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Sunday 6 July 2014

Company law amendments - Series IV

In the fourth series of company law amendments, I am posting some more sections which also includes Director amendments. You can read these amendments both in paragraph and tabular form.


Audit committee
The  section  177 of 2013 Act acknowledges the significance of an audit committee and entrusts it with extra roles and responsibilities.
Though, the fact that the 2013 Act is not wholly in accord with the requirements of clause 49 of the equity listing agreement, cannot be unseen. Whereas most of the requirements including establishment of a ‘vigil mechanism’ for directors and employees to report real concerns, that are similar to the requirements of clause49 of the equity listing harmony have been incorporated in the 2013 Act, the differences are as follows:
                        As per the 2013 Act, the audit committee should have majority of independent directors.
                        Chairman of the audit committee need not be an independent director.
                        A majority of the members of the audit committee should be financially literate, i,e. should have the capability to read and understand the financial statements.
                        Every listed company and the following class (es) of companies as set in the draft rules should establish a vigil mechanism for directors and employees to report real concerns such as :*

- Companies which accept deposits from the public
- Companies which have borrowed money from banks and public financial institutions over and above fifty crore rupees
Nomination and remuneration committee and stakeholders relationship committee
The section 178(1) of  2013 requiring constituting the nomination and remuneration committee by every listed company and the following group of companies as set in the draft rules:
(A) Every listed company
(B) Every other public company that has a paid-up capital of 100 crore INR or more or which has, in cumulative, outstanding loans or borrowings or debentures or deposits over and above 200 crore INR.
The Nomination and Remuneration Committee is required to make and suggest to the Board of Directors, the company’s policies, regarding the remuneration for the directors, key managerial personnel and other employees, criteria for determining qualifications, positive attributes and independence of a director.
In addition as per the section 178(5) of 2013 Act, a board of a company that has in excess of 1000 shareholders, debenture-holders, deposit-holders and any other security holders at any time during a financial year is required to comprise a Stakeholders Relationship Committee.
Contributions to charitable funds and political parties
As per the section 181 of 2013 Act the authority of making contribution to ‘bona fide’ charitable and other funds is planned to be available to the board subject to certain limits. As per the existing requirement of section 293 of the 1956 Act, such power could only be exercised in the general meeting in case of public companies and subsidiaries of public companies as per the 1956 Act.
In addition,  according to the section 182 of 2013 Act, the limits of contribution to political parties is proposed to be extended  to  7.5% of the average net profits during the three immediately preceding financial years  from the existing limit of 5% under the 1956 Act.
Disclosure of interest by director
The  section 184 of  2013 Act sets  similar requirements regarding the disclosure of interest by the director as contained in the existing section 299 of the 1956 Act. The barely alteration that could be identified is where a contract or arrangement entered into by the company without disclosure of interest by director or with participation by a director who is concerned or interested in any manner, directly or indirectly, in the contract or arrangement, shall be voidable at the choice of the company.
Loans and investments by a company
The section 186 of  2013 Act mentions  that companies can make investments only through two layers of investment companies subject to exceptions which includes company registered outside India. There are no such restrictions which are currently imposed under the 1956 Act.
Further, the exemption available from the provisions of section 372A of the 1956 Act to private companies as well as loans or investment given or made by a holding company to its subsidiary company are no longer available under the 2013 Act.
Related party transactions
Most of the provisions under Section 188 of 2013 Act are pretty similar to the requirements under sections 297 and 314 of the 1956 Act. Some of key changes envisaged in the 2013 Act include the following:
                        Need for central government sanction has been done away with.
                        The 2013 Act has widened the sphere of transactions such as leasing of property of any type, appointment of any agent for purchase and sale of goods, material, services or property.
                        Cash at current market price has now been substituted with ‘arm’s length transaction’ which has been defined in the section.
                        Transactions entered into with associated parties now to be included in the board’s report along with explanation for entering into such contracts and arrangements.
                        Penalty for contravention of the provisions of section 297 was covered in general provisions in the 1956 Act. However, this is now covered specifically in the section itself which now extends to imprisonment.
                        Central government may set extra conditions.

Key Points
S.No.
Particulars
As per Companies Act 1956
As per Companies Act 2013
1
Vacation of office of Director
Director shall vacate his office, if he fails to attend all the meeting of board for consecutive period of three months
Director shall vacate his office, if he fails to attend all the meeting of board for consecutive period of 12 months
2
Resignation of director
No fact of resignation required in the next AGM of the company
In case of resignation of any director, the board should place the fact of such resignation in next general meeting of the company
3
Nomination and remuneration committee and stakeholders relationship committee
No provision regarding this in old companies act
The section 178(1) of  2013 Act requiring constituting the nomination and remuneration committee by every listed company and the following group of companies as set in the draft rules. In addition as per the section 178(5) of 2013 Act, a board of a company that has in excess of 1000 shareholders, debenture-holders, deposit-holders and any other security holders at any time during a financial year is required to comprise a Stakeholders Relationship Committee
4
Contributions to charitable funds and political parties
The authority of making contribution to ‘bona fide’ charitable and other funds could only be exercised in the general meeting in case of public companies and subsidiaries of public companies
The authority of making contribution to ‘bona fide’ charitable and other funds is planned to be available to the board subject to certain limits
5
Limits of contribution to poliitical parties
The limits of contribution to political parties is  5%
The limits of contribution to political parties is proposed to be extended  to  7.5% of the average net profits during the three immediately preceding financial years
6
Disclouse of interest by director
Contract or arrangement entered into by the company without disclosure of interest by director or with participation by a director who is concerned or interested in any manner, directly or indirectly, in the contract or arrangement, shall be not be voidable at the choice of the company
Contract or arrangement entered into by the company without disclosure of interest by director or with participation by a director who is concerned or interested in any manner, directly or indirectly, in the contract or arrangement, shall be voidable at the choice of the company
7
Loans and investments by a company
Companies can make investments without such restrictions
Companies can make investments only through two layers of investment companies subject to exceptions which includes company registered outside India
8
Related party transactions - CG approval
Approval of central government required
CG approval is no longer required
9
Related party transactions - method
Cash at current market price
Arm's length transaction
10
Transactions with associated parties
Transactions entered into with associated parties not to be included in the board’s report
Transactions entered into with associated parties now to be included in the board’s report



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