant matters concerning subsidiaries/associates rather than to comply with entire reporting requirements of sec 143(3) of the Act. Form ADT 4 (manner of reporting fraud) to be modified to enable an auditor to explain his comments.

Threshold has been proposed for punishment for fraud to avoid misuse of provision; frauds involving amounts below specified limits which do not involve public interest to be given differential treatment and compoundable. Penalty/fine proposed to be reduced in case of noncompliance with various sections of the Act including sections 92, 137, 140, 184, 185 and 186.

The report proposes few changes in financial reporting provision which includes exemption to place standalone financial statements of step down overseas subsidiary on website if that overseas subsidiary has prepared CFS in statutory format as per the law of jurisdiction and placed on website. Further, the overseas subsidiaries while placing on website/attaching to Indian holding company’s financial statements may submit/attach the financial statements as per the statutory/GAAP requirements of local jurisdiction. The definition of ‘associates’ and ‘joint ventures’ be clarified to be in accordance with applicable accounting standards.

While sections pertaining to re-opening of accounts are still not notified, it is proposed to restrict re-opening to eight years unless longer period required by central government.

17

Financial Reporting Requirements and Auditor’s Responsibilities, 2e

•

•

•

•

•

•

Chapter 1

Interim dividend could be declared from brought forward surplus in the profit and loss account in addition to the profits of the current financial year generated till the date of declaration.

The applicability of CSR provisions to be determined basis specified net worth or turnover or net profit of ‘preceding financial year’ instead of ‘any financial year’. The CSR expenditure to be determined on the basis of ‘net profits’ instead of ‘average net profits’. Companies not required to appoint independent directors to have CSR committee with two or more directors.

No change has been proposed for limits on directorships but proposal to exclude the directorship in a dormant company for reckoning the limit.

Related party transactions between a holding company and its wholly owned subsidiaries would not require approval of the audit committee for which approval of board is not required; this would be in sync with SEBI Listing regulations, 2015.

Companies may advance loan to any other person in whom the director is interested subject to prior approval of company by a special resolution.

Omission of restrictions of layers of investment companies since sufficient safeguards built into oversight mechanism of SEBI and stock exchanges. The definition of the term ‘principal business’ of an investment company to be included in line with RBI guidelines. In view of comprehensive SEBI regulations on forward dealing and insider trading, it is proposed to omit the relevant sections from the Act. The definition of KMP proposed to be amended to empower board to designate other than whole time officers of the company as key managerial personnel. A whole time KMP holding necessary qualifications permitted to hold more than one position in the same company at the same time.

The definition of various terms including debenture, financial year, nominee director, net worth, subsidiary company, turnover etc. have been proposed to be amended to bring clarity/relaxation. Private limited companies and wholly owned subsidiaries of unlisted companies permitted to convene AGMs at any place in India subject to approval of 100% shareholders in advance.

The Committee has also recommended certain changes specifically for encouraging start-ups which include reducing compliance burden on account of private placement procedure, permitting start-ups to raise deposits for its initial five years without any upper limits, to issue ESOPs to promoters working as employees etc.

While these are recommendations, it is expected that expected that the MCA should finalise these soon and provide the much needed clarifications on time.

18

Chapter 1

1.5

Companies Act, 2013: Key highlights

Companies (Amendment) Bill, 2016 introduced in Lok Sabha

The Companies (Amendment) Bill, 2016 (‘the Bill’) was introduced in Lok Sabha on 16 March 2016 to give effect the recommendations of the Companies Law Committee. Most of the provisions in the Bill have arisen out of the recommendations of the company law committee.

Reference may be made to ‘Proposals of the Companies (Amendment) Bill, 2016 as introduced in the Lok Sabha on 16 March 2016’ issued by the Corporate Laws & Corporate Governance Committee of the ICAI included in Annexures at the end of chapter.

1.6

Report of Standing Committee on Finance on Companies (Amendment) Bill, 2016

The Companies (Amendment) Bill 2016 (‘Bill’) was introduced in Lok Sabha on 16 March 2016 which is based on the recommendations of the CLC after taking into account the comments received on the report. The amendment bill proposes to amend 87 sections of the Act. It was referred to the Standing Committee on Finance (‘Committee’) on 12 April 2016 for examination and report thereon. The Committee has submitted its observations/recommendations on the amendment bill.

Keeping in view the broad objectives of the Bill, the committee would, in general, make the following observations and recommendations to impart greater vibrancy to the Companies statute: (i)

The compliance threshold should be based on business volume or turnover or scale of operations rather than the form of the company.

This will ease the compliance burden for smaller companies including start-ups and MSMEs. In this regard, a distinction may also be made between corporates involving public funds and substantial employment and other enterprises operating on a smaller scale. In any case, the Rules framed and circulars issued under the Act should be waived/modified with a view to making the compliance processes simpler and easier for all companies incorporated under the Act. Towards this end, duplication, superfluity and purposeless documentation should be avoided. The prescribed procedures/processes should be subject to constant review depending on feedback received from stakeholders. A structured mechanism may be set up in the Ministry of Corporate Affairs (‘MCA’) for this purpose.

19

Financial Reporting Requirements and Auditor’s Responsibilities, 2e

Chapter 1

(ii)

Any contradiction between the substantive provisions or that with the Rules should be examined and rectified; as for instance, Section 73 of the Act contains provisions prohibiting acceptance of deposits from public under certain circumstances which is to be read with Section 76, which allows a public company of prescribed size to invite deposits from persons other than its members; while the existing Rules allow an eligible company to invite deposits from its members, contrary to Section 76. Therefore, in such cases, the Rules require to be amended corresponding to the relevant Section in the main Act. The Committee desire that such ambiguities should be rectified forthwith.

(iii)

Section 197 of the Act dealing with Managerial remuneration is sought to be amended by way of changes in sub-sections (1), (3), (9), (10) and (11) and inserting new sub-sections (16) and (17) with a view to omitting altogether the requirement for government approval with necessary safeguards in the form of additional disclosures, special resolutions and auditor certifications etc.

The Committee, while welcoming the waiver of seeking approvals for managerial remuneration, would however suggest that the government should retain the right to seek necessary information on aspects relating to managerial remuneration [Managing Director or CEO and the Key Managerial Personnel (KMPs) together] of listed companies and companies operating with public funds from time to time, keeping in view factors such as adequacy of volumes, profits, reserves, repayment of debt etc. As ‘ease of doing business’ is conjoined with the object of ‘promoting economic growth’ in the country, it is necessary that an element of control, as suggested above, is retained in the Act.

(iv)

20

Presently, the Act permits companies to avail of loans from directors and their relatives, subject to a restriction that they furnish a declaration that it is out of their own funds. As such funds remain the main source of financing for MSMEs in the absence of bank credit, the restrictions as to loans advanced by shareholders (presently limited to 100% of net worth to companies with less than 50 members to those making profit to those who have not defaulted in repayments) should be removed to enable growth and revival in the MSME sector. The prohibition, as to any loan in excess of the prescribed limits, to be treated as ‘deposit’ subject to rating by recognised rating agencies and maintenance of redemption reserves should also be waived with a view to bolstering the finances of a MSME. The Committee desire that such prohibitions and controls inhibiting the growth of companies, particularly in the MSME sector, should be removed.

Chapter 1

(v)

Companies Act, 2013: Key highlights

Clause 23 (i) of the Bill proposes separate Annual Return format with lesser details in abridged form for small companies and One Person Companies (OPCs). While welcoming this change from ‘ease of doing business’ perspective, the Committee would like the MCA to analyse and review the new concept of ‘One Person Company’ and its sustainability in company law and practice, particularly considering the shelter or scope it provides for incurring huge and needless liabilities without concurrent responsibility to discharge them.

Further, based on detailed examination of the bill and suggestions received form the stakeholders the Committee have commented upon on some of the important clauses of the Bill.

Proposed amendments in Bill

Accepted/Not Additional accepted recommendations

Section 2(6) - Definition of term ‘Associate Company’ Explanation to Section 2(6) substituted: For the purpose of this clause: - the expression ‘significant influence’ means control of at least 20% of total voting power, or control of or participation in business decisions under an agreement; - the expression ‘joint venture’ means a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement; The Bill recommends that with respect to the definition of associate company, significant influence means control of atleast twenty per cent of total voting power instead of total share capital.

Further definition of joint venture has been proposed to be added.

Accepted

-

Section 2(46) - Definition of ‘Holding Company’ Explanation to Section 2(46) inserted, that the expression ‘company’ includes any body corporate.

Accepted

-

21

Financial Reporting Requirements and Auditor’s Responsibilities, 2e

Proposed amendments in Bill

Chapter 1

Accepted/Not Additional accepted recommendations

Section 2(76) - Definition of ‘Related Party’ Following will be substituted in Section 2(76)(viii): “related party”, with reference to a company, means: (viii) any body corporate which is: (A) a holding, subsidiary or an associate company of such company; (B) a subsidiary of a holding company to which it is also a subsidiary.

(C) an investing company or the venture of a company.

The Bill recommends that with respect to the definition of related party in the context of a company, now the definition is substituted by body corporate instead of a company.

Accepted

-

Section 3 - Formation of Company New Section 3A inserted after Section 3: The amendment states that if at any time the number of members of a company is reduced, in the case of a public company, below seven, in the case of a private company, below two, and the company carries on business for more than six months while the number of members is so reduced, every person who is a member of the company during the time that it so carries on business after those six months and is cognisant of the fact that it is carrying on business with less than seven members or two members, as the case may be, shall be severally liable for the payment of the whole debts of the company contracted during that time, and may be severally sued therefore.

Accepted

-

22

Chapter 1

Proposed amendments in Bill

Companies Act, 2013: Key highlights

Accepted/Not Additional accepted recommendations

Not accepted Section 4 (5) (i) Period of filing of incorporation documents Explanation to section 4 substituted: For the purpose of this clause, the words “sixty days from the date of the application”, will be substituted for the words “twenty days from the date of approval or such other period as may be prescribed”.

The Bill proposed to change the time limit of name reservation from “sixty days from the date of the application” to “twenty days from the date of approval or such other period as may be prescribed”.

The committee is of the view of increasing the time limit for reserving the name of the company by the Registrar subsequent to its incorporation from the proposed 20 days to 60 days or a longer period as may be prescribed, the proposed clause may be modified accordingly.

Section 21- Authentication of documents, proceedings and contracts For the purpose of the section 21 following will be substitutedthe words “an officer of the company” shall be substituted by the words “an officer or employee of the company”.

The Bill recommends the amendment to Section 21, to allow authorizations, on the signature of ‘any employee of the company duly authorised by the Board’. The amendment has been done so as to allow any other employee to sign, with a board resolution.

Accepted

-

Section 42 - Offer or invitation for subscription of securities on private placement Explanation to Section 42(9) and 42(10) amended• Section 42(9) - It has been proposed that if a company defaults in filing the return of allotment within fifteen days from the date of the allotment the

Accepted

-

23

Financial Reporting Requirements and Auditor’s Responsibilities, 2e

Proposed amendments in Bill

•

Chapter 1

Accepted/Not Additional accepted recommendations

company, its promoters and directors shall be liable to a penalty for each default of one thousand rupees for each day during which such default continues but not exceeding twenty-five lakh rupees.

Section 42(10) - It has been proposed that if a company makes an offer or accepts monies in contravention of this section, the company, its promoters and directors shall be liable for a penalty which may extend to the amount raised through the private placement or two crore rupees, whichever is lower, and the company shall also refund all monies with interest at the rate of twelve per cent per annum to subscribers within a period of thirty days of the order imposing the penalty.

Section 92(1) Annual Return This section requires the companies to prepare annual return containing all the information about the company.

Explanation to section 92 amended: Every company shall place a copy of the annual return on the website of the company, if any, and the web-link of such annual return shall be disclosed in the Board’s report.

The Bill recommends to place a copy of the annual return on the website of the company, if any, and the web-link of such annual return shall be disclosed in the Board’s report.

Accepted

The committee agreed to the amendment but added that abridged and simple form of annual return may be prescribed for small companies (less than annual turnover of INR 100 crore).

Committee has further stated that for other form of companies, annual return format should be devised so as to avoid repetitive and superfluous information.

Section 101 - Notice of meeting Explanation to Section 101(1) substituted:

Accepted

Considering the suggestions from stakeholders, to ensure protection of interests of

24

Chapter 1

Proposed amendments in Bill

Companies Act, 2013: Key highlights

Accepted/Not Additional accepted recommendations

For the purpose of this sectionGeneral meeting may be called after giving shorter notice than that specified in this sub-section, if consent in writing or by electronic mode is accorded thereto.

The Bill propose the amendment of Section 101(1) mentioning that general meeting may be called after giving shorter notice than 21 days, if consent in writing or by electronic mode is accorded thereto: • in the case of an annual general meeting, by not less than ninetyfive per cent of the members entitled to vote thereat; and • in the case of any other general meeting, by members of the company: • holding, if the company has a share capital, not less than ninetyfive of such part of the paid-up share capital of the company as gives a right to vote at the meeting; or • having, if the company has no share capital, not less that ninetyfive percent of the total voting power exercisable at that meeting.

Section 129(3) Financial statements Explanation to Section 129(3) substituted (Preparation of Consolidated financial statements): Where a company has one or more subsidiaries or associate companies, it shall, in addition to financial statements provided under sub-section (2), prepare a consolidated financial statement of the company and of all the subsidiaries and associate companies in the same form and

minority shareholders, it is suggested by the committee that a general meeting of Companies having share capital may be called after giving shorter notice if consent thereto is accorded by majority of members in number entitled to vote and representing holding not less than 95% per cent of such part of the paid-up share capital of the company entitled to vote thereat.

In case of Companies not having share capital a general meeting may be called after giving shorter notice if consent thereto is accorded by majority of members representing not less than 95% of the voting rights exercisable at the meeting. This will bring in necessary flexibility in procedural matters.

Accepted

-

25

Financial Reporting Requirements and Auditor’s Responsibilities, 2e

Proposed amendments in Bill

Chapter 1

Accepted/Not Additional accepted recommendations

manner as that of its own and in accordance with applicable accounting standards, which shall also be laid before the annual general meeting of the company along with the laying of its financial statement under subsection (2).

The Bill recommends the amendment of the term ‘subsidiary’ to be replaced with the term ‘subsidiary and associate’.

Not accepted Section 136 Rights of member to copies of audited financial statement According to section 136, a copy of the financial statements, including consolidated financial statements, if any, auditor’s report and every other document required by law to be annexed or attached to the financial statements, which are to be laid before a company in its general meeting, shall be sent to every member of the company, to every trustee for the debenture-holder of any debentures issued by the company, and to all persons other than such member or trustee, being the person so entitled, not less than twenty-one days before the date of the meeting.

Explanation to section 136 substituted: The amendment bill has proposed that copies of documents referred to in Section 136(1) of the Companies Act, 2013 can be sent at a shorter notice if it is so agreed by ninety-five per cent of members entitled to vote.

Section 137 Copy of financial statement to be filed with the Registrar Explanation to Section 137 (1) inserted: It is provided that in the case of a 26

Stakeholders has suggested that above stated limits for approval should be ‘members holding not less than ninety-five percent of such part of the paid-up share capital of the company as gives a right to vote at the meeting’. This suggestion is accepted by both MCA and the committee. The Committee has also recommend that in order to facilitate “ease of doing business”, the MCA should further amend Section 136 and exempt the companies from the requirement of uploading financial statements of foreign subsidiaries, in case such companies upload the consolidated financial statement on website of such foreign companies.

Not accepted Considering the suggestions from stakeholders, the committee has recommended to broaden the applicability of the clause to all holding Indian

Chapter 1

Proposed amendments in Bill subsidiary which has been incorporated outside India (‘foreign subsidiary’), which is not required to get its financial statement audited under any law of the country of its incorporation and which does not get such financial statement audited, the requirements of the fourth proviso of Section 137(1) shall be met if the holding Indian listed company files such unaudited financial statement along with a declaration to this effect and where such financial statement is in a language other than English, along with a translated copy of the financial statement in English.

Companies Act, 2013: Key highlights

Accepted/Not Additional accepted recommendations Companies for filling copy of financial statement with the Registrar. The committee also recommended that in case a company is required to file consolidated financial statements, it should be exempted from the requirement of filing individual financial statement of subsidiary companies.

Section 141 (3) (d) Definition of ‘relative’ Section 141(3) of the Act provides the list of persons who will not be eligible for appointment as an auditor of a company. It includes definition of ‘relative’ as follows: ‘Relative’ means the spouse of a person; and includes a parent, sibling or child of such person or of the spouse, financially dependent on such person, or who consults such person in taking decisions in relation to his investments.

Explanation to Section 141 (3) (d) inserted: For the purpose of this sectionThe Bill proposes to amend the term “relative”. The words ‘or who consults such person in taking decisions in relation to his investments’ should be removed from the explanation.

Not accepted The committee is of the view that the words ‘or who consults such person in taking decisions in relation to his investments’ can be removed, as these words make the intended definition of ‘relative’ under this clause too broad and openended, leaving scope for mis-interpretation. Instead, the committee has suggested that the words “institutionalized consultation in the usual course of business’’ may be substituted to bring greater clarity.

Section 160 - Right of persons other than retiring directors to stand for directorship According to section 160 of the Act, a

Not accepted Stakeholders has suggested that in addition to above, this exemption should also be extended to a director 27

Financial Reporting Requirements and Auditor’s Responsibilities, 2e

Proposed amendments in Bill

Chapter 1

Accepted/Not Additional accepted recommendations

person who is not a retiring director, subject to the provisions of the Act, be eligible for appointment to the office of the director along with the deposit of the amount as may prescribed.

Explanation to Section 160(1) insertedAccording to this proviso, the requirement of deposit of amount shall not apply in case of appointment of an independent director or a director recommended by the Nomination and Remuneration Committee, if any, constituted under Section 178(1).

recommended by the Board of Directors of the Company, in the case of a company not required to constitute Nomination & Remuneration Committee.

Not accepted Section 197 Overall maximum managerial remuneration and managerial remuneration in case of absence or inadequacy of profits Explanation to Section 197 (9) reads as underIf any director draws or receives, directly or indirectly, by way of remuneration any such sums in excess of the limit prescribed by this section or without approval required under this section, he shall refund such sums to the company, within two years of such lesser period as may be allowed by the company, and until such sum is refunded, hold it in trust for the company.

Explanation to Section 197 amendedSection 197 is sought to be amended by way of changes in sub-sections (1), (3), (9), (10) and (11) and inserting new sub-sections (16) and (17) with a view to omitting altogether the requirement for government approval with necessary safeguards in the form of additional disclosures, special resolutions and auditor certifications etc.

The Committee, while welcoming the waiver of seeking approvals for managerial remuneration, would however suggest that the government should retain the right to seek necessary information on aspects relating to managerial remuneration [Managing Director or CEO and the Key Managerial Personnel (KMPs) together] of listed companies and companies operating with public funds from time to time, keeping in view factors such as adequacy of volumes, profits, reserves, repayment of debt etc. As ‘ease of doing business’ is conjoined with the object of ‘promoting economic growth’ in the country, it is necessary that an element of control, as suggested above, is retained in the Companies Act, 2013.

28

Chapter 1

Proposed amendments in Bill

Companies Act, 2013: Key highlights

Accepted/Not Additional accepted recommendations The committee has proposed that safeguards introduced in the amendment bill may be further strengthened accordingly to protect the interests of secured creditors, debenture holders etc.

Not accepted Section 403 Fee for filing etc.

Explanation to section 403(1) substituted: The Bill recommends to amend the proviso that where any document, fact or information required to be submitted, filed, registered or recorded, as the case may be, (under section 89, 92, 117, 121, 137 and 157) is not submitted within the period provided in those sections, it may be submitted, filed, registered or recorded, as the case may be, within a period of two hundred and seventy days from the expiry of the period so provided in those sections, on payment of such additional fee as may be prescribed.

Further, where the default continues for two or more occasions in submitting, filing, registering or recording of the document, fact or information under referred sections, this proviso shall not apply, until the document, fact or information is submitted, filed, registered or recorded, as the case may be, with additional fee, without prejudice to any legal action or liability under this Act.”; Section 447 - Punishment for fraud Explanation to Section 447 amended: after the words “guilty of fraud”, the words “involving an amount of at least ten lakh rupees or one percent of the

Accepted

The Committee believes that enhanced fee may not actually deter noncompliance. It may thus be a fallacious assumption that the fee structure can be used to ensure statutory compliance. The Committee would rather suggest that the compliance requirements may be made less onerous with a reasonable time period for all companies, and simultaneously, noncompliance within the stipulated period should invite strict penalty and prosecution. In view of the Committee, only such an approach will ensure an upto-date registry of companies. The present approach of condonation of delay, late filing by payment of higher fee etc. may not really help achieve this objective, as borne out by the MCA’s own experience in the matter.

The Committee agrees that, being a substantive matter, monetary thresholds may be prescribed in the Act itself for the sake of clarity with 29

Financial Reporting Requirements and Auditor’s Responsibilities, 2e

Proposed amendments in Bill

Chapter 1

Accepted/Not Additional accepted recommendations

turnover of the company, whichever is lower” will be inserted; Proposed amendment to Section 447 of the Act states that any person who is found to be guilty of fraud, involving an amount of at least ten lakh rupees or one per cent of the turnover of the company, whichever is lower, and does not involve public interest shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud.

Following proviso will be inserted to Section 447: Where the fraud involves an amount less than ten lakh rupees or one per cent of the turnover of the company, whichever is lower, and does not involve public interest, any person guilty of such fraud shall be punishable with imprisonment for a term which may extend to five years or with fine which may extend to twenty lakh rupees or with both.

regard to the nature of fraud and for categorising the offence as compoundable or non-compoundable.

Recommendations of the Committee on other issues Additional suggestions of Stakeholders

Accepted/ Not Accepted

Additional recommendations by committee

Section 134 (5) (e) - Certification

by Board of Directors in Board’s report on adequacy of Internal Financial Controls (IFC).

It has been proposed that “the words Internal Financial Controls under section 134(5)(e) to be

Accepted

-

30

Chapter 1

Additional suggestions of Stakeholders

Companies Act, 2013: Key highlights

Accepted/ Not Accepted

Additional recommendations by committee

Accepted

-

replaced with ‘Internal Controls Over Financial Reporting’ in line with the proposed amendment of Section 143(3)(1) in the Companies (Amendment) Bill, 2016. The certification requirements be limited to listed entities only.

Inconsistencies between SEBI Regulations and the Act

(i) Section 194 Prohibition on forward dealings in securities of company by director or key managerial personnel and Section 195 Prohibition on insider trading of securities.

Bill seek to omit these sections as these are regulated under the SEBI Act.

(ii) Section 93 Return to be filed with Registrar in case promoters’ stake changes Bill seeks to omit Section 93 of the Companies Act, 2013 with respect to return to be filed in case of change in stakes of promoters and top ten shareholders since this requirement is covered under SEBI Law

(iii) Section 2(30) Definition of debenture According to section 2(30) of Companies Act, 2013, “debenture” includes debenture stock, bonds or any 31

Financial Reporting Requirements and Auditor’s Responsibilities, 2e

Additional suggestions of Stakeholders other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not.

Explanation to section 2(30) inserted: (a) the instruments referred to in Chapter III-D of the Reserve Bank of India Act, 1934; and (b) such other instrument, as may be prescribed by the Central Government in consultation with Reserve Bank of India, issued by a company, shall not be treated as debenture;”; The amendment has been proposed as phrase “any other instrument of a company evidencing a debt” appearing in the definition made it very broad and included, by implication, instruments like commercial papers and other money market instruments, which were often used as an important short-term fund raising source by eligible companies; and were well regulated under RBI regulations.

(iv) Section 53 Prohibition on issue of shares at a discount As per Companies Act, 2013, a company shall not issue shares at a discount. Any share issued by a company at a discounted price shall be void 32

Accepted/ Not Accepted

Chapter 1

Additional recommendations by committee

Chapter 1

Additional suggestions of Stakeholders

Companies Act, 2013: Key highlights

Accepted/ Not Accepted

Additional recommendations by committee

Explanation to section 2A inserted: The amendment proposes to allow companies to issue shares at a discount to its creditors when its debt is converted into shares in pursuance of any statutory resolution plan or debt restructuring scheme in accordance with any guidelines or directions or regulations specified by the RBI or the Banking (Regulation) Act, 1949. The amendment seeks to bring harmony between Companies Act, 2013 and RBI Act, 1934/ Banking (Regulation) Act, 1949/ Regulations.

(v) Section 77 Duty to register charges etc.- Explanation to Section 77(1) inserted The amendment proposes to exempt the charges from registration as prescribed in consultation with RBI.

(vi) Section 26 Matters to be stated in the Prospectus Section 26 of the Companies Act, 2013 requires detailed disclosure in the prospectus.

Explanation to section 26 amended: The Bill proposes to amend Section 26 with a view to align disclosures in the prospectus required under Companies Act, 2013 and the SEBI Act, 1992. Further, Bill 33

Financial Reporting Requirements and Auditor’s Responsibilities, 2e

Additional suggestions of Stakeholders

Accepted/ Not Accepted

Chapter 1

Additional recommendations by committee

recommends omitting prescriptions in the Companies Act and allowing these prescriptions to be made by the SEBI in consultation with the Central Government. This is being done because the offer documents were becoming too long, detailed, and repetitive and also difficult to understand.

Not accepted Exemptions to unlisted closely held public companies Closely held public companies with less than 10% public shareholding are still required to comply with many onerous requirements like appointing women directors, restrictions on related party transactions, Board committees and so on. Therefore, exemptions given to private companies may also be extended to public companies with public share ownership of less than 10%.

As acknowledged by the committee, it is desirable that compliance requirements, in general, are made less onerous for all forms of companies. However, companies with a business volume or sales turnover of less than say, INR 100 crore annually, (which do not accept public deposits) whatever their form, may be treated on a different footing with simplified formats of disclosure and minimum compliance. This will also keep the compliance and scrutiny load manageable at the levels of the Registry, regulators and other mandated authorities, while facilitating ‘ease of doing business’ for smaller entities.

Corporate Social Responsibility Not accepted (Section 135) There are stringent requirements concerning constitution of CSR Committee, formulation of CSR Policy, monitoring the Policy and various other matters about project-based expenditure and so

Taking into account the objective behind the provisions of section 135 of the Act, all companies covered under sub-section (1) of that section should be covered within CSR requirements.

Exemptions for private companies from Section 135 may,

34

Chapter 1

Additional suggestions of Stakeholders on. Such elaborate requirements are quite unnecessary and cumbersome for private companies. The provisions made applicable to private companies here seem unintentional.

Private companies which get covered under Section 135 should have simplified procedures for such compliances and implementation.

Auditor Rotation Auditor’s rotation should not be mandated. Unlisted Indian subsidiaries of foreign multinationals should be permitted to align their auditors with that of the parent company, thus, exempting them from mandatory auditor rotation requirements. Similarly private limited companies should also be exempted from mandatory audit rotation since there is very little public interest involved in the same.

Companies Act, 2013: Key highlights

Accepted/ Not Accepted

Additional recommendations by committee therefore, not be considered.

Not accepted The Committee has suggested that it is appropriate that subsidiaries of foreign companies and private companies are given justifiable relief depending upon their capital and turnover thresholds. Accordingly, the exemption limits/thresholds prescribed under the Rules may be reviewed in consultation with the ICAI.

35

Financial Reporting Requirements and Auditor’s Responsibilities, 2e

Additional suggestions of Stakeholders Section 132 Constitution of National Financial Reporting Authority (NFRA) Section 132 provides for creation of NFRA for dealing with auditing and accounting matters.

This section is yet to be notified.

36

Accepted/ Not Accepted

Chapter 1

Additional recommendations by committee

Not accepted The ICAI had expressed their reservations and raised concerns over the constitution of NFRA. It was stated that the ICAI is already discharging its regulatory functions with regard to discipline through a robust mechanism wherein a Board of Discipline and Disciplinary Committee with Government nominees has been entrusted with the responsibility, the Chartered Accountants profession sees constitution of NFRA as an interference in the functioning of the profession, multiple layers of regulation would lead to delay/duplication of work and therefore suggested for omission of Section 132.

The Committee desires that the existing mechanism in this regard under the ICAI should be streamlined and strengthened without needlessly adding to regulatory levels. This may be undertaken in consultations with the ICAI, which is the designated elected self-regulatory body for professional audit in the country.

Necessary amendments to the ICAI may be brought before Parliament, if required, for this purpose so that adequate transparency can be ensured in maintaining accounting and auditing norms as well as ethical standards with a view to protecting the interest of investors and stakeholders.

Chapter 1

Additional suggestions of Stakeholders

Companies Act, 2013: Key highlights

Accepted/ Not Accepted

Additional recommendations by committee

Not accepted Ease of compliance for Startups For ease of compliance for startups, it has been suggested by the stakeholders that start-ups as defined under start-up India program should qualify for benefits as available to small companies under Section 2(85) of the Act even if they exceed the thresholds.

The Committee has recommended that in conformity with government policy on Start-ups under the Startup India Programme, appropriate exemptions from compliances may be given to start-ups. The relevant rules and procedures may accordingly be modified to give necessary relief to start-ups including ease of raising finance at the earliest. As observed by the Committee earlier, these exemptions and waivers should be linked to thresholds of business volume or turnover, regardless of the form of the company, which would enable smaller players to organise themselves easily and do business in an unhindered and smooth manner.

Not accepted Role of Independent Directors The stakeholders suggested that the institution of Independent Directors should be made more effective and there is need to reduce their liability to make their role more purposeful.

The Committee has suggested that MCA should encourage and create a conducive and positive legal environment for the institution of Independent Directors to evolve in the country. It is not necessary or fair to saddle Independent Directors with penal liabilities. The Committee would thus expect the MCA to review the position accordingly

Key Managerial Personnel (KMP) Section 2(51) of the Companies Act,2013, defines KMP, in relation to a company as the Chief Executive Officer or the managing director or the manager, the company secretary, the wholetime director, the Chief Financial

The committee is of the view that qualifications for appointment as CFO may be best left to the concerned company. Further placing any specific qualifications for this position may bring rigidity in the provisions. The mandatory appointment of KMP for all listed company and every 37

Financial Reporting Requirements and Auditor’s Responsibilities, 2e

Additional suggestions of Stakeholders

Accepted/ Not Accepted

Chapter 1

Additional recommendations by committee

Officer (CFO) and such other officer as may be prescribed.

Further, every listed company and every other public company having a paid-up share capital of INR 10 crore rupees or more shall have whole-time key managerial personnel.

ICAI had made representations in this regard that the Companies Act, 2013 does not, presently, specify the qualifications of a Chief Financial Officer. In view of the significantly enhanced compliance requirements and the overarching role of the finance function in the present day context, it may be relevant to consider appointing Chartered Accountants in such CFO positions which are to be mandatorily filled up under the above mentioned KMP requirement.

other public company having a paid-up share capital of INR 10 crore or more, would provide ample opportunities for CAs in natural course of time. Therefore such specification is not allowed.

Removal of object clause Section 4 of the Companies Act, 2013 requires a company to have a ‘Memorandum of Association’ (MOA) to state “the objects for which the company is proposed to be incorporated and any matter considered necessary in furtherance thereof.”

Explanation to section 4 amended: The Bill proposes the amendment to allow companies the option to have an unrestricted objects clause in its MOA.

The committee is of the view that although remuneration of detailed objects in the MOA may not be essential and making the object clause itself redundant. It cannot be anybody’s case that a company should incorporate itself in a vacuum without specifying the objects or its business. This might lead to formation of bogus companies. The committee believe that statement of objects in the MOA is necessary for establishing the credentials and seriousness of intent of the promoter(s) of the company and build confidence of investors and

38

Chapter 1

Additional suggestions of Stakeholders

Companies Act, 2013: Key highlights

Accepted/ Not Accepted

Additional recommendations by committee creditors.

Therefore the amendment is to be reconsidered.

The report has been presented in Lok Sabha and it is expected that Companies Bill, 2016 should be enacted after consideration of recommendations made by the Standing Committee in its 37th report.

39

Financial Reporting Requirements and Auditor’s Responsibilities, 2e

Chapter 1

Annexures 1.

Sections notified w.e.f 12 September 2013 - Notification No. S.O. 2754(E)

2.

Section 135 and Schedule VII notified w.e.f April 2014 - Notification No. S.O. 582(E)

3.

Sections notified w.e.f. 1 April 2014 – Notification no. 902(E)

4.

Sections notified w.e.f. 6 June 2014– Notification no. 1459(E)

5.

Sections notified w.e.f. 29 May 2015– Notification no. 1440(E)

6.

Companies (Amendment) Act, 2015

7.

Sections notified w.e.f. 14 December 2015–Notification No. S.O. 3388(E)

8.

Circular No. 07/2014, dated 1 April 2014

9.

Exceptions/Modifications/Adaptations to certain sections - Notification no.

G.S.R.464(E)

th

th

th

10. Sections notified w.e.f. 13 January 2016 – Notification No. S.O. 125(E) 11. Sections notified w.e.f. 1 June 2016 – Notification No. S.O. 1934(E) th

12. Sections notified w.e.f. 7 September 2016 – Notification No. S.O. 2866(E) 13. Proposals of the Companies (Amendment) Bill 2016 as introduced in the Lok Sabha on 16th March, 2016 th

14. Sections notified w.e.f. 15 December 2016 – Notification No. S.O. 3677(E) th

15. Sections notified w.e.f. 26 December 2016 – Notification No. S.O. 4167(E) th

16. Sections notified w.e.f 18 May 2016 - Notification no. S.O. 1795 (E) 17. Designation of Special Courts - Notification no. 1796 dated 18 May 2016 18. Exemption from the provisions of the 2013 Act for specified IFSC private/public companies – Notification nos. GSR 08(E) and GSR 09(E)

40

Chapter 1

Annexures

Annexure 1

Sections notified w.e.f 12 September 2013 - Notification No. S.O. 2754(E) New Delhi, the 12th September, 2013 S.O. 2754(E)—In exercise of the powers conferred by sub-section (3) of section 1 of the Companies Act, 2013 (18 of 2013), the Central Government hereby appoints the 12th day of September, 2013 as the date on which the following provisions of the said Act shall come into force, namely :SL. No.

Section

1.

Section 2 clause (1); clauses (3) to (6) (both inclusive); clauses (8) to (12) (both inclusive); clauses (14) to (22) (both inclusive); clauses (24) to (28) (both inclusive); clause (29) [except sub-clause (iv)]; clause (30); clauses (32) to (40) (both inclusive); clauses (43) to (46) (both inclusive); clauses (49) to (61) (both inclusive); clauses (63) to (66) (both inclusive); clause (67) [except sub-clause (ix)]; clauses (68) to (82) (both inclusive); clause (84); clause (86); clause (87) [except the proviso and Explanation (d)], clauses (88) and (89); clauses (90) to (95) (both inclusive); Section 19; Section 21; Section 22; Section 23 [except clause (b) of sub-section (1) and sub-section (2)]; Section 24;

2.

3.

4.

5.

6.

41

Financial Reporting Requirements and Auditor’s Responsibilities, 2e

7.

8.

9.

10.

11.

12.

13.

14.

15.

16.

17.

18.

19.

20.

21.

22.

23.

24.

25.

26.

27.

28.

29.

30.

31.

32.

33.

34.

35.

36.

37.

38.

39.

40.

42

Chapter 1

Section 25 [except sub-section (3)]; Sections 29 to 32 (both inclusive); Section 33 [except sub-section (3)]; Section 34; Section 35 [except clause (e) of sub-section (1)]; Sections 36 to 38 (both inclusive); Section 39 [except sub-section (4)]; Section 40 [except sub-section (6)]; Sections 44 and 45; Sections 49 to 51 (both inclusive); Sections 57 to 60 (both inclusive); Section 65; Section 69; Section 70 [except sub-section (2)]; Section 86; Section 91; Section 100 [except sub-section (6)]; Section 102; Section 103; Section 104; Section 105 [except the third and fourth proviso of sub-section (1) and subsection (7)]; Section 106; Section 107; Section 111; Section 112; Section 113 [except clause (b) of sub-section (1)]; Section 114; Section 116; Section 127; Section 133; Section 161 [except sub-section (2)]; Sections 162 and 163; Section 176; Sections180 to 183 (both inclusive);

Chapter 1

41.

42.

43.

44.

45.

46.

47.

48.

49.

50.

51.

52.

53.

54.

55.

Annexures

Section 185; Section 192; Section 194; Section 195; Section 202; Section 379; Sections 382 and 383; Section 386 [except clause (a)]; Section 394; Section 405; Sections 407 to 414 (both inclusive); Section 439; Sections 443 to 453 (both inclusive); Sections 456 to 463 (both inclusive); Sections 467 to 470 (both inclusive).

[F. No. 1 / 15 /2013-CL. V] Annexure 2

Section 135 and Schedule VII notified w.e.f April 2014 Notification No. S.O. 582(E) New Delhi, the 27th February, 2014 S.O. 582(E).—In exercise of the powers conferred by Sub-section 3 of Section 1 of the Companies Act, 2013 (18 of 2013), the Central Government hereby appoints the 1st day of April, 2014 as the date on which the provision of section 135 and Schedule VII of the said Act shall come into force.

[F. No. 1/15/2013-CL-V] Annexure 3

Sections notified w.e.f. 1 April 2014 – Notification no. 902(E) New Delhi, the 26th March, 2014 S.O. 902(E).—In exercise of the powers conferred by sub-section (3) of Section 1 of the Companies Act, 2013 (18 of 2013), the Central Government hereby appoints the 1st day of April, 2014 as the date on which the following provisions of the said Act shall come into force, namely: 43

Financial Reporting Requirements and Auditor’s Responsibilities, 2e

Chapter 1

Sl. No. Sections 1

Section 2

2

clause (2);

3

clause (7);

4

clause (13);

5

clause (31);

6

clause (41);

7

clause (42);

8

clause (47) and clause (48);

9

clause (62);

10

clause (83);

11

clause (85);

12

Explanation (d) of clause (87);

13

Sections 3 to 6 (both inclusive);

14

Section 7 [except sub-section (7)];

15

Section 8 [except sub-section (9)];

16

Sections 9 to 13 (both inclusive);

17

Section 14 [except second proviso to sub-section (1) and sub-section (2)];

18

Sections 15 to 18 (both inclusive);

19

Section 20;

20

clause (b) of sub-section (1) and sub-section (2) of section 23;

21

sub-section (3) of section 25;

22

Sections 26 to 28 (both inclusive);

23

Sub-section (3) of section 33;

24

Clause (e) of sub-section (1) of section 35;

25

Sub-section (4) of section 39;

26

Sub-section (6) of section 40;

27

Sections 41 and 42 (both inclusive);

28

Section 43;

29

Sections 46 and 47 (both inclusive);

30

Sections 52 to 54 (both inclusive);

44

Chapter 1

Annexures

Sl. No. Sections 31

Section 55 except sub-section (3);

32

Section 56;

33

Section 61 [except proviso to clause (b) of sub-section (1)];

34

Section 62 [except sub-sections (4) to (6)];

35

Sections 63 and 64 (both inclusive);

36

Sections 67 and 68 (both inclusive);

37

Sub-section (2) of section 70;

38

Section 71 [except sub-sections (9) to (11)];

39

Section 72;

40

Section 73;

41

Sub-section (1) of section 74;

42

Section 76;

43

Sections 77 to 85 (both inclusive);

44

Sections 87 to 90 (both inclusive);

45

Sections 92 to 96 (both inclusive);

46

Sub-section (6) of section 100;

47

Section 101;

48

Third and Fourth proviso to sub-section (1) and sub-section (7) of section 105;

49

Sections 108 to 110 (both inclusive);

50

Clause (b) of sub-section (1) of section 113;

51

Section 115;

52

Sections 117 and 118 (both inclusive);

53

Section 119 [except sub-section (4)];

54

Sections 120 to 122 (both inclusive);

55

Section 123;

56

Section 126;

57

Sections 128 and 129 (both inclusive);

58

Section 134;

59

Sections 136 to 139 (both inclusive); 45

Financial Reporting Requirements and Auditor’s Responsibilities, 2e

Chapter 1

Sl. No. Sections 60

Section 140 [except second proviso to sub-section (4) and subsection (5)];

61

Sections 141 to 160 (both inclusive);

62

Sub-section (2) of section 161;

63

Sections 164 to 168 (both inclusive);

64

Section 169 except sub-section (4);

65

Sections 170 to 172 (both inclusive);

66

Sections 173 to 175 (both inclusive);

67

Sections 177 to 179 (both inclusive);

68

Section 184;

69

Sections 186 to 191 (both inclusive);

70

Section 193;

71

Sections 196 to 201 (both inclusive);

72

Sections 203 to 205 (both inclusive);

73

Section 206 to 209 (both inclusive);

74

Section 210;

75

Section 211;

76

Section 212, [except references of sub-section (10) of section 66, subsection (5) of section 140, section 213, sub-section (1) of section 251 and sub-section (3) of section 339 made in sub-section (6) and also subsections (8) to (10)];

77

Sections 214 and 215;

78

Section 216 [except sub-section (2)];

79

Section 217;

80

Sections 219 and 220 (both inclusive);

81

Section 223;

82

Section 224 [except sub-section (2) and (5)];

83

Section 225;

84

Sections 228 and 229 (both inclusive);

85

Sections 366 to 369 (both inclusive);

86

Section 370 (except the proviso);

46

Chapter 1

Annexures

Sl. No. Sections 87

Section 371;

88

Section 374;

89

Sections 380 and 381 (both inclusive);

90

Sections 384 and 385 (both inclusive);

91

Clause (a) of section 386;

92

Sections 387 to 390 (both inclusive);

93

Sub-section (1) of section 391;

94

Sections 392 and 393 (both inclusive);

95

Section 395;

96

Sections 396 to 398 (both inclusive);

97

Section 399 [except reference of word Tribunal in sub-section (2)];

98

Sections 400 to 404 (both inclusive);

99

Section 406;

100

Section 442;

101

Sections 454 and 455 (both inclusive);

102

Section 464;

103

Schedule-I;

104

Schedule-II;

105

Schedule-III;

106

Schedule-IV;

107

Schedule-V;

108

Schedule-VI. [F. No. 1/15/2013-CL. V]

47

Financial Reporting Requirements and Auditor’s Responsibilities, 2e

Chapter 1

Annexure 4

4.

Sections notified w.e.f. 6 June 2014– Notification no.

1459(E)

New Delhi, the 6th June, 2014 S.O. 1459(E).— In exercise of the powers conferred by sub-section (3) of Section 1 of the Companies Act, 2013 (18 of 2013), the Central Government hereby appoints the 6th day of June, 2014 as the date on which the provisions of subsections (2) and (3) of Section 74 of the said Act shall come into force.

[F. No. 1/8/2013-CL-V] Annexure 5

Sections notified w.e.f. 29th May 2015– Notification no.

1440(E) New Delhi, the 29th May, 2015 S.O. 1440(E).—In exercise of the powers conferred by sub- section (2) of Section 1 of the Companies (Amendment) Act, 2015 (21 of 2015), the Central Government hereby appoints the 29th May, 2015 as the date on which the provisions of sections 1 to 12 and 15 to 23 of the said Act shall come into force.

[F. No. 1/6/2015-CL. V ]

48

Chapter 1

Annexures

Annexure 6

THE COMPANIES (AMENDMENT) ACT, 2015 NO. 21 OF 2015 [25th May, 2015] An Act to amend the Companies Act, 2013.

18 of 2013.

BE it enacted by Parliament in the Sixty-sixth Year of the Republic of India as follows:— 1. Short title and commencement.

(1) This Act may be called the Companies (Amendment) Act, 2015.

(2) It shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint and different dates may be appointed for different provisions of this Act and any reference in any provision to the commencement of this Act shall be construed as a reference to the coming into force of that provision.

2. Amendment of section 2.

In section 2 of the Companies Act, 2013(18 of 2013.) (hereinafter referred to as the principal Act),— (i) in clause (68), the words “of one lakh rupees or such higher paid-up share capital” shall be omitted; (ii) in clause (71), in sub-clause (b), the words “of five lakh rupees or such higher paid-up capital,” shall be omitted.

3. Amendment of section 9.

In section 9 of the principal Act, the words “and a common seal” shall be omitted.

4. Omission of section 11.

Section 11 of the principal Act, shall be omitted.

5. Amendment of section 12.

In section 12 of the principal Act, in sub-section (3), for clause (b), the following clause shall be substituted, namely:— “(b) have its name engraved in legible characters on its seal, if any;”.

6. Amendment of section 22.

In section 22 of the principal Act,— (i) in sub-section (2),— 49

Financial Reporting Requirements and Auditor’s Responsibilities, 2e

Chapter 1

(a) for the words “under its common seal”, the words “under its common seal, if any,” shall be substituted; (b) the following proviso shall be inserted, namely:— “Provided that in case a company does not have a common seal, the authorisation under this sub-section shall be made by two directors or by a director and the Company Secretary, wherever the company has appointed a Company Secretary.”; (ii) in sub-section (3), the words ‘‘and have the effect as if it were made under its common seal” shall be omitted.

7. Amendment of section 46.

In section 46 of the principal Act, in sub-section (1), for the words “issued under the common seal of the company”, the words “issued under the common seal, if any, of the company or signed by two directors or by a director and the Company Secretary, wherever the company has appointed a Company Secretary” shall be substituted.

8. Insertion of new section 76A. After section 76 of the principal Act, the following section shall be inserted, namely:— “76A. Punishment for contravention of section 73 or section 76.

Where a company accepts or invites or allows or causes any other person to accept or invite on its behalf any deposit in contravention of the manner or the conditions prescribed under section 73 or section 76 or rules made thereunder or if a company fails to repay the deposit or part thereof or any interest due thereon within the time specified under section 73 or section 76 or rules made thereunder or such further time as may be allowed by the Tribunal under section 73,— (a) the company shall, in addition to the payment of the amount of deposit or part thereof and the interest due, be punishable with fine which shall not be less than one crore rupees but which may extend to ten crore rupees; and (b) every officer of the company who is in default shall be punishable with imprisonment which may extend to seven years or with fine which shall not be less than twenty-five lakh rupees but which may extend to two crore rupees, or with both: Provided that if it is proved that the officer of the company who is in default, has contravened such provisions knowingly or wilfully with the intention to deceive the company or its shareholders or depositors or creditors or tax authorities, he shall be liable for action under section 447.”.

9. Amendment of section117.

In section 117 of the principal Act, in sub-section (3),— (i) in clause (g), the word ‘‘and’’ occuring at the end shall be omitted; (ii) after clause (g), the following proviso shall be inserted, namely:— 50

Chapter 1

Annexures

“Provided that no person shall be entitled under section 399 to inspect or obtain copies of such resolutions; and”.

10. Amendment of section 123.

In section 123 of the principal Act, in sub-section (1), after the third proviso, the following proviso shall be inserted, namely:— “Provided also that no company shall declare dividend unless carried over previous losses and depreciation not provided in previous year or years are set off against profit of the company for the current year.”.

11. Amendment of section 124.

In section 124 of the principal Act, in sub-section (6),— (i) for the words, brackets and figure “unpaid or unclaimed dividend has been transferred under sub-section (5) shall also be”, the words “dividend has not been paid or claimed for seven consecutive years or more shall be” shall be substituted; (ii) after the proviso, the following Explanation shall be inserted, namely:— “Explanation.—For the removal of doubts, it is hereby clarified that in case any dividend is paid or claimed for any year during the said period of seven consecutive years, the share shall not be transferred to Investor Education and Protection Fund.’’.

12. Amendment of section 134.

In section 134 of the principal Act, in sub-section (3), after clause (c), the following clause shall be inserted, namely:— “(ca) details in respect of frauds reported by auditors under sub-section (12) of section 143 other than those which are reportable to the Central Government;”.

13. Amendment of section 143.

In section 143 of the principal Act, for sub-section (12), the following sub-section shall be substituted, namely:— “(12) Notwithstanding anything contained in this section, if an auditor of a company in the course of the performance of his duties as auditor, has reason to believe that an offence of fraud involving such amount or amounts as may be prescribed, is being or has been committed in the company by its officers or employees, the auditor shall report the matter to the Central Government within such time and in such manner as may be prescribed: Provided that in case of a fraud involving lesser than the specified amount, the auditor shall report the matter to the audit committee constituted under section 177 or to the Board in other cases within such time and in such manner as may be prescribed: Provided further that the companies, whose auditors have reported frauds under this sub-section to the audit committee or the Board but not reported 51

Financial Reporting Requirements and Auditor’s Responsibilities, 2e

Chapter 1

to the Central Government, shall disclose the details about such frauds in the Board's report in such manner as may be prescribed.”.

14. Amendment of section 177.

In section 177 of the principal Act, in sub-section (4), in clause (iv), the following proviso shall be inserted, namely:— "Provided that the Audit Committee may make omnibus approval for related party transactions proposed to be entered into by the company subject to such conditions as may be prescribed;".

15. Amendment of section 185.

In section 185 of the principal Act, in sub-section (1), in the proviso, after clause (b), the following clauses and proviso shall be inserted, namely:— “(c) any loan made by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company; or (d) any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company: Provided that the loans made under clauses (c) and (d) are utilised by the subsidiary company for its principal business activities.".

16. Amendment of section 188.

In section 188 of the principal Act,— (a) in sub-section (1),— (i) for the words "special resolution", at both the places where they occur, the word "resolution" shall be substituted; (ii) after the third proviso, the following proviso shall be inserted, namely:— "Provided also that the requirement of passing the resolution under first proviso shall not be applicable for transactions entered into between a holding company and its wholly owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval."; (b) in sub-section (3), for the words "special resolution", the word "resolution" shall be substituted.

17. Amendment of section 212.

In section 212 of the principal Act, in sub-section (6), for the words, brackets and figures "the offences covered under sub-sections (5) and (6) of section 7, section 34, section 36, sub-section (1) of section 38, sub-section (5) of section 46, subsection (7) of section 56, sub-section (10) of section 66, sub-section (5) of section 140, sub-section (4) of section 206, section 213, section 229, sub-section (1) of section 251, sub-section (3) of section 339 and section 448 which attract the punishment for fraud provided in section 447", the words and figures "offence covered under section 447" shall be substituted.

52

Chapter 1

Annexures

18. Amendment of section 223.

In section 223 of the principal Act, in sub-section (4), in clause (a), for the words "by the seal", the words "by the seal, if any," shall be substituted.

19. Amendment of section 248.

In section 248 of the principal Act, in sub-section (1),— (i) in clause (a), after the word ‘incorporation’, the word ‘or’ shall be inserted; (ii) clause (b) shall be omitted.

20. Amendment of section 419.

In section 419 of the principal Act, in sub-section (4), the words "or winding up" shall be omitted.

21. Amendment of section 435.

In section 435 of the principal Act, in sub-section (1),— (i) for the words "trial of offences under this Act", the words "trial of offences punishable under this Act with imprisonment of two years or more" shall be substituted; (ii) the following proviso shall be inserted, namely:— "Provided that all other offences shall be tried, as the case may be, by a Metropolitan Magistrate or a Judicial Magistrate of the First Class having jurisdiction to try any offence under this Act or under any previous company law."

22. Amendment of section 436.

In section 436 of the principal Act, in sub-section (1), in clause (a), for the words "all offences under this Act", the words, brackets and figures "all offences specified under sub-section (1) of section 435" shall be substituted.

23. Amendment of section 462.

In section 462 of the principal Act, for sub-section (2), the following sub-sections shall be substituted, namely:— “(2) A copy of every notification proposed to be issued under sub-section (1), shall be laid in draft before each House of Parliament, while it is in session, for a total period of thirty days, and if, both Houses agree in disapproving the issue of notification or both Houses agree in making any modification in the notification, the notification shall not be issued or, as the case may be, shall be issued only in such modified form as may be agreed upon by both the Houses.

(3) In reckoning any such period of thirty days as is referred to in sub-section (2), no account shall be taken of any period during which the House referred to in subsection (2) is prorogued or adjourned for more than four consecutive days.

(4) The copies of every notification issued under this section shall, as soon as may be after it has been issued, be laid before each House of Parliament.”

53