Category: companies act

4 steps to effective interactions between CA-CS for smooth audit

Statutory audit for a business is both a boon and a bane, with only the time horizon separating the two. Even the most favourably disposed will consider going through audit a pain as it involves additional work, requires work discipline and demands explanations for all deviations. Even at a later date benefits do not ‘emerge’, for absence of problems related to the audit period is the only gain.

Audit-pain can grow exponentially when two experts have a differing view on a given compliance issue. Often the difference could be between the company secretary who has implemented a given business decision and the statutory auditors who feels otherwise. These differences can lead to missed timelines, lost business opportunities and additional costs. Pre-empting differences or when differences emerge addressing them at early stages is the most viable way out. In practice this translates to having these four steps in place:

  1. Scheduled meetings at predefined intervals, say each quarter or half-year, without any specific agenda. This can be a good forum for not only strengthening their personal relationship, but also nipping any issues as they crop up.
  1. Identifying potentially contentious issues before taking decision and involving the two professionals in the decision making process. Illustrations of such issues can be private placement of shares, capital restructuring, using new borrowing instruments and affecting managerial compensation changes among others
  1. Once a difference has cropped up, recognize the difference and plan to resolve it. This involves documenting the difference and its implications as a preparatory step to the meeting for resolution.
  1. Prudence demands that a backup plan be agreed on identifying what will be the planned action should the situation turn unfavourable, which is agreed to between the two professionals.

As in all issues involving interpersonal relationship, while processes help avoid or minimize issues, the perfect solution is in the parties involved taking an objective view and use the cushion of personal goodwill to resolve the difference.

Gist of regulatory changes introduced in the Companies Act 2013 in February 2015

03/03/2015- General circular 03/2015: Clarification in relation to filing of Form DIR-11& DIR-12 under the CA 2013 In the absence of authorised signatories, even after resignation as a director, the resigned director is permitted to sign DIR- 12 (Particulars of appointment of directors and the key managerial personnel and the changes among them) to facilitate compliance.

24/02/2015- The Companies (Declaration and Payment of Dividend) Amendment Rules, 2015 Inserts a footnote missed out in the original circular G.S.R 397€ dated 12th June, 2014 24/02/2015 –The Companies (Registration Offices And Fees) Amendment Rules, 2015 Changes made: (a)In rule 10, after sub-rule (6), the following sub-rule shall be inserted, namely:-

“7. Any further information or documents called for, in respect of application or e-form or document, filed electronically with the Ministry of Corporate Affairs shall be furnished in Form No. GNL-4 as an addendum”

(b) In the Annexure, after Form No. GNL- 3, the following Form shall be inserted, namely:-Form No.GNL-4

16/02/2015- The Companies (Indian Accounting Standards) Rules, 2015 Indian Accounting Standard (Ind AS) mandated for companies whose securities are listed in stock exchange and net worth in excess of Rs.500 crores. With effect from FY 2016-17

13/02/2015 -The Companies (Removal of difficulties) Order, 2015 Companies (Removal of Difficulties) Order, 2015 has been released by MCA dated February 13, 2015 to remove the anomaly in definition of small company – Section 2(85) and allow banking company or an insurance company or a housing finance company to acquire securities in its ordinary course of business- Section 186(11)(b)

Section 2(85) definition of a small company modified. Small company needs to satisfy all the following criteria:

  1. Other than a public company,
  2. Paid up capital does not exceed fifty lakh rupees (or higher amount prescribed),
  3. Turnover does not exceed two crore rupees (or higher amount prescribed)
  4. Not a holding or subsidiary company of any company (including a private of public company) 5. Not a company registered under Section 8 of this Act
  5. Not a company or body corporate governed by any special Act. Section-186 amended to exclude acquisitions made by a banking company or an insurance company or a housing finance company, making acquisition of securities in the ordinary course of its business from the provisions of Section- 186 (1) related to making investments through more than two layers of investment companies.

03/02/2015- General circular 01/2015: Constitution of a high level committee for the progress of CSR policies by companies under Section 135 High Level Committee constituted to:

  1. Recommend suitable methodologies for monitoring compliance of the provisions of CSR by the Companies.
  2. Suggest measures to be recommended by the Government for adoption by the companies for systematic monitoring and evaluation of their own CSR initiatives.
  3. Make suitable recommendations, if a different monitoring mechanism is warranted for Government Companies undertaking CSR.
  4. Identify strategies for monitoring and evaluation of CSR initiatives through expert agencies.    

 

Veto Rights and Good Governance: Are the two in Sync?

One of the most debatable questions in CimplyFive’s First Survey on Secretarial Practice conducted in July 2016 was on the practice of taking Director’s consent for holding Board Meeting at shorter notice.

Though this is not a statutory requirement, our survey indicated that 81% of the respondents revealed that they took Directors consent for holding Board Meetings at shorter notice. Taking consent from all participants even though it is not mandatory seems to be a desirable practice as it meets the basic yardstick of good governance, which is to enable all the eligible members to participate in the decision making process. The moot question is, does a deeper scrutiny of this practice stand the test of good governance?

When we dig deeper, an unintended implication of this practice has the effect of providing a veto right to each and every director, as the failure of even a single director to give their consent has the effect of deferring the Board Meeting, even if every other director wants to have it.

In this context, it is worth noting an interesting observation made by the Robert’s Rules of Order, first published in 1876 which is considered the Bible of Parliamentary procedures, on getting consent from members. The options available are:  

All members, or  

All members present, or  

All members present and voting.

The Book reasons that getting consent from all the members or all members present has the effect of treating a vote to abstain or inability to vote for whatever reason, as a negative vote. Given this effect, this basis is not to be used unless the matter is of such grave importance that a positive consent from all the members is considered essential. Given this backdrop, it is worth examining how and why veto rights emerged, and is it an appropriate instrument for Corporate Board Meetings.

Veto rights or negative affirmative rights are basically negation of the power of majority to take decisions. This is a right not normally accorded in the statute books, which uphold the principles of democracy and endorses decision made by the majority. The rare exceptions where the rule of majority is negated by the statutes is when the rights of a minority group is adversely affected or a basic principle of their association is being modified, altered or substantially changed.

In sharp contrast, veto rights are a standard feature of private Shareholder Agreements that are used mainly by financial investors taking a stake in start-ups to protect their large financial outlay they bring to the table. Covering areas of Board representation, Approval for Financing plans and CXO appointments, Anti-dilution provisions and Shareholder Reward sharing mechanisms like Right of First Offer (ROFO), Right of First Refusal (ROFR), Tag along rights and Drag-along rights, veto rights have a logical and justified place, as in their absence it will be difficult for start-ups with ideas to attract capital, despite the knowledge that capital without entrepreneurs will remain idle cash. Hence, for dreams to be realized and idle cash to become riches, veto embedded in shareholder agreements is a valuable conduit.

In contrast to shareholder meetings where ownership rights are to be protected, the Corporate Board is more a body of collective wisdom to guide and run the company, which includes some high-end residual powers that involve day to day running of the company like powers to borrow and appoint representatives to present company’s interest. Given the nature of the Corporate Board, it is worth debating if consent from Directors should be obtained for holding Board Meetings at Shorter Notice.

Gist of regulatory changes in Companies Act, 2013 in the month of July, 2016

14.07.2016

  1. a) Companies (cost records and audit) Amendment Rules, 2016

Highlights of the Amendment are:

  1. Definition of Regulated Sector for Telecommunication Industry expanded to include activities that requires authorization or license issued by the Department of Telecommunications, Government of India under Indian Telegraph Act,1885.
  2. Consent letter and eligibility certificate to be obtained from the Cost Auditor prior to proposing a Cost Auditor for appointment by the Board.
  3. Provision introduced for

          o Removal of Cost Auditor after giving a reasonable opportunity of being heard.

          o Cost Audit Report should be approved by the Board of Directors.

          o Cost Audit Report (CRA-4) to be filled in XBRL format.

19.07.2016

  1. a) Companies (Share Capital and Debentures) Third Amendment Rules, 2016

 

  1. Companies which have defaulted on payment of dividends, repayment of loans or statutory payments were earlier prevented from issuing equity shares with differential rights. After this amendment these restrictions are withdrawn five years after the Company has made good these defaults.
  2. Preferential offer of partly paid up shares at the time of their allotment permitted.  
  3. Companies without Share Capital need to file Form SH-7 for increase in members now.
  4. Secured debentures can be issued by creating a charge on the properties or assets of company’s subsidiaries or its holding company or its associates companies.
  5. Startups (as defined by the Department of Industrial Policy and Promotion) are given additional flexibility for a period of five years from the date of Incorporation to:
  1. Issue Sweat Equity shares up to 50% of its paid-up capital.
  2. Provide ESOPs to promoters or directors, including directors who either  directly or indirectly, holds more than ten percent of the equity shares.

 

  1. b) In exercise of the powers conferred by sub- section (1) of section 381 of the Companies Act, 2013 (18 of 2013)
  • A foreign Airlines Company is now required to submit the following documents to ROC from the FY 2016-17  
  • Latest consolidated financial statements of the parent foreign company.
  • A statement of receipt and payments for its Indian operations for the financial year, duly authenticated by a practicing Chartered Accountant.  

21.07.2016

National Company Law Tribunal Rules, 2016 and National Company Law Appellate Tribunal Rules, 2016

National Company Law Tribunal Rules, 2016 and National Company Law Appellate Tribunal Rules, 2016 is notified with effect from 21.07.2016.

27.07.2016

  1. a) Companies (Incorporation) Third Amendment Rules, 2016
  • Now a natural person shall not be member of more than 1 OPC and the said person shall not be a nominee of more than 1 OPC.
  • Proof of identity and residence of the subscriber are not required to be filed with the ROC at the time of filing application of incorporation of the company, where the subscriber is already having a valid DIN.  
  • Every Company having a website to disclose/publish its name, address of its registered office, the CIN, Telephone number, fax number if any, email and the name of the person who may be contacted in case of any queries.
  • Rule 37 is inserted for conversion of unlimited Iiability company into a limited Iiability company by shares or guarantee.  
  • Forms INC-27 and INC-11 have been amended and new forms for ‘Advertisement to be published in the newspaper for conversion of Unlimited Liability into Limited Liability Company’ and ‘Certificate of Incorporation pursuant to conversion of Unlimited Liability Company into Limited Liability Company’ have been inserted in the principal rules.  
  • Partnership firm can’t be subscriber to the Memorandum of Association
  1. b) Companies (Accounts) Amendment Rules ,2016

A Company which is a subsidiary of another company need not present its Consolidated Financial Statement (CFS) if:

    • Its parent presents CFS
    • Is not listed in any Stock Exchange or has plans to list in a Stock Exchange.
    • Has given notice of its intent not to publish CFS to its members, both with voting and without voting rights and they have not objected to it.  

The Directors’ Report is now required to include highlights of performance and contribution to the overall performance of subsidiaries, associates and joint venture companies instead of a report on their performance and financial position.  

A Cost Accountant both in practice or in employment can be appointed as an Internal Auditor.  AOC-4 form now contains a provision to file revised Financial statements.

  1. c) Special Court under section 435 of the Companies Act, 2013

MCA has designated the ‘Court of Additional Sessions Judge-03, South-West District, Dwarka’ as the Special Court under Section 435 of the Companies Act, 2013 in respect of jurisdiction of National Capital Territory of Delhi for the purposes of providing speedy trial of offences punishable under the Companies Act, 2013 with imprisonment of two years or more under the Companies Act, 2013.  

29.07.2016

MCA has announced relaxation of additional fee and extension of due date for filing of AOC-4, AOC-4 (XBRL), AOC -4(CFS) and MGT-7 for AGM held on or after 01.04.2016 up to 29.10.2016.

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