Companies Act, 2013 Important provisions which have become effective from 12th September, 2013

Companies Act, 2013 Important provisions which have become effective from 12th September, 2013

The Ministry of Corporate Affairs has notified  12th Septmber, 2013 as effective date for 98 sections of the Companies Act, 2013 (hereinafter referred as ˜the Act™)  vide its notification dated 12th September, 2013.  Certain important provisions (which have become effective) are briefly explained below to ensure timely compliance by the companies.

  • Special resolution for borrowing in excess of paid-up capital and free reserve
    • Section 180 of the Act, inter alia, requires that a company cannot borrow in excess of its paid-up capital & free reserve unless it is approved by special resolution.
    • Section 180 does not exempt a private company. Hence, a private company is also required to pass special resolution if its proposed borrowing with its existing borrowing exceeds its paid-up capital and free reserves.
  • Associate Company
    • Section 2 (6) defines  Associate Company as the company in which another company holds at least 20% of total share capital ( and not only equity capital) or can have significance influence on business decisions due to agreement  or joint venture.
    • As per section 2 (76) Related party includes ˜Associate Company™. Hence, contract with Associate Company will require disclosure/ approval / entry in statutory register as is applicable to contract with a Related party.
  • Expert
    • Section 2 (38) defines an expert as a person who has authority to issue certificate e.g Chartered Accountant, Company Secretary.
    • A stakeholder may claim damage from the expert under the Act. Hence, an expert should take utmost care while issuing certificate/giving advice to a company. An expert should maintain records to defend his position if claim is made against him.
  • Free Reserve
    • Section 2 (43) defines free reserve as amount available for distribution as per the latest audited balance sheet but excludes revaluation reserve and change due to change  in carrying value of its assets/liability routed through profit & loss account or otherwise.
  • Net-worth
    • Section 2 (57), inter alia, includes securities premium account but excludes write back of depreciation in Net-worth.
  • Officer who is in default
    • Section 2 (60) includes Key Managerial Personnel ( i.e MD, CEO, CFO, Company Secretary and other prescribed persons).
    • Hence, Key Managerial Personnel should take utmost care while discharging their respective responsibility to avoid damage claim, penalty and prosecution under the Act.
  • Private Company 
    • Section 2  (68) permits a private company to have total members upto 200 persons.
    • It also excludes restriction of not accepting deposits from public, as section 76 permits only prescribed public company to accept deposit from public.
    • As per circular dated 13th September, 2013, submissions of Memorandum & Articles of Associate of a  private company to be incorporated must have clauses as per section 2 (68).
  • Public Company
    • Section 2 (71) defines public company to  include a private company which is a subsidiary of a public company.  The private company may have specific clauses as provided in section 2 (68).
  • Remuneration
    • Section 2 (78) provides computation of perquisites as per Income-Tax Act.
  • Small Company
    • Section 2 (85) defines a small company as  a private company with paid-up capital not exceeding Rs 50 lakhs or turnover not exceeding Rs 2 cr during previous financial year.
    • Small Company is given  relaxation from complying with certain provisions of the Act.
  • Subsidiary Company
    • Section 2 (87) provides, inter alia, that that if a company hold more than one half of total share capital of other company, then the other company  will be subsidiary of the former company.  Hence, target percentage is more than 50% (and not 51% or more) and holding in total capital including preference shares is to be considered.
  • Authentication of documents, proceedings and contracts 
    • Section 21 provides that any Key Managerial Personnel can sign a document or proceedings requiring authentication or a contract on behalf of the company.  Hence, CFO and CEO (in addition to Company Secretary) can also sign certified true copy of resolution, Memorandum & Articles and other documents.
  • Prohibition on Buy-back of shares
    • Section 70 prohibit buy back of shares through a subsidiary company or through an investment company.
    • It also prohibits buy back of shares if default is made in repayment of Fixed Deposit, interest on Fixed Deposit, redemption of debenture/preference shares, payment of dividend and repayment of term loan or interest thereon to a financial institution/bank. However, it excludes default in payment of working capital facility/interest from a bank.
  • Explanatory Statement for special business
    • Section 102, inter alia, provides that an explanatory statement for a special business must provide nature of interest of every director, Key Managerial Personnel and their relatives.
    • If the proposed transaction is with a company, then shareholding in other  company by its promoter, directors, Key Managerial Personnel is to be stated in the statement provided it exceeds 2% in other company.
  • Quorum for shareholders™ meeting
    • Section 103, inter alia, provides for quorum of 5 to 30 persons depending upon number of members of a public company. For a private company, quorum will be 2 members.
  • Chairman of a general meeting
    • Section 104 provides that members present at the meeting will appoint one of them as Chairman for the meeting on show of hands unless the articles of the company provides otherwise.
    • It is advisable to amend articles to provide that the Chairman of the Company™s Board will be the Chairman of a general meeting.
  • Appointment of Additional Director
    • Section 161 permits appointment of a person as an additional director provided that the person has not failed to get appointment as a director in a general meeting.
  • Contribution to Political parties.
    • Section 182 permits a company which is in existence for not less than 3 financial years – to contribute, directly or indirectly,  an amount not exceeding 7.5 % of the last 3 years average profit to  political parties.
  • Loan to Directors etc
    • Section 185 prohibit loan including any loan represented by book debt to its directors or to any other person in whom the director is interested or give guarantee or security for a loan taken by them unless it is given to MD or whole time director as per terms and conditions / scheme applicable to all its employees. The scheme should be approved by a special resolution.
  • Restriction on non-cash transaction with directors
    • Section 192 prohibits purchase or sale of asset from/to the company™s director or director of its holding company, subsidiary company or associate company unless it is approved by shareholders at general meeting.
  • Prohibition on forward dealings in securities of the company by the director and Key Managerial Personnel
    • Section 194 prohibits a company™s director and its KMP to do forward trading in the company™s securities.

Please note that the above is only a summary of important provisions of the Companies Act, 2013 which have become effective from 12th September, 2013. For details, please no through the Act, notification and circular.

Tags: Companies ActCompanySecretaryCorporate Affairs MinistryFinancial servicesFixed DepositIncome taxPrivately held companyPublic companySubsidiary

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Uday N. Kajaria | Chartered Accountant

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