Volume 5, Issue 2

20 September 2013

Business Alert
Ministry of Corporate Affairs notifies 98 sections of the Companies Act, 2013

The Companies Bill, 2012 received the President’s assent on 29 August 2013 and became the Companies Act, 2013 (new Act). The new Act was published in the Official Gazette on 30 August 2013. 

On 12 September 2013, 98 sections of the new Act came into force after being notified by the Ministry of Corporate Affairs (MCA).  A large number of sections that have been made effective do not require rules for effective compliance. In other words, these sections do not require statutory/regulatory consultation or prescription of relevant rules/forms. The remaining sections of the new Act will become effective on dates as may be appointed by the Central Government by notification in the Official Gazette.

Key highlights of certain sections that have been brought into force under the new Act

  1. Definitions

The following new definitions have been notified:

  • Associate Company and Unlimited Company
  • Authorised Capital or Nominal Capital, Issued Capital, Subscribed Capital and Called-up Capital
  • Charge
  • Chartered Accountant and Cost Accountant
  • Chief Executive Officer, Chief Financial Officer
  • Control
  • Expert
  • Financial Institution
  • Financial Statements
  • Global Depository Receipt
  • Promoter, Whole-time Director and Key Managerial Personnel
  • Notification
  • Ordinary and Special Resolution
  • Postal Ballot and Voting Right
  • Register of Companies
  • Related Party
  • Small Company
  • Turnover
  • Tribunal
  1. Private company (section 2(68))
  • A private company can now have up to a maximum of 200 members. The Companies Act, 1956 (existing Act) limits the number to 50.
  • Restriction to invite the public to subscribe to shares and debentures is now extended to include all types of securities.
  1. Subsidiary company not to hold shares in its holding company (section 19)
  • A subsidiary company can hold shares in its holding company as a trustee, even if the holding company or subsidiary is a beneficiary of the same. Under the existing Act, this was not allowed if the holding or the subsidiary was beneficially interested in the trust.
  • This restriction in holding shares of its holding company is now imposed on a ‘company’ as against a ‘body corporate’ under the existing Act.  It may also be noted in this context that the definition of subsidiary has been expanded to include investment by way of preference shares. 
  1. Issue of securities
  • The new Act clearly provides the manner in which public and private companies can issue securities (section 23).
    Powers of the Securities and Exchange Board of India (SEBI) to administer the provisions of the new Act related to a listed company and a company that intends to get its securities listed, have been extended (section 24).
    Every company making a public offer will now be required to issue securities only in dematerialised form with no monetary threshold (section 29).
  • Even where a prospectus is published as a newspaper advertisement, it will be required to include the contents as mentioned in the Memorandum of Association (section 30).
    Scope of liability in case of mis-statements in the prospectus has been expanded (sections 34 and 35). 
  1. Transfer and transmission of securities (section 58)
  • A company is now required to inform about refusal to register securities (as against only shares in the existing Act) within 30 days (as against 2 months in the existing Act) to the transferor and transferee or concerned person in relation to transmission.
  • Power to prefer an appeal is now restricted only to a transferee.
    Time for making an appeal is reduced/streamlined.
    Contravention of the order of the Tribunal is now a non-compoundable offence and the penalty has been enhanced. 
  1. Buy-back (section 70)
  • Default in complying with the provisions related to declaration of dividend also prohibits a company from buying back its own shares.  
  • Prohibition of buy-back in case of default in repayment of deposit or interest, redemption of debentures or preference shares, etc. is no longer absolute.  Buy-back is permitted provided the default is rectified and three years have elapsed after ceasing of such default.
  1. Management and administration
  • The Board is expressly authorised to convene an extraordinary general meeting (section 100). 
    The explanatory statement with respect to every general meeting must now also specify the nature of concern or interest, whether financial or otherwise, of every director, manager (if any), key managerial person and their relatives (section 102).
  • Quorum for a general meeting in public companies is now proportional to the number of members in that company and not five as in the existing Act (section 103).
    Eligibility criteria for requisition of circulation of members’ resolution have been modified (section 111).
  1. Central Government to prescribe accounting standards (section 133)
  • The Central Government may prescribe accounting standards as recommended by the Institute of Chartered Accountants of India (ICAI) in consultation with and after examination of the recommendations made by the National Financial Reporting Authority (NFRA).
  • With respect to accounting standards, the role of the NFRA is limited to advising the Central Government or examining the accounting standards prescribed by ICAI.
  • The MCA has clarified vide its notification dated 13 September 2013 that until the accounting standards are not notified by the Central Government under the new Act, the existing accounting standards notified under the Companies Act, 1956 shall continue to apply.
  1. Appointment and qualification of Directors (sections 161 and 163)
  • A person who fails to get appointed as a Director in a general meeting cannot be appointed as an Additional Director.
    An Alternate Director to an Independent Director should also satisfy the criteria set out for an Independent Director.
    Subject to Articles, the Board can appoint a director nominated by any institution in pursuance of any law or agreement as a Nominee Director.
  • The person to be appointed as the Alternate Director shall be a person other than the person holding any alternate directorship for any other director in the company. However, a Director of the company may act in dual capacity, i.e., for himself and as an Alternate Director for any other director of the company.
  • The provision related to the appointment of directors to be voted individually shall be applicable to all companies, including private companies.
  • Articles of a private company may now provide for appointment of directors by way of proportional representation.
  1. Restrictions on powers of the Board (section 180)
  • Section 293 of the existing Act, which requires that certain powers be exercised by the Board only with the consent of the shareholders in a general meeting, is now applicable to all companies instead of only a public company and its subsidiary.  Also, shareholders will now need to pass a special resolution and not an ordinary resolution as required under the existing Act.
  • Approval of a general meeting is no longer required in case of compulsory acquisition of any undertaking, property or premises.
  1. Political contributions (section 182)
  • Limits for political contributions by a company have been changed.  These should now not exceed 7.5% of the average net profit of the company during the immediately preceding three financial years (as against 5% under the existing Act).
    The punishment for contravention has been enhanced.
  1. Loans to Directors (section 185)
  • Except by passing a special resolution, no company, whether public or private, can give any loan (including loan represented by book debt) or provide any security or guarantee in connection with a loan to a Director or any other person in whom he is interested.  Accordingly, the requirement of having to approach the Central Government is done away with.
  • However, a company can give a loan to its managing director/whole-time director without shareholders’ approval if the loan is being given as part of the condition of service extended by the company to all its employees.
  • The punishment for contravention has been increased and the company and the concerned director shall be liable for punishment and not any other person, even if he is knowingly party to default.
  1. Restriction on non-cash transactions involving Directors (section 192)
  • Except with the approval in a general meeting, a company cannot enter into any arrangement by which a Director, either of the company or of its holding company, or any person connected to him can acquire assets for consideration other than cash from the company and vice versa.
  1. Forward dealings and insider trading (sections 194, 195)
  • The new Act provides for prohibition on insider trading and forward dealings in securities of a company by its key managerial personnel. 
  1. National Company Law Tribunal (sections 407–414)
  • The provisions related to the constitution of the National Company Law Tribunal and Appellate Tribunal as well as those related to the qualifications of its president/chairperson and members, selection of members, term of office, salary, allowances and other terms and conditions of service of members have been brought into effect.  

The following table summarises the sections of the Companies Act, 2013 that have been made effective from 12 September 2013:

  Section Name
Chapter 1 Preliminary
2 Definitions (except 2, 7, 13, 23, 29 sub-clause(iv), 31, 41, 42, 47, 48, 62, 67 sub-clause(ix), 83, 85, 87 proviso and explanation (d))
Chapter 2 Incorporation of the Company and Matters Incidental Thereto
19 Subsidiary company not to hold the shares in the holding company
21 Authentication of documents, proceedings and contracts
22 Execution of acts of exchange, etc.
Chapter 3 Prospectus and Allotment of Securities
23 Public offer and private placements (except clause (b) of sub-section 1, sub-section 2)
24 Power of Securities and Exchange Board to regulate issue and transfer of securities, etc.
25 Document containing offer of securities for sale to be deemed prospectus (except sub-section 3)
29 Public offer of securities to be in dematerialised form
30 Advertisement of prospectus
31 Shelf prospectus
32 Red herring prospectus
33 Issue of application forms for securities (except sub-section 3)
34 Criminal liability for mis-statements in prospectus
35 Civil liability for mis-statements in prospectus (except sub-section 1 clause (e))
36 Punishment for fraudulently inducing persons to invest money
37 Action by affected persons
38 Punishment for personation for acquisition, etc., of securities
39 Allotment of securities by company (except sub-section 4)
40 Securities to be dealt with in stock exchanges (except sub-section 6)
Chapter 4 Share Capital and Debentures
44 Nature of shares or debentures
45 Numbering of shares
49 Calls on shares of same class to be made on uniform basis
50 Company to accept unpaid share capital, although not called up
51 Payment of dividend in proportion to amount paid-up
57 Punishment for personation of shareholder
58 Refusal of registration and appeal against refusal
59 Rectification of register of members
60 Publication of authorised, subscribed and paid-up capital
65 Unlimited company to provide for reserve share capital on re-registration
69 Transfer of certain sums to capital redemption reserve account
70 Prohibition for buy-back in certain circumstances (except sub-section 2)
Chapter 6 Registration Charges
86 Punishment for contravention
Chapter 7 Management and Administration
91 Power to close register of members or debenture holders or other security holders
100 Calling of extraordinary general meeting (except sub-section 6)
102 Statement to be annexed to notice
103 Quorum for meetings
104 Chairman of meetings
105 Proxies (except sub-section 1 (third and fourth proviso),sub-section 7)
106 Restriction on voting rights
107 Voting by show of hands
111 Circulation of members' resolution
112 Representation of President and Governors in meetings
113 Representation of corporations at meeting of companies and of creditors (except sub-section 1 (clause b))
114 Ordinary and special resolutions
116 Resolutions passed at adjourned meeting
Chapter 8 Declaration and Payment of Dividend
127 Punishment for failure to distribute dividends
Chapter 9 Accounts of Companies
133 Central Government to prescribe accounting standards
Chapter 11 Appointment and Qualifications of Directors
161 Appointment of additional director, alternate director and nominee director (except sub-section 2)
162 Appointment of directors to be voted individually
163 Option to adopt principle of proportional representation for appointment of directors
Chapter 12 Meeting of Board and its Powers
176 Defects in appointment of directors not to invalidate actions taken
180 Restrictions on powers of Board
181 Company to contribute to bona fide and charitable funds, etc.
182 Prohibitions and restrictions regarding political contributions
183 Power of Board and other persons to make contributions to the national defence fund, etc.
185 Loan to directors, etc.
192 Restriction on non-cash transactions involving directors
194 Prohibition on forward dealings in securities of company by a key managerial personnel
195 Prohibition on insider trading of securities
Chapter 13 Appointment and Remuneration of Managerial Personnel
202 Compensation for loss of office of managing or whole-time director or manager
Chapter 22 Companies Incorporated Outside India
379 Application of Act to foreign companies
382 Display of name, etc., of foreign company
383 Service on foreign company
386 Interpretation (except clause (a))
Chapter 23 Government Companies
394 Annual reports on Government companies
Chapter 25 Companies to furnish Information or Statistics
405 Power of Central Government to direct companies to furnish information or statistics
Chapter 27 National Company Law Tribunal and Appellate
407 Definitions
408 Constitution of National Company Law Tribunal
409 Qualification of President and Members of Tribunal
410 Constitution of Appellate Tribunal
411 Qualification of Chairperson and Members of Appellate Tribunal
412 Selection of Members of Tribunal and Appellate Tribunal
413 Term of office of President, Chairperson and other Members
414 Salary, allowances and other terms and conditions of service of Members
Chapter 28 Special Courts
439 Offences to be non-cognizable
443 Power of Central Government to appoint company prosecutors
444 Appeal against acquittal
445 Compensation for accusation without reasonable cause
446 Application of fines
Chapter 29 Miscellaneous
447 Punishment for fraud
448 Punishment for false statements
449 Punishment for false evidence
450 Punishment where no specific penalty or punishment is provided
451 Punishment in case of repeated default
452 Punishment for wrongful withholding of property
453 Punishment for improper use of "Limited" or "Private Limited"
456 Protection of action taken in good faith
457 Non-disclosure of information in certain cases
458 Delegation by Central Government of its powers and functions
459 Powers of Central Government or Tribunal to accord approval, etc., subject to conditions and to prescribe fees on applications
460 Condonation of delay in certain cases
461 Annual report by Central Government
462 Power to exempt a class or classes of companies from provisions of this Act
463 Power of Court to grant relief in certain cases
467 Power of Central Government to amend Schedules
468 Power of Central Government to make rules relating to winding up
469 Power of Central Government to make rules
470 Power to remove difficulties