Top 10 things to know about Companies Act, 2013

Almost a year has passed since the Companies Act, 2013 had been implemented. The act has replaced some grandfathered provisions of the old Companies Act of 1956 and has brought in some new ones in place. Some of these provisions have had huge success while many others were criticized to the core. Sitting at the end of the year, let us have a look at the top 10 things to know about the Companies Act, 2013 and their impact on our businesses.  images

1) Alteration of Objects clause :

As per the new Act, a company can carry out only those businesses which are mentioned in the Main Objects of the company. Earlier, the Companies which have diversified in other activities used to pass resolution in the Board of Directors meeting or in the General Meeting whereby the activities mentioned in other Objects i.e. at Clause III-C were invoked. However, henceforth, all such Companies are required to alter the main objects to reflect the current business activities. Consequently, the company may also be required to change its name to bring it in consonance with its main objects.

2)  CIN to be mentioned in letter heads, invoices etc, along with Former Name, if any:

The new Act has taken the publication of identity of a company to a whole new level. It provides that every company shall get its name, address of its registered office and the Corporate Identity Number (CIN) along with telephone number, fax number, if applicable, e-mail and website addresses, if any, printed in all its business letters, visiting cards, letter papers and in all its notices and other official publications. Company’s former name(s) (since last two years) also has to be mentioned in the above listed documents for the next two years (with effect from April 1, 2014).

3)   Resident Director:

Every Company is now required have a director who stayed in India for a total period of 182 days
or more in previous calendar year.

4) Statutory Registers and Return in New formats:

As per the New Act, register of members is to be kept in new format. The PAN Number, email ID and other particulars are to be mentioned compulsorily beside particulars of share capital or debenture. Existing companies are required to update the same within six months from the effective date, i.e. from 01.04.2014.

5) Loans & Advances:

                 Loan to Directors etc.

A private limited company is prohibited to advance any kind of loan / guarantee / security to any director, Director of holding company, his partner, his relative, Firm in which he or his relative is partner, private limited in which he is director or member or any bodies corporate whose 25% or more of total voting power or board of Directors is controlled by him.

                 Loans from Directors & Members

Unsecured Loans from Directors and shareholders were primary source of funds for private limited companies. Consequently, most of the Private Limited Companies have accepted unsecured loans from Directors, Director’s relatives or from its members till date. However, the new Act says that all such Companies now have to refund such unsecured loan/deposit immediately. As per the relevant rules, Companies can accept unsecured loan or deposit from Director of only if such amount is not from borrowed funds. On failure to refund such unsecured loans already accepted from Directors’ relatives or members, such amounts immediately shall be treated as deposit. Consequently, the defaulting Company and its officers in default may face penalty/prosecution proceedings under the relevant provisions of the Act. The whole point of forming a Private Company is to keep the business affairs private. The private companies could arrange its means of finance through private resources, so that they can finance the project through internal resources. This used to save the companies from the burden of interest on loans from banks and financial institutions. Now, this would not apply and hence maintaining business has become costlier. Further, the private Limited Companies which have borrowed money in excess of its paid up capital and free reserves are required to pass special resolution and members have to decide up to which limit the Company can borrow.

As per the recent circular from MCA, the amounts received by private companies from their member, directors or their relatives prior to 01.04.2014 will not be treated as Deposits. Hence, this would now save some efforts on the part of the companies to comply with the Deposit Rules.

Click here to download a copy of the circular: General_Circular_5-2015

6) Share application money & allotment of shares Valuation of shares by independent valuer:

                         APPLICATION & ALLOTMENT

According to the Deposit Rules, the Companies have to allot the share application subscription money to the subscriber within 60 days from the date of receipt of money. In case the company fails to do so, the amount has to be refunded within fifteen days from the date of completion of sixty days. In case the company fails to refund such amount, it shall be treated as a deposit under the new rules. In case non refund of share application money, another impact would be to transfer the amount including interest to Investor Education and Protection Fund of Central Government.

                       VALUATION OF SHARES

The Act has introduced the concept of Independent Valuer for the Valuation of Shares. As a result of this, Directors cannot undervalue the share. Consequently, existing shareholders would get appropriate returns in case the Company grows. This would cover the valuation in respect of any property, stock, shares, debentures, securities or goodwill or any other assets of the company. Registered valuers can be A chartered accountant, company secretary or cost accountant who is in whole-time practice, or retired member of Indian Corporate Law Service or any Indian Citizen holding equivalent Indian or foreign qualification as the Ministry of Corporate Affairs may by an order recognize; A Merchant Banker registered with SEBI, A member of the Institute of Engineers in whole time practice, A member of the Institute of Architects and who is in whole-time practice . This concept of valuation is still new in India and needs a lot of thought prior to implementing the same.

7)   Financial year and AGM:

Now, every company will have a uniform financial year i.e. 31st March. Companies incorporated on or after 01st January of a particular year have the option to extend their financial year and close its books of accounts as on 31st March of the subsequent year. For eg: say a company has been incorporated on 05th January, 2015. It has the option with itself of not closing its books of accounts as on 31st March, 2015. Rather, it can extend its financial year and close its books as on 31st March, 2016.

8) Consolidation of accounts:

Any company having an associate or subsidiary is required to prepare consolidated financial statements taking into consideration of consolidation of accounts of subsidiary and associate companies. Disclosure of subsidiary and associate companies in Board report has also been made mandatory.

9) Related party transactions:

The scope of related party transactions has been widened in the new Act and now Companies should take reasonable care in entering related parties transactions with respect to

  • Sale, purchase or supply of any goods or material
  • Selling or otherwise disposing of, or buying, property of any kind;
  • Leasing of property of any kind
  • Availing or rendering of any services;
  • Appointment of any agent for purchase or sale of goods, materials, services or property;
  • Such related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company; and
  • Underwriting the subscription of any securities or derivatives thereof, of the company

10) Appointment of Statutory Auditors:

Every Listed company can appoint an individual auditor for 5 years and a firm of auditors for 10 years. This period of 5 / 10 years commences from the date of their appointment. Therefore, those companies have reappointed their statutory auditors for more than 5 / 10 years,have to appoint another auditor in Annual General Meeting for year 2014.