Compliance and New reporting
requirements under Companies Act 2013 for Listed, Public and Private Companies
I. Compulsory Reporting Requirements
1.
Consolidated
Financial Statement:
Applicable: To all the Companies having one or more
subsidiaries.
Subsidiary includes: Associate Companies and Joint Venture Companies
Crux of the point: In addition to the stand alone
financial statements prepared by the companies a combined
financial statements of the parent company and its subsidiaries is to be
prepared.
Challenges in adhering to the Act:
a.
When there is complex group structure in place.
b.
When the Joint venture companies follow different methods of financial
reporting.
2. Cash flow statement:
Applicable: To all the Companies except one person companies, small companies and dormant companies
Crux of the
point: All the respective companies have to include a Cash
Flow Statement in their Annual Financial Statement.
(Rules are yet
to specify the list of companies)
3.
Reporting on Fraud: Serious Fraud
Investigation Office (SFIO)
Applicable: To all the
Companies on satisfying any one of the following:
-
When the Frauds
are happening frequently or
-
When the fraud
amount involved or is likely to be involved is not less than
o
5% of net profit
or
o
2% of the
turnover of the company for the preceding financial year.
Fraud: Fraud includes corrupt practices, deceit, conflicts of
interest and bribery, also.
4.
Others:
a. Reporting
by Independent Director:
One of the duties of independent director as per
Schedule IV is to report concerns about unethical behaviour, actual or
suspected fraud or violation of the company’s code of conduct.
b.
Re-opening / restatement of Financial Statements:
Voluntary revision
of Financial Statements by Board:
-
The financial
statements can be voluntarily revised based on an application by the Board.
-
The accounts of
only 3 preceding financial years can be revised.
Revision of
Financial Statements by SEBI, Regulatory authorities or Auditors:
-
A legal
framework has been put in place for the SEBI, Regulatory Authorities or Auditors
to apply for restatement of company’s financial statement if needed.
-
There is no time
restriction if the revision has been initiated by the statutory regulatory
authorities.
Challenges in
adhering:
The tax implication has to be
evaluated again by the companies based on the revised financials.
c. Maintenance of Books of Accounts:
The books of accounts and other relevant papers can be maintained in electronic mode in the prescribed manner.
II. Disclosures
1.
Disclosures in the Board of Directors’ Report:
a.
Extract of Annual Return
b.
Number of board meetings
c.
CSR initiatives and policy
d.
Particulars of loans, guarantees,
investments etc.
e. Secretarial Audit Report to be annexed to the
Board’s report
f. Detailed reasons for revision of financial
statements - Board’s duty to send revised financial statements to shareholders
g.
Listed
company to disclose the ratio of the remuneration paid to directorsand
employees.
h. Receipt of commission by a director from the
holding company or subsidiary company
i. Every related party transaction along with the
justification for entering into such transaction has to be disclosed.
j. Additional information in Directors’ Responsibility
Statement
o
For
listed companies - directors to lay down
internal financial controls and ensure such controls are adequate and operating
effectively
o
Principal
business activities, particulars of its holding, subsidiary and associate
companies
o
Details
of shares, debentures and other securities with shareholding pattern
o
Indebtedness
o
Members
and debenture holders with changes therein
o
Promoters,
directors, KMP with changes therein
o
Meetings
of members or class thereof, board and other committees and details of
attendance
o
Penalties
imposed on the company, its directors or officers and details of compounding of
offence
o
Shares
held by FIIs
2.
Disclosures in the Auditor’s Report:
a.
Auditors to conduct
a more integrated audit and to give their opinion on the financial reporting
and internal controls of the Company.
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Sweat Equity Shares:
Meaning: Sweat equity shares are
equity shares issued by a company to its employees or directors at a discount,
or as a consideration for providing know-how or a similar value to the company.
Procedure and conditions to be fulfilled to
issue Sweat Equity Shares:
A
company may issue sweat equity shares of a class
of shares already issued if these conditions are met:
a. The issue of sweat equity shares should be
authorised by a special resolution passed by the company in a general meeting.
b. The resolution should specify the number of shares,
current market price, consideration, if any, and the section of directors
/employees to whom they are to be issued.
c.
A
separate resolution should be passed if the shares to be issued (during any one
year, to identified employees and promotes) is equal to or exceeds 1% of the
issued capital (excluding outstanding warrants and conversion) as stood on the
day of grant of sweat equity shares
d.
The
Explanatory Statement should include the following details:
i.
The
date of the meeting;
ii.
Reasons/justification
for the issue;
iii. The
number of shares, consideration for such shares and the class or classes of
persons to whom such equity shares are to be issued;
iv.
The
value of the sweat equity shares along with valuation report/ basis of
valuation and the price at the which the sweat equity shares will be issued;
v.
The
names of persons to whom the equity will be issued and the person's
relationship with the company;
vi. Ceiling
on managerial remuneration, if any, which will be affected by issuance of such
equity;
vii.
A
statement to the effect that the company shall conform to the accounting
policies specified by the Central Government; and
viii.
Diluted
earning per share pursuant to the issue of securities to be calculated in accordance
with the Accounting Standards specified by the Institute of Chartered
Accountants of India.
e. As on the date of issue, a year should have elapsed
since the company was entitled to commence business.
Listed Company: on Recognized Stock Exchanges
a. SEBI
(Issue of Sweat Equity) Regulations, 2002 has to be followed to issue sweat
equity shares.
Listed Company: on Unrecognized Stock Exchanges
a. Sweat
equity shares can be issued in accordance with such guidelines as may be
prescribed.
b. SEBI
also prescribes the accounting treatment of sweat equity shares. Thus, sweat
equity is expensed, unless issued in consideration of a depreciable asset, in
which case it is carried to the balance sheet.
Unlisted Company:
a.
Unlisted
Companies (Issue of Sweat Equity) Rules, 2003 has to be followed
b.
Sweat
equity shares cannot be issued before one year of commencement of operations.
c.
Unlisted
companies cannot issue more than 15 percent of the paid-up capital in a year or
shares with a value of more than Rs 5 crores - whichever is higher - except
with the prior approval of the central government. If the sweat equity is being
issued for consideration other than cash, an independent valuer has to carry
out an assessment and submit a valuation report.
d. The
company should also give 'justification for the issue of sweat equity shares
for consideration other than cash, which should form a part of the notice sent
for the general meeting'.
e. The
board of directors' decision to issue sweat equity has to be approved by
passing a special resolution at a shareholders' meeting later in the year. The
special resolution must be passed by 75 percent of the members attending voting
for it.
f.
Sweat
equity shares are no different from employee stock options with a one year
vesting period. It is essential when a company is formed, to assure the
financial investors that the knowhow providers will stay on, or for a start-up
with limited resources to attract highly-qualified professionals to join the
team as long-term stakeholders.
g. These
shares are given to a company's employees on favourable terms, in recognition
of their work. Sweat equity usually takes the form of giving options to
employees to buy shares of the company, so they become part owners and
participate in the profits, apart from earning salary.
h. Section
79A of the Companies Act lays down conditions for the issue of sweat equity
shares.
Lock in period:
The Sweat Equity Shares issued
shall be locked in for a period of three
years from the date of allotment.
Issue of Sweat Equity for a consideration other than Cash
If the sweat equity is issued for
consideration other than cash, then company shall comply with following:
- The valuation of the intellectual property or of the know-how provided or other value addition to consideration at which sweat equity capital is issued, shall be carried out by a valuer;
- The valuer shall consult such experts, as he may deem fit, having regard to the nature of the industry and the nature of the property or the value addition;
- The valuer shall submit a valuation report to the company giving justification for the valuation;
- A copy of the valuation report of the valuer shall be sent to the shareholders with the notice of the general meeting;
- The company shall give justification for issue of sweat equity shares for consideration other than cash, which shall form part of the notice sent for the general meeting; and
- The amount of Sweat Equity shares issued shall be treated as part of managerial remuneration .
Placing of Auditors Report
before the Annual General Meeting.
In the General meeting subsequent to the issue of sweat
equity, the Board of Directors shall place before the shareholders, a
certificate from the auditors of the company that the issue of sweat equity
shares has been made in accordance with the Regulations and in accordance with
the resolution passed by the company authorizing the issue of such Sweat Equity
Shares.
Disclosure in Director's Report:
The Board of Directors, shall, inter alia, disclose either
in the Directors' Report or in the annexure to the Director's Report.
Disclosure to include number of shares to be issued, conditions for issue,
pricing formula, the total number of shares arising as a result of issue, money
realised or benefit accrued to the company, diluted Earnings per Share (EPS)
pursuant to issuance of sweat equity shares.
Registers :
The company shall maintain a specified register
Compliance Certificate
A certificate of compliance (with the rules
framed by the authorities) duly signed by the auditors or practising company
secretary should be placed before the shareholders at the annual general
meeting.
Sitting Fee [ Section 310 ]
MINISTRY OF
FINANCE
(DEPARTMENT OF
COMPANY AFFAIRS)
NOTIFICATION
New Delhi,
the, 24th July, 2003
G.S.R. 580(E) .- In exercise of the powers conferred by
sub-section (1) of section 642 of the Companies Act, 1956 (1 of 1956), the
Central Government hereby makes the following rules further to amend the
Companies (Central Government's) General Rules and Forms, 1956,
namely:-
1. (1) These rules
may be called the Companies (Central Government's) General Rules and Forms
(Third Amendment) Rules, 2003.
(2) They shall
come into force on the date of their publication in the Official
Gazette.
2. In Companies
(Central Government's) General Rules and Forms, 1956, for rule 10-B, the
following shall be substituted, namely :-
"10-B
Section 310 - For the purposes of the first proviso to section 310, the amount
of remuneration by way of fee for each meeting of the Board of directors or a
committee thereof, shall be as under:
(a)
|
Companies with a paid-up
share capital and free reserves of Rs.10 crore and above or turnover of
Rs.50 crore and above
|
Sitting fees not to exceed
the sum of twenty thousand rupees
|
(b)
|
Other
companies
|
Sitting fees not to exceed
the sum of ten thousand rupees
|
"
Directors or Relative holding Office or Place of Profit (Sec 314)
In a Nut shell lets us see Sec
314 of the Act read with Director’s Relative (Office or Place of Profit) Rules
2011:
Applicability: It applies to both Directors and Relative of
Directors of any kind of companies
Gist of the Section:
Section
|
Remuneration Limit
|
Procedure involved
|
Sec 314
|
Upto Rs. 20,000
|
Prior Board Approval is
sufficient
|
Sec 314 (1)
|
Rs. 20,000 – Rs. 50,000
|
Prior Board Approval and Share
holders approval in the ensuing General Meeting
|
Sec 314 (2)
|
Rs, 50,000 – Rs, 2,50,000
|
Prior Board Approval and Share
Holders Approval and the Increase in the limit would be valid subject to
Central Government Approval
|
Sec 314 (2)
|
Above Rs. 2,50,000
|
Prior Board Approval, Share
Holders Approval and Central Government Approval
|
Violation of the Section:
-
Sec 314 (1): The relative has to vacate the office in
the ensuing General Meeting.
-
Sec 314 (2): He’ll further have to refund all the
amount received as remuneration from the Company. and has to vacate the office
immediately
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Is Fixed Deposit with Bank an Investment under the Companies Act
1956
Let’s analyse if fixed deposit
with bank is considered to be an investment under the companies act 1956 or not
in different phases:
Phase 1:
In the Companies Act, Section 292,
states certain powers of the Board that is required to be exercised at the
Board meeting only. On an in depth analysis of the same, we can say
The
power to invest the funds of the company (Sec
292 (1)(d))
It is to be exercised only at the board meeting.
Phase 2:
Let us analyse if fixed deposit
forms part of investment. Investment normally means:
-
laying out of money in such a manner that it would
produce some revenue.
-
It can be said that mere deposit of money is not
considered to be an investment and
-
It must be possible to earn an income for a reasonable
length of time. (Hence purchase of property for some purpose other than the
receipt of income is not an investment)
Conclusion:
On analyzing the above it can be said
that placement of surplus of funds by a company in the fixed deposit with the
banks to earn interest income
thereon constitutes investment for the purpose of section 292(1)(d) of the
Companies Act.
Board approval is
required to be obtained in the Board meeting.
Section 383A of the Companies Act: Is it
mandatory to pass a Board resolution for appointment of the Company Secretary:
No, it is not mandatory for the company to
pass a Board resolution for appointment of the Company Secretary. A Company
Secretary can be appointed by the company by giving her an offer letter. The
offer letter has been accepted by the ROC for filing form 32.
Incase of any default on complying with
section 383A of the Companies act the company and every officer of the company
shall be punishable with fine which may extend to Rupees Five Hundred
(presently) during which the default continues.
Hence a resolution in the board meeting is
required to be passed for taking note of the same.
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