Changes Specifically affecting Private Limited Companies

1. Changes Specifically affecting Private Limited Companies Anand Banka Partner, Talati & Talati

2. What is Company? • Latin word • Com = with or together • Pains = bread • OPC?

3. Salient Features • Made effective in Phased manner • 98 sections on 12 Sept 2013 • Remaining on 01 April 2014 • Rules – the game changer!! • Flexibility to notify sections separately via Rules

4. Definition • No. of members increased from 50 to 200 • Joint shareholders to be treated as one member • Employees or Ex-employees are not included in the number of members • Minimum share capital of Rs. 1,00,000

5. Commencement of Business • Company not to commence business unless • Declaration filed with ROC that every subscriber to the MOA has paid the value of shares agreed to be taken by him • A verification of its registered address has been filed with ROC • If declaration not filed within 182 days from date of incorporation, Registrar would initiate action to remove the name of the company

6. Further issue of shares • Pre-emptive right of existing shareholder • Minimum 15 days and max 30 days for acceptance of offer • Notice of offer of rights shares can be dispatched through electronic mode • If not right issue then - • To any person, if authorised by Special Resolution • At a price to be determined by registered valuer

7. Bonus shares • Sec 205 (3) of 1956 Act permitted capitalisation of profits or reserves for issuing bonus shares • Thus, a company can issue bonus shares by capitalisation of revaluation reserve • Supreme court decision in Bhagwati Developers v. Peerless General Finance & Investment Co (2005) • SEBI (ICDR) Regulations, 2009 prohibits issue of Bonus shares by capitalisation of revaluation reserves • Now, Companies Act 2013 also prohibits issuing Bonus shares by capitalising reserves created by revaluation of assets

8. Annual Return • To be signed by Director and Company Secretary • If no CS, then by a CS in practice • If paid up capital > 5 crores AND Turnover > 25 crores • To be certified by a CS in practice • Stating that the company has complied with all the provisions of this Act • Penalty on CS for non-compliance • Rs. 50,000 to Rs. 5 lacs

9. Consolidation • SEBI mandated consolidation • Only for Listed companies • Subsidiary, Associate and JV • Companies Act 2013 mandated Consolidation • For all companies, private or public • Subsidiary (incl. Associate and JV) • AS 21 was issued in 2001 • Practical exposure to SMP? • IFRS: Private Companies net worth in excess of Rs. 500 crores

10. Inter-corporate Loans (Sec 185) No company shall (directly or indirectly)- • Advance any loan (or give security or guarantee in relation to any loan) • Including loan represented by a book debt • To its director or any other person in whom the director is interested • Director of holding company • Partner of director • Firm in which director or relative is a partner • Pvt company in which director is a director or member • Any body corporate in which >= 25% voting power held by such director • Any body corporate BOD is accustomed to act in accordance with directions of BOD of lending company • 5 lacs to 25 lacs • Imprisonment upto 6 months

11. Contd… • Not applicable to – • Loans to MD or WTD • Employee loan • By special resolution • In ordinary course of business, provided interest is charged @ bank rate declared by RBI

12. Notification 19 Nov 2013 • Sec 372A applicable till Sec 186 is notified 14 Feb 2014 • Sec 372A exempts loans, guarantees, security or investment by holing company to its wholly owned subsidiary • Sec 185 prohibits guarantee, security by holding company in respect of loan taken by subsidiary company • Hence, till Sec 186 is notified, Guarantee, security provided by holding to its subsidiary in respect of loans made by banks or financial institutions shall be exempted

13. Rules • From 12 Sept to 31 March 2014 • As per the interpretation, H Co cannot give loans to S Co • 1 April 2014 onwards… • Any loan made by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company is exempted from the requirements under this section • Provided that such loans are utilised by the subsidiary company for its principle business activities

14. Investments (Sec 186) • Investments to be made through not more than 2 layers of investment companies • Exemptions • Company incorporated outside India • For the purpose of meeting the requirements under any law or under any rule or regulation • 25,000 to 5 lacs • Imprisonment upto 2 years

15. Corporate Social Responsibility • Applicability • Net Worth >= 500 Cr • Turnover>= 1000 Cr • Net Profit >= 5 Cr • To spend 2% of Avg NP of last 3 years • 3 Directors (incl. Independent Director) • 2 Directors allowed • Independent director not required

16. Director • Atleast one director to be resident in India for more than 182 days in a calendar year • Maximum directorships = 20 companies (max 10 public companies) • Previously – 15 public companies (Pvt companies excluded)

17. Disqualification of Director • Convicted of any offence and sentenced to imprisonment for 7 years or more • Convicted of any offence and sentenced to imprisonment for not less than 6 months, and 5 yrs has not elapsed since • Convicted of offence of dealing with related party transactions at any time during the preceding 5 years • Not obtained Director Identification Number • Is a director of a company whether public or private which (Sec 274 (1) (g) of Companies Act.956) • Has not filed annual accounts or returns for any continuing 3 years • Has failed to repay on due date its deposit or interest thereon, or redeem it debenture or pay dividend for one year or more

18. Related Party Transactions (sec 188) Arms-length transaction Not an Arms-length transaction Paid up capital < 1 Crore Paid up capital > 1 Crore Sec 188 not applicable All transactions All other transactions • Exceeds 5% of T/o or 20% of NW, whichever is higher • Appt at place of profit with remuneration > 1 lakh p.m. • 3. Remuneration for underwriting > 10 lakhs SPECIAL RESOLUTION Board Resolution

19. 25,000 to 5 lacs RPT (Sec 188) Issues • Special resolution (Votes for = 3 * votes against) • Pvt Company with 2 members who are also directors? • Interested directors cannot vote • Interested shareholders cannot vote • Hence, transaction possible only if it is at arm’s length • RPT definition different from AS 18, as in • KMP and directors of holding, subsidiary, associate and their relatives • Senior management of holding, subsidiary, associate and their relatives

20. Appointment of KMP 1 lac to 5 lacs • Paid up share capital >= 5 crores • MD/ CEO/ Manager/ WTD • Whole-time Company Secretary • CFO • Can be a KMP of only one company at the same time, except its subsidiary company • Chairperson to be different from MD/ CEO, unless exempted by articles of association • Term of MD = 5 years

21. Rules • Every listed company and • every other public company • having a paid-up share capital >= 10 Crores • shall have whole-time key managerial personnel

22. Depreciation • Component Accounting • Depreciation based on useful life • Example: P&M • Old – 4.75% i.e. 20 years • New – 15 years Change in the useful life Used <= 15 years Used >= 15 years Charge to retained earnings Depreciate over balance useful life

23. Rotation of Auditors • Proprietor = max 5 years • Firm = max 2 tenors of 5 years each • Cooling period of 3 years • Confusion: what if resign in the 9th year? • Auditor cannot provide other services • OPC and small company excluded from rotation

24. Rules • all private limited companies having paid up share capital of rupees twenty crore or more; OR • having public borrowings from financial institutions, banks or public deposits of rupees fifty crores or more

25. Part IX of 1956 Act • Sec 366 to Sec 374 of 2013 Act corresponds to Part IX • Partnership to Company • LLP to Company? • LLP Act, 2008 – no provision • Part IX – no provision • As per Companies Act, 2013 – LLP, Partnership both can be converted into company

26. Acceptance of Deposits • Companies (Acceptance of Deposits) Rules, 1975 • Definition of deposit excludes – • Amount received from Director or relative of the director or from member • Companies (Acceptance of Deposits) Rules, 2014 • Definition of deposit excludes – • Amount received from Director • Hence, amount received from relatives and members will be considered as public deposit

27. Other important points… • It cannot issue securities (eg. debentures)to more than 200 in a year (private placement) • Form Stakeholders relationship committee if security holders > 1,000 • Institute Vigil Mechanism if borrowings > 50 Crores from banks and financial institutions • Exemption from appointment of Women Director and Small Shareholder Director

28. Imprisonment upto 10 years • fine upto 3 times the amount Fraud (sec 447) • any act, omission, concealment of any fact or abuse of position • committed by any person or any other person with the connivance in any manner, • with intent to deceive, • to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, • whether or not there is any wrongful gain or wrongful loss;

29. Also considered fraud… • If in any return, report, certificate, financial statement, prospectus, statement or other document, any person makes a statement,— (a) which is false in any material particulars, knowing it to be false; or (b) which omits any material fact, knowing it to be material

30. ThanQ? Anand Banka Partner, Talati & Talati Email: anand.banka@talatiandtalati.com Mob: 98673 53743