R.Sankaraiah
Executive Director Finance
1
SYNOPSIS
Companies Bill
 Guiding principles
 Welcome changes
 Added Obstacles
Need for harmonization
Conflicting provisions/areas requiring harmonisation
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Listing agreement
Accounting Standards
Ind-AS converged with IFRS
The revised Schedule VI
CARO
XBRL
Competition Act
Way Ahead
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Companies Bill-Guiding principles

To enable a compact statute, amenable to easy understanding
and interpretation;

To encourage setting up of businesses while enabling measures
to protect the interests of stakeholders / investors, including
small investors;

To provide a framework for responsible and accountable selfregulation obviating the need for a regime based on Govt.
approvals;

To provide for more effective and speedy winding up process
based on international practices;

To strengthen enforcement powers and enhance penalties for
offences; and

To segregate substantive law from the procedures which are
proposed to be prescribed as rules.
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Companies Bill
Welcome Changes
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Companies Bill-Welcome changes
Remuneration to MDs/WTDs
 No statutory restriction on the payment of remuneration to
Managing Directors/Whole Time Directors.
 Approval of Central Govt. not required for payment of
remuneration.
 Only Shareholders’ approval through special resolution is
required.
Electronic Facility Permitted for Board Meetings
 Directors can participate in the Board Meetings through
Video conferencing or other prescribed electronic means.
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Companies Bill-Welcome changes
No Central Government Approval for Interested Contracts

No Central Govt. approval will be required for companies whose
paid-up capital is more than Rs. 1 crore for entering into
Contracts with Directors/their relatives/firms in which Directors
or their relatives are Partners/Private Companies of which they
are Members or Directors.

Only Shareholders’ approval through special resolution is
required, in certain cases.
Transactions Pertaining to Immovable Properties

Transactions with respect to immovable properties viz. leasing,
selling or purchasing have been appropriately brought under
purview which requires consent of Board of Directors of a Public
Company. This is not covered as a specific item in Sec. 297 of the
Companies Act, 1956.
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Companies Bill-Welcome changes
Mergers/Amalgamations Simplified

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Simplification of process of merger between small
companies, and between holding and wholly owned
subsidiary.
No Court approval required for such merger/
amalgamation.
One Person Company

Concept of One Person Company introduced. Companies
with sole member may be incorporated.
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Companies Bill-Welcome changes
Removal of Obsolete Provisions

Obsolete provisions viz. Obtaining Certificate of
Commencement of Business and holding of Statutory
Meetings in case of Public Limited companies have been
removed.
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Companies Bill
Added Obstacles
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Companies Bill- Added Obstacles
Restriction on Accepting Public Deposits

Prohibition on Companies other than NBFCs and Banking
Companies from accepting deposits from persons other than
its members tends to restrict the options of fund raising by
companies.

The rationale of such restrictive provision is also not clear. A
person even holding One share will be Member of the
Company and would thus be entitled to make deposits with
the Company, which will tend to defeat the spirit of law.
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Companies Bill- Added Obstacles
Prohibition on Issue of Shares with Differential
Voting Rights

Issue of shares with differential voting rights has been
prohibited, thus prohibiting certain classes of investors who
are interested in returns on investments without interfering
in the Management of the Company
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Companies Bill- Added Obstacles
Restriction on Number of Directorships in Public
Limited Companies
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The existing limit of 15 Public Limited Companies has been
retained. However, certain exclusions specified under Sec.
278 of the Present Companies Act have been removed viz.
 Alternate Directorships
 Directorship in Companies which are not carrying
business for profits.
Recommend that in addition to retaining of above exclusions,
directorships in holding and subsidiary companies should
also be excluded.
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Companies Bill- Added Obstacles
Class Actions by Member/Creditor

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Such a provision would make the Company and its
Directors at the mercy of individual shareholder/creditor,
irrespective of his interest in the Company which could be
detrimental to the functioning of the Company and could
lead to vexatious litigations.
A person holding even One share or creditor of even One
rupee will be able to jeopardize the functioning of the
company
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Why
Harmonisation?
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Need for Harmonisation
 A good law is one which speaks goodness not only for itself
but also for others. It should neither over-ride the other
related Acts nor allowed to be over-ridden by other
statutes. Most of the Indian statutes in corporate laws
including Companies Act, 1956 suffer from this lacuna
 This becomes essential since a listed Company is
administered by :
 Companies Act, 1956
 the SEBI Act, 1992
 the Securities Contracts (Regulation) Act, 1956
 Listing Agreement with Stock Exchanges
 Host of Rules and regulations under these Acts and
others.
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If not harmonised…
 Confusion and unnecessary legislative overlap
 Creation of multiple institutional mechanisms that result in an
administrative fracas.
 It burdens the judiciary by increasing litigation
 Often leaves the Indian state non-compliant with several
international law obligations
 Compromises the legal system as a whole by making it less
coherent.
 Poses an obstacle to economic growth and sustainable
development
 Increases commercial risks and transaction costs
 Hampers the activities of commercial entities and restrict their
participation in international trade
 Investment may be severely affected or may not take place at all
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Provisions Harmonised with Other Statutes
 Introduction of One Person Company which is in harmony with
other legislations prevailing in other countries viz. United
States, Australia, United Kingdom, European Union, Singapore
etc.
 Provision in the Companies Bill that issue and transfer of
securities and non-payment of dividend by listed companies or
those companies which intend to get their securities listed on
any stock exchange in India, shall, except as provided under this
Act, be administered by SEBI.
 Adoption of definition of Acquirer and Persons Acting in
Concert as per SEBI Takeover Regulations.
 Harmonisation of Bill with Information Technology Act, 2000
relating to the manner in which records shall be filled,
recognition of digital signatures for verification and
authentication, Board Meeting by video conference, service of
documents through electronic mode.
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Conflicting Provisions
Requiring Harmonisation
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Listing agreement
1. Number of Independent Directors
2. Audit Committee o f Directors
3. Compromise/Arrangements/ Amalgamations
Accounting Standards
1. Related Party - Meaning thereof
2. Associate Company - Meaning thereof
Ind-AS converged with IFRS
The revised Schedule VI
CARO
XBRL
Competition Act
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Listing Agreement
Independent Directors – Definition
Companies Bill
Cl. 132(5)- It is Non-executive director of the company, other than
a nominee director who neither himself nor any of his relatives:
1. has any pecuniary relationship (amounting to 10% or more of
its gross turnover or total income) with the Company, holding,
subsidiary or associate company, or its promoters, or directors
amounting to 10% or more of its gross turnover or total income
during the preceding 2 financial years or current financial year;
Cont.
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Listing Agreement
Independent Directors – Definition (Cont.)
Companies Bill
2. has been an employee/partner, in any of the preceding 3 financial
years of:
a. a firm of auditors or company secretaries in practice or cost
auditors of the company or its holding, subsidiary or associate
company; or
b. any legal or a consulting firm that has any transaction with the
company, its holding, subsidiary or associate company
amounting to 10% or more of the gross turnover of such firm;
3. is a CEO/Director, of any non-profit organisation that receives 25%.
or more of its income from the company, any of its promoters,
directors or its holding, subsidiary or associate company or that
holds 2% or more of the total voting power of the company
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Listing Agreement
Independent Directors – Definition (Cont.)
Listing Agreement
Cl. 49 define as a non-executive director of the company who:
1. does not have any material pecuniary relationships with the
company, its promoters, its directors, its sr. management or its
holding company, its subsidiaries and associates which may affect
independence of the director;
2. is not a partner or an executive during the preceding 3 years, of:
a. the statutory audit firm or the internal audit firm that is
associated with the company, and
b. the legal firm(s) and consulting firm(s) that have a material
association with the company.
3. is not a material supplier, service provider or customer or a lessor or
lessee of the company, which may affect independence of the
director;
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Listing Agreement
Independent Directors – Definition (Cont.)
Conflict
 As per Listing Agreement the determining factor is the materiality
from the viewpoint of Company as well as Director concerned.
 Whereas Bill quantifies materiality by prescribing cut-off of 10% or
more of the gross turnover/income of the company.
 Bill fails to cover transactions which may be insignificant for the
Company but may be material for the concerned director which may
affect his independence.
 ‘associate companies’ defined in Bill as a company in which that other
company has a significant influence, but which is not a subsidiary
company of the company having such influence or of any other
company.
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Listing Agreement
Conflict
 In Cl. 49 reference is given to AS-23 which defines it as an enterprise
in which the investor has significant influence and which is neither a
subsidiary nor a joint venture of the investor. Thus, in one case Joint
Venture is covered. In another it is excluded.
 Bill also restricts employment/ partnership in firm of company
secretaries in practice/cost auditors/legal/consulting firms, not only
of the Company but also of holding, subsidiary and associate
companies.
 However, Cl. 49 restricts only in case statutory audit and internal
audit firms of the company.
 Firm of Internal auditors has been included in Cl. 49 whereas it has
not been included in Bill.
 Bill includes CEO/Director of non-profit organizations in certain
cases whereas Cl. 49 does not.
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Listing Agreement
Number of Independent Directors – Listed Company
Companies Bill
 Listed companies having such Paid-up Share Capital as may be prescribed -
At least One third of the Board
Listing Agreement
 In case Chairman is Non-Executive- At least One-third of the Board
 In case Chairman is Executive / related to any Promoter or Person holding
management position at the Board level or one level below the Board - At
least Half of the Board
Conflict
 Disharmony arises in case where Chairman is Executive / Related to
Promoter etc.
 In such cases, as per Listing Agreement at least 50% of Board should
comprise of Independent Directors whereas as per Bill it should be Onethird.
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Number of Independent Directors -Unlisted Company
Companies Bill
 Unlisted Public companies and Subsidiaries of any Public
company - Central Government may prescribe the minimum
number.
Concern
 Provision of Independent Director, per se, is a vital provision
which needs to completely addressed in the Act itself rather
than being left to the Rule making power of the Central Govt.
 Will create uncertainties and may impose unnecessary burden
on unlisted companies.
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Listing Agreement
Audit Committee of Directors
Companies Bill
 Majority should be independent
 At least One Member should have knowledge of financial management,
audit or accounts.
 Authorisation to Central Govt. to prescribe the constitution of Audit
Committee in case of unlisted companies also.
Listing Agreement
 Two-thirds of the Members should be Independent directors.
 All members should be financially literate and at least one member should
have accounting or financial expertise.
 Financial literacy has been explained as the ability to read and understand
basic financial statements.
 Accounting or Financial expertise has been explained as experience in
finance or accounting, or requisite professional certification in accounting, or
any other comparable experience or background
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Listing Agreement
Audit Committee of Directors (Cont.)
Conflict
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Composition of the Committee i.e. number of independent
directors. Bill provides for Majority to be independent whereas
Listing Agreement requires Two-third.
Qualification of Members. Bill requires only one member to have
financial knowledge.
Cl. 49 of Listing Agreement requires all members to be financially
literate and at least one having financial expertise.
Rationale of having Audit Committee in closely held companies
not clear.
Will lead to uncertainty and hardship to small companies.
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Listing Agreement
Compromise/Arrangements/ Amalgamations
Companies Bill
Clause 201(5) requires:
 Notice of meeting for considering the compromise/arrangement/
amalgamation to be inter-alia sent to RBI/SEBI/ Stock Exchanges and such
other authorities which are likely to be affected by the compromise or
arrangement.
 Representations, if any, by such authorities shall be made within one month
from the date of receipt of such notice, failing which, it shall be presumed
that they have no representations to make on the proposals.
Listing Agreement
 Cl. 24(f) requires company to file any such scheme/petition proposed to be
filed before any Court or Tribunal with the Stock exchange, for approval, at
least a month before it is presented to the Court or Tribunal.
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Listing Agreement
Compromise/Arrangements/ Amalgamations (Cont.)
Conflict
 Once the approval has already been obtained from Stock Exchanges, prior to
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filing of the Scheme with the Court/Tribunal, there is no reason/justification
to again obtain the approval of Stock Exchanges.
Can the stock exchange which has earlier granted approval, subsequently
object to the Scheme?
Requirement of obtaining SEBI’s approval is unwarranted, as SEBI
administers Listed Companies through Stock Exchanges.
RBI’s consent may be relevant only for NBFCs/ Banking/Financial Companies
and not in case of companies engaged in manufacturing/ trading/ service.
It would make the process of amalgamations etc. more cumbersome and
time consuming.
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Accounting Standard
Related Party - Meaning thereof
Companies Bill- Cl. 2(1)(zzy) defines as:
a.
b.
c.
d.
e.
f.
g.
a relative of a director or key managerial personnel;
a firm, in which a director, manager or his relative is a partner;
a private company in which a director or manager is a member or
director;
a public company in which a director or manager is a director or
holds along with his relatives, more than 2% of its paid-up share
capital;
any body corporate whose Board/ MD/Manager is accustomed to
act in accordance with the advice, directions or instructions of a
director or manager;
any person under whose advice, directions or instructions a director
or manager is accustomed to act;
holding, subsidiary, fellow subsidiary or an associate company
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Accounting Standard
Related Party - Meaning thereof (Cont.)
Accounting Standard -AS-18 defines as:
a. Holding companies, subsidiaries and fellow subsidiaries
b. Associates and joint ventures
Individuals (incl. their relatives) – having voting power giving them
control or significant influence
d. Key management personnel including their relatives
e. Enterprises where controlling individual or key managerial
personnel has significant influence
c.
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Accounting Standard
Related Party - Meaning thereof (Cont.)
Conflict
•
•
Under AS-18, determining factor is the ability of the party to
control/exercise significant influence. Under the Bill it is the status
of the person.
A person who is a Professional Director will not come under the
category of Related Party as per AS-18, whereas as per the
Companies Bill not only such Director but even his relatives, firm
in which he or his relative is partner, other companies in which he
is a director or holds with his relatives more than 2% of Paid-up
capital will come within the ambit of related party.
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Accounting Standard
Associate Company - Meaning thereof
Companies Bill


Cl. 2(1)(f) defines as in relation to another company, means a
company in which that other company has a significant influence,
but which is not a subsidiary company of the company having such
influence or of any other company.
Significant Influence here means control of at least 26% of total
voting power, or of business decisions under an agreement
Accounting Standard

AS-18 defines as an enterprise in which the investor has significant
influence and which is neither a subsidiary nor a joint venture of the
investor.
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Accounting Standard
Associate Company - Meaning thereof (Cont.)
Conflict


Bill exempts only subsidiary whereas Accounting Standard exempts
subsidiary as well as Joint Venture.
The financial statement being prepared as per AS will give a
different treatment to an entity which is an associate whereas it will
be viewed differently under Companies Act.
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Ind-AS converged with IFRS
Illustrative List of areas where changes will be required
in case Ind-AS are made mandated on standalone
financial statements
 Computation of profits available for dividend distribution
 Whether profits/losses arising out of fair value changes will
be available for distribution as dividend
 Whether items of other comprehensive income will be
considered for computing profits available for dividend
 Computation of managerial remuneration
 Whether profits/losses arising out of fair value changes will
be available for distribution as dividend
 Whether items of other comprehensive income will be
considered for computing profits available for dividend
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Ind-AS converged with IFRS
 Availability of retained earnings (positive or negative) arising
on first time adoption of Ind-AS
 The impact of transition to Ind-AS is going to affect the net
worth. What will be the treatment of this impact
 Impact of retrospective adjustment arising out of prior period
errors and changes in accounting policies on returns filed with
ROC, data submitted to banks and other authorities
 Prior period items and changes in accounting policies
require restatement
 Is it going to be permitted in law
 Impact on returns already submitted
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The revised Schedule VI
 The format and content of balance sheet and statement
of profit and loss account have been re-characterized
and convergence to accounting standards have been
attempted and henceforth accounting standards shall
prevail over the revised schedule.
 However the format of financial statements are neither
in sync with those statements under the SEBI (ICDR)
Regulations, 2009 nor under Clause 41 to the listing
agreement.
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CARO
Companies Audit Report Order, 2003 is another segment
which is prescribed only under the Companies Act, 1956
but not found elsewhere. While the objective of the
Report is laudable, from the stakeholder point of view, it
should be synchronised and harmonised with other
allied corporate laws.
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XBRL
The green initiative of the Ministry of Corporate Affairs in
bringing another feather change is that of introduction of
new filing of financial statements in Extensible Business
Reporting Language (XBRL)and it should found its place
in other corporate laws as financial statements gets unified
and filed under one common umbrella from which users
and public can have the domain.
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Competition Act
 Matters relating to mergers and amalgamations in the
new Companies Bill should also take into account the
compliances required under other laws such as the
Competition Act.
 The provisions on Mergers and Amalgamations are
silent on the interface with the Competition Act, 2002
and the Competition Commission’s role in clearing
merger proposals.
 Whilst there seems to be a speedier mechanism for
effectuating mergers, the uncertainties with respect to
compliance with other laws including Competition Act
needs to be addressed
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Way Ahead
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Way Ahead
 Adopt a systematic approach to corporate law reforms.
 A “principled” development of the law is preferable rather than
wholesale adoption or even a form of piecemeal reform.
 A more business-friendly approach with a laissez-faire spirit and a
more internationally competitive company law will gradually evolve.
Perhaps, aspects such as democracy and citizenship may become
more important in the future reform of company law.
 It is hoped that Companies Bill would be revised in the light of issues
addressed in the report of the Hon’ble Parliamentary Standing
Committee and a brilliant piece of legislation would be brought out
to usher in a new era of best governance practices.
 The Companies Bill 2009, which has been pending for passage for
quite some time now is expected to be tabled in the Parliament soon
which would then be discussed, debated and considered for approval
and would replace the Companies Act, 1956. The new bill is hoped to
fulfil the expectations of its having greater shareholder democracy
and stricter corporate governance norms.
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