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MrunalExplained:CompaniesAct2013,TypesofCompanies
Mrunalhttp://mrunal.org
[Economy]CompaniesAct2013:Salientfeatures,typesof
Companies,publicltd.vsprivateltd,IndependentDirectors,
SFIO,SEBICorporategovernancenorms
PostedBySupportStaffOn14/08/2014@12:33amInEconomy|61Comments
Prologue
Whatiscorporategovernance
Typeofcompanies
Holding,SubsidiaryandAssociatecompanies
BoardofDirectors
Independentdirectors(ID)
SEBInorms:Independentdirectors
Boardmeetingsdurationandquorum
BoD:Committee
AnnualGeneralMeeting(AGM)
Auditrelatedprovisions
AuditCommittee
ExternalAuditorstermsandresponsibility
CompanySecretary
CompanysLoans
4newstatutorybodies
#1:NationalCompanyLawTribunal(NCLT)
#2:NationalFinancialReportingAuthority(NFRA)
#3:InvestorandEducationProtectionAUTHORITY
#4:SeriousFraudInvestigationOffice(SFIO)
2%CorporateSocialresponsibility(CSR)
SEBIscorporategovernancenorms
Appendix:Relatedpartytransactions(RPT)
Prologue
AssuchImwritingsummariesofEconomicsurvey2013.ButCompaniesAct,2013isarecurring
terminmanychapters.Therefore,needstobecoveredparallel.
Whatiscorporategovernance
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Whatiscorporategovernance
Manydefinitions,youneedtomemorizeatleastonefortheGS4.
Corporategovernanceisawayofdirectingthecompany
Toprotectstakeholdersinterest.ObservethewordstakeholdernotShareholders.Meaning,
companyshouldlookafteritscustomers,rawmaterialsuppliers,wholesales,dealers,employees,
shareholdersallforthem
Tocomplywithlegalregulatoryrequirements.Notjustfromtechnical/auditpointofviewbutfrom
ethicalpointofviewaswellforexamplemisleadingads,harmfulproducts,environmentally
unsustainableproductionmethodsetc.
Absenceofcorporategovernanceleadstofraud,mismanagement,embezzlementandharmto
societyandenvironment.
Torecentinitiativestoenforcecorporategovernance
CompaniesAct
originalactmadein1956
newactpassedinAugust2013
SEBInorms
2012:AdiGodrej
Committee
2014,April:SEBIpublished
Hastotal470sections,Governmentbeganphasewisenotificationfrom
Feb2014.
willbeeffectivefrom1
Imnotgoingintothetechnicalpartsrelatedtomerger,acquisition,
October2014(i.e.oneday
takeoveretc.butjustfocusingonareashavingconnectionwithethics, beforeGandhisBday)
corporategovernance,CSR&alliedtopics.
Typeofcompanies
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HavetoregisterwithMinistryofCorporateAffairs
CompaniesAct1956
Companiesact2013
OnePersonCompany.
nosuchthing
minimumcapitalonelakhrupees
ButhastoconverttopublicorprivatelimitedcompanyIFturnover>2cr
orcapital>50lakhs.
privatelimited:2to50
members
2to200members.minimumcapitalRs.onelakh
publiclimited:samein
7tounlimitedmembersminimumcapitalRs.FIVElakhswithinthat,two
bothacts
subgroups
ListedcompanyifshareslistedonanyIndianstockexchangee.g.Infosys,TCSetc.
Unlistedcompany:selfexplanatory.e.g.NokiaIndia,SaharasthosetwoHousingfinance
companies*.
*whichweresellingOFCDs&gotSubratoinJail,forhedidnotgetSEBIpermissionbeforeselling
OFCDsanddidnotrepayinvestorsmoneywhenSEBIorderedhimto.
overall,9lakhcompaniesinIndia
>90%ofIndiancompaniesareprivatelimited.
Holding,SubsidiaryandAssociatecompanies
Holdingcompany=itselfowns20%ormoresharesofanothercompany.
thatAnothercompanyisfurtherclassifiedinto:
subsidiarycompany
associatecompany
If50%sharesownedbyholdingcompany. If20%ormoresharesownedbyholdingcompany.
BoardofDirectors
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CompaniesAct2013:Salientfeaturesforcorporategovernance
democraticcountry voters=>parliament=>executive
companies
Shareholders(AGM)=>boardofdirectors=>CEO,executives.
Boardofdirectorsconsistsof
Chairman
executivedirectors/fulltimedirectors
nominateddirectors(BybanksorcentralGovernmente.g.duringmegascamlikeSatyam)
Independentdirectors:toprotecttheinterestsofminorityshareholders.
NowletscheckprovisionsofCompaniesact2013fordirectors
Minimumdirectorsineachcompany
Onepersoncompany 1
privateltd.
publicltd.
Maximum15directors
CanaddevenmoredirectorsbyresolutioninAGM(Annualgeneralmeetingofshareholders).
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Onepersoncanserveasdirectorinmaximum20companies
OnedirectormustbeIndianresident(i.e.stayinginIndiafor182daysormore)
OnedirectorWomanintheboard.(SEBInormssaysthesame)
Ifdirectorremainsabsentfor12monthsconsiderhispositionvacant,andgetnewguy.Means
SachinandRekhawillhavetothinktwicebeforebecomingdirectorsinanycompany.
Anyways,theseareprovisionsfordirectors,ingeneral.Nowletscheckspecificprovisionsfor
Independentdirectors
Independentdirectors(ID)
JobofIndependentdirector=protecttheinterestsofshareholders,particularlytheminority
shareholders.Hehastofulfillfollowingcriteria:
HeisnotaPromoterofthecompany,NOTnominatedbytheChairman
Hehasnopecuniaryinterestinthecompany,exceptsalaryasdirector.(meaningcompanys
wholesaler,retaileretc.cannotbecomeindependentdirectors)
Heisnotanemployeeofthecompany
CompaniesAct2013IDrequirements
1/3rddirectorsinpublicltd.companymustbeIndependentdirectors.(so,ifcompanytakes15
directors,5mustbeID)
Theyllhave2termsoffiveyearseach=total10years
ButtheirperformancewillbereviewedinshareholdersAnnualGeneralMeeting(AGM).Meansagain
SachinandRekhawillhavetothinktwicebeforebecomingIndependentdirectorsofanycompany.
After10yearsservice,iftheywanttojoinsamecompanyasIDagain,theyllhavetowaitfor3
yearscoolingperiod.
SEBInorms:Independentdirectors
Letspausefromcompaniesactforawhile.Weknowthat
CompaniesAct
newactpassedinAugust2013
SEBInorms
2014,April:SEBIpublished
willbeeffectivefrom1stOctober2014
so,whatdoesSEBInormssayabouttheseindependentdirectors?
10yearstermyesBUTfromretrospectiveeffect.Meaning,ifIwereanIndependentDirectorina
companysince2010,thenmyretirementis2020.(andnot2014+10=2024).
OnepersoncanbecomeIndependentdirectorofsevencompaniesatmost.
Ifheisafulltimedirectorinasinglecompany,thenhecanbecomeIDin3companiesatmost.
Enoughofdirectors,movingtonexttopic:
Boardmeetingsdurationandquorum
Doesntapplytoonepersoncompanies.
Companymustholdminimum4meetingsperyear
mustnothavemorethan120daysgapbetweentwomeetings
Quorum:1/3rdstrengthortwodirectors,whicheverismax.
Ifdirectorscannotgivephysicalpresence,videoconferencingispermitted.
Directorsmustbegiven7dayspriornotice.(Sotheycanmakepriortravelarrangements.)
BoD:Committee
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justlikeparliamenthasPAC,estimateCommittee,departmentalstandingCommitteeetc.same
way,CompanieswillberequiredtomakefollowingCommitteesoutoftheirboardmembers
Auditcommittee
Stakeholderrelationshipcommittee(SRC)
CSRcommittee(CSRC)
NominationandRemunerationcommittee(NRC)theyllobservefollowing
MD/Directorssalarydoesntexceed11%ofcompanysprofit
PayriseofCEO,directorsetc.vscompanyperformance
TheyllpresentthisdatainAGM.
Sofar,wecheckedprovisionsrelatedtodirectorsandboardmeetings.Mockquestionscanbe
formedbytwistingthefacts,forexample
WhichofthefollowingstatementsarecorrectasperthenewcompaniesAct?
1/3rddirectorsmustbeIndianresidents
atleastonewomandirectormustbeIndian
atleastoneindependentdirectormustbeawoman
noneofabove(Correctanswer)
Movingtonexttopic
AnnualGeneralMeeting(AGM)
Onepersoncompany:noneed
Public&pvtLTD.companiesyestheyvetoholdAGM.
Generalnoticecanbesentbyletter/emailtoshareholders.
Proxyvotingpermitted.
ElectronicVotingalsopermitted(asperSEBIscorporategovernancenorms).
Quorumdependsonnumberofshareholders.
DatanotimportantexceptforMBAinterviews
members
privateltdcompany
quorum
2members
publicltdcompanyupto1000shareholders 5members
publicltd>1000upto5000
15members
publicltd.>5000shareholders
30members
Auditrelatedprovisions
AuditCommittee
HavetomakeanauditCommitteefromboardofdirectors.
Itschairmanmustbeanindependentdirector.
ProvisionforinternalauditbyCA,Accountants,evenother(nonCA)persons.ICAIisopposingthis.
Companieswillhavetosetupwhistleblowermechanism.
ExternalAuditorstermsandresponsibility
Oneauditorcanauditmaximumof20companies.
IfhefindsanyfraudhemustreporttobothUnionGovernment(ministryofcorporateaffairs)and
duringtheAGM.
Auditorcannotauditthesamecompany
forever
individualauditor 5years
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auditfirm
2termsx5years=10years
Afterthatcoolingoffperiodof5years.
Why?Well,samereasonwhyGovernmentofficialsshouldbetransferredafter35yearssothey
dontdevelopnexuswithlocalthugs.
CompanySecretary
CompanySecretaryactsasalinkbetweenboardofdirectorsandshareholders.
HearrangesBoDmeetings,AGM,ensurequorum,minutesofthemeetingetc.
Companiesabovecertainsharecapital,havetocompulsorilyhirecompanySecretary.
CompaniesAct1956
CompaniesabovecapitalofRs.5crore=>havetocompulsorilyhirecompany
Secretary.
Companiesact
2013
10crore
Therearehardly~7000companiesinIndiahavingsharecapitalof10croreorabove.(Whilethere
are>20,000peopledoingthiscourse).
ForremainingcompaniesnotnecessarytohirecompanySecretary=lessjobsavailableforcompany
Secretaries.
ThereforecompanySecretariesandtheirnationalbody,areopposingthisnewprovision.
CompanysLoans
Companycannotgiveloantodirector/relatedpersons
Ifcompanygivesloantoanyonethenitsminimuminterestratemustbehigherthanthatof
Governmentsecurities(Gsec).(OtherwiseCEOmightpassloantohisownpuppetdriverat2%
interestandthenuseItforbettingincricketorsharemarket!)
CompanymustgetCreditrating(A,BB,Cetc.)beforeacceptingpublicdeposit(incollective
investmentschemes)
Companieshavetoappointachieffinanceofficetolookafterauditandaccount.
4newstatutorybodies
Not1,not2,not3total4newstatutorybodieswillbecreatedunderCompaniesAct2013.
Inotherwords,ifanyministrywantstolearnhowtoharassUPSCaspirantstheyshouldtake
COACHINGfrombabus@ministryofcorporateaffairs.
ListofStatutoryBodiesunderCompaniesAct
Matter
Statutorybody
tribunal/litigations NationalCompanyLawTribunal(NCLT)
accountingnorms
NationalFinancialReportingAuthority(NFRA)
awarenessgeneration InvestorandEducationProtectionFund
frauddetection
SFIO
Letschecktheirfeaturesonebyone
#1:NationalCompanyLawTribunal(NCLT)
Composition Judicial+technicalmembers
Deadline
havetofinishcasein3months
Hearing
Youcanpresentcasebyyourown,vialawyer,CAorcompanySecretary.
Appeal
IfeitherpartyisunsatisfiedwithNCLTverdict,theycanapproachNCLAT(national
companylawAPPEALATEtribunal).
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DisputeswhereNCLTwilladjudicate:
Companyfailstocomplywithanyprovisionsoftheact(e.g.quorumnotmaintained,auditorsnot
changedafterdeadlineetc.)
Mergerandacquisitiondisputes
ConvertingPublicltd.Toprivateltd.
FilingClassactionsuits(e.g.SatyamsUSshareholdersfilledsuchsuitinUSAandrecoveredmoney.
ButIndianshareholderscouldntbecause56sacthadnosuchprovision)
#2:NationalFinancialReportingAuthority(NFRA)
1Chairman+15members
WillsetAccountingstandardsforcompanies
WillhavePowersofcivilcourt.
AggrievedpartycanappealatNFRAA(NationalFinancialReportingAPPELATEAuthority)
CandebarCAandaccountantsforprofessionalmisconduct.
ICAIunhappywiththisprovisionbecauseunderCharteredAccountantsAct,1949,theyvethe
powerstotakeactionagainstCAs.
#3:InvestorandEducationProtectionAUTHORITY
Asthenamesuggests,thisfundmoneyisusedforawarenessgeneration,financialliteracyso
investorsdontfallintotrapslikeSaradhachitfund,SaharaOFCDetc.
Wheredotheygetmoney?Ans.Companieshavetopaydividend,interestandprincipaltotheir
investors.
Butifanymoneyremainsunclaimed(death,disappearanceofinvestoretc.)=>Moneygoesto
corporateaffairsministry=>intothisfund.
Thisisnotanewthing.Alreadyexists,But2013sactgivesitstatutorystatus,withfollowing
provisions
HQatDelhi.RegionalofficesacrossIndia.
Chairman:SecretaryofCorporateaffairsministry
Membership:executivedirectorsfromRBI,SEBIexpertsfromlegalandfinancialsector.
#4:SeriousFraudInvestigationOffice(SFIO)
Notanewbody,alreadysetupin2003undercorporateaffairsministry(basedonNareshChandra
report)
IthassolvedSaradhachitfund,Satyamscametc.
ThenwhatsnewinCompaniesAct2013?
SFIOismadeastatutorybody.
ItllhavepowertoSearchseizearrest(untilnow,itcouldonlyexaminedocuments)
SFIOinvestigatorswillhavesamepowersunderCrPC,likeapoliceofficer.
OnceSFIOgetscase,otheragenciescantproceed.
Statepolice,ED,CBIetc.willhavetohandoverdocuments,witnessandcooperateinfurther
investigation.
2%CorporateSocialresponsibility(CSR)
Underthenewact,Companieswillhavetospend2%oftheirlastthreeyearsaverageprofitonCSR
activities.(e.g.schools,slumredevelopment,chowkidaritopreventjuntafrom
urinating/defecatingaroundrailwaystationetc.)
2%CSRruleappliestoonly
followingcompanies
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Netprofit 5crore(beforetax)
Networth 500crore
turnover 1000core
2%ruledoesntapplytoincomeearnedfromforeignbranchesoftheabovecompanies.
AbovecompanieshavetosetupCSRCommitteemadeupof3boardofdirectors.
Committeewillformulate&monitorCSRpolicy.
SEBIscorporategovernancenorms
2012:AdiGodrejCommittee
2014,Feb:SEBInotifiedthenorms
2014,1stOctober:theseruleswillbecomeeffective.
Theyrunparalleltowhatisalreadygivenundercompaniesact.
Followingdiagramsummarizesitjustwritetwolinesoneachofthemandyouredonewith100200
wordsquestioninmains.
Appendix:Relatedpartytransactions(RPT)
Lengthytopic,notimportantforprelims.Butwillbeimportantfor(MBA)interviewsbecausethis
MarutiSuzukicontroversywilldragonforlong.
MarutiSuzukiIndialtd
majorityshareholder SuzukiJapan
minorityshareholder HDFC,RelianceCapital,ICICI,SBIetc.
2012:StrikeinManesarplant,Haryana.Managerdied,morethan3000crorelostduetohaltin
production.
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Afterthis,Suzuki(Japan)registeredaseparatecompanySuzukiMotors,Gujarattosetupseparate
factoryinMehsana,Gujarat.
SuzukiitselfwillmanufacturethecarsinthisGujaratplant,willhandItovertoMarutiSuzukifor
sellingthroughitsshowrooms.
before
after
MarutiSuzukimanufactured
cars,soldthem=profitto
Suzukiwillkeepprofitoncarmanufacture.
themselves.
Maruti(India)willenduplikeacardistributorcompany=>less
Thentheydistributeddividend
profitforIndiancompany=>lessdividendtoitsminority
toSuzukiandother
shareholders.
shareholders.
Sointhiscase,wevetwoparties
HoldingCompanySuzuki(Japan)thatowns~56%inMarutiSuzukiIndialtd.(Subsidiarycompany).
Nowoneparty(Japan)istakinganaction(ofsettingplantinGujarat),whichwillhavenegative
ramificationfortheinvestorsinotherparty(IndianMaruti).
Thisisonetypeofrelatedpartytransaction.
AspercompaniesAct2013,RelatedpartytransactionsrequirevotingapprovalfrommajorityOFthe
minorityshareholders.Therefore,Suzukihasdecidedfollowing:
Firsttheylldoroadshowsandseminarsforawarenessgenerationamongshareholders(aboutthe
benefitsofGujaratplant)
(Rumors)TheyhaveevenhiredinvestmentbankerstoinfluencetheFIIswhoownsharesinMaruti
SuzukiIndia.
VotingwillbedoneprobablyinSeptember2014sAGM
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Atthattime,Suzukicantvote(becausemajorityshareholder)butIFfromtheremaining
shareholders,if3/4thvoteinfavor,thenSuzukicanproceedinsettingupGujaratplant.
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