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Companies Act, 2013 - Rules 2

Published on Sat, Sep 14,2013 | 18:38, Updated at Sat, Sep 14 at 18:38Source : Moneycontrol.com 

Companies Act, 2013 - Rules 2

The rules do not prescribe a class of companies that will have to rotate their auditors. Thank you @meinkampf13 for reminding me that this is missing. A class of companies has to be specified, auditor rotation is unlikely to be applicable to all companies, small and big, private and public. I suppose that will come later. SURPRISE!

And as well known audit partner Dolphy Dsouza pointed out a difficult to meet  eligibility requirement for auditors – ‘a relative of an auditor may hold securities of face value or interest in the company not exceeding rupees one lakh.’ Though given that relative has been defined to mean immediate family – I don’t see this posing a big problem.

And now on to Installment 2 of rules analysis - as in the first one…my comments in bold italics followed by the relevant rule…

CHAPTER 11:  APPOINTMENT AND QUALIFICATIONS OF DIRECTORS

Business opportunity for Independent Directors Yellow Pages!

11.4 (1)…anybody, institute or association which has been authorized in this behalf by the Central Government shall create and maintain a data bank of persons willing and eligible to be appointed as independent director and such data bank shall be placed on the website of the Ministry of Corporate Affairs or on any other website as may be approved or notified by the Central Government.

Disclaimer: Independent Directors are subject to character risk and there is no assurance or guarantee that the objectives of Independence will be achieved!

(3) A disclaimer shall conspicuously be displayed on the website along with the databank that a company must carry out its own due diligence before appointment of any person as an independent director and the body, institute or association as notified by the Central Government for creating and maintaining the databank or the Central Government shall not be responsible for the person chosen for appointment on its board as independent director out of such databank. Further, the Central Government or such body, institute or association shall neither be responsible for any contravention of any law committed by any company or its directors by the reason of the fact that the person appointed by the company as an independent director, was selected from the databank nor it will be a defence in any court of law.

1 cup search + 250 grams printer icon = Databank!
Someone has lots of free time in the MCA…this databank issue has been given serious TLC!

(7) Such databank posted on the website shall:

(a) be publicly accessible at the specified website;
(b) be substantially identical to the physical version of the panel or data bank;
(c) be searchable on the parameters specified in rule 11.4(2);
(d) be presented in a format or formats convenient for both printing and viewing online; and
(e) contain a link to obtain the software required to view / print the particulars free of charge.

A shareholder can be picked to be a small shareholders’ director and will be considered an Independent Director if he meets the definition of Independent including ‘(e) who, neither himself nor any of his relatives(iii) holds together with his relatives two per cent. or more of the total voting power of the company; This rule implies that the ‘Independent’ tag is an add-on.

11.5
(4) Such director shall be considered as an independent director subject to his giving a declaration of his independence in accordance with sub-section (7) of section 149 of the Act.

(5) The appointment of small shareholders’ director shall be subject to the provisions of section 152 except that-

(a) The director shall not be liable to retire by rotation;
(b) The director’s tenure as small shareholders’ director shall not exceed a period of three consecutive years; and
(c) on the expiry of the tenure, the director shall not be eligible for re-appointment.

But oddly, the next Rule indicates that 'Independence' is a necessary requirement.

(7) A person appointed as small shareholders’ director shall vacate the office if -

(a) the director ceases to be a small shareholder, on and from the date of cessation;
(b) the director incurs any of the disqualifications specified in section 164;
(c) the office of the director becomes vacant in pursuance of section 167;
(d) the director ceases to meet the criteria of independence as provided in sub-section (6) of section 149.

CHAPTER 12: MEETINGS OF BOARD AND ITS POWERS

Venue means  place. No kidding!

Meetings of Board through video conferencing or other audio visual means
(6) With respect to every meeting conducted through video conferencing or other audio visual means authorised under these rules, the scheduled venue of the meeting as set forth in the notice convening the meeting shall be deemed to be the place of the said meeting and all recordings of the proceedings at the meeting shall be deemed to be made at such place. The statutory registers which are required to be placed in the Board meeting as per the provisions of the Act shall be placed at the scheduled venue of the meeting. Where such registers are required to be signed by the directors, the same shall be deemed to have been signed by the directors participating through electronic mode if they have given their consent to this effect and it is so recorded in the minutes of the meeting.

Hurrah! Company law finally has a whistleblower protection mechanism…or something like that!

Establishment of vigil mechanism
12.5. (1) For the purposes of sub-section (9) of section 177, every listed company and the companies belonging to the following class or classes shall establish a vigil mechanism for their directors and employees to report genuine concerns:-

(1) Companies which accept deposits from the public; and
(2) Companies which have borrowed money from banks and public financial institutions in excess of fifty crore rupees;

(2) Companies which are required to constitute an audit committee shall operate the vigil mechanism through the audit committee. If any of the members of the audit committee are conflicted in a given case, they should recluse themselves and the others on the committee would deal with the matter on hand. In case of other companies, the Board of directors shall nominate a director to play the role of audit committee for the purpose of vigil mechanism to whom other directors and employees may report their concerns.

(3) This mechanism shall provide for adequate safeguards against victimization of employees and directors who avail of the mechanism and also provide for direct access to the chairperson of the Audit committee or the director nominated to play the role of audit committee, as the case may be, in exceptional cases. Once established, the existence of the mechanism may be appropriately communicated within the organization.

(4) In case of repeated frivolous complaints being filed by a director or an employee, the audit committee or the director nominated to play the role of audit committee may take suitable action against the concerned director or employee including reprimand.

In which the Rules have Rules to follow? This seems to mean that ‘stock broker, sub-broker, share transfer agent, banker to an issue, trustee of trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser and such other intermediary’ cannot avail of inter-corporate loans or deposits beyond a limit…yet to be prescribed!

Loan and investment by a company
12.8. For the purposes of sub-section (6) of section 186, no company registered under section 12 of the Securities and Exchange Board of India Act, 1992 and also covered under such class or classes of companies which may be notified by the Central Government in consultation with the Securities and Exchange Board, shall take any inter-corporate loan or deposits, in excess of the limits prescribed under the regulations applicable to such company, pursuant to which it has obtained certificate of registration from the Securities and Exchange Board of India.

Okay some serious stuff coming up on RPTs. Does this narrow or expand the scope of permitted RPTs?  I say it narrows the scope of RPTs… ie: ALL COMPANIES WITH A PAID-UP SHARE CAPITAL OF RS 1 CR OR MORE will need approval via special resolution before entering a contract/arrangement with RPT. And that ANY AND ALL COMPANIES will need approval via special resolution to  enter contracts/arrangements of the size and type mentioned below  (a,b,c). For ease of understanding I am first copying the relevant section (188) of the Companies Act and there the concerned rule (12.14).

Act: 188. (1) Except with the consent of the Board of Directors given by a resolution at a meeting of the Board and subject to such conditions as may be prescribed, no company shall enter into any contract or arrangement with a related party with respect to—

(a) sale, purchase or supply of any goods or materials;

(b) selling or otherwise disposing of, or buying, property of any kind;

(c) leasing of property of any kind;

(d) availing or rendering of any services;

(e) appointment of any agent for purchase or sale of goods, materials, services or property;

(f) such related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company; and

(g) underwriting the subscription of any securities or derivatives thereof, of the company:

Provided that no contract or arrangement, in the case of a company having a paid-up share capital of not less than such amount, or transactions not exceeding such sums, as may be prescribed, shall be entered into except with the prior approval of the company by a special resolution:

Provided further that no member of the company shall vote on such special resolution, to approve any contract or arrangement which may be entered into by the company, if such member is a related party:

Provided also that nothing in this sub-section shall apply to any transactions entered into by the company in its ordinary course of business other than transactions which are not on an arm’s length basis.

Rules: 12.14 (1) For the purposes of first proviso to sub-section (1) of section 188,

(i) a company having a paid-up share capital of rupees one crore or more shall not enter into a contract or arrangement with any related party; or

(ii) a company shall not enter into a transaction or transactions, where the transaction or transactions to be entered into

(a) individually or taken together with previous transactions during a financial year, exceeds five percent of the annual turnover or twenty percent of the net worth of the company as per the last audited financial statements of the company, whichever is higher, for contracts or arrangements as mentioned in clauses (a) to (e) of sub-section (1) of section 188; or

(b) relates to appointment to any office or place of profit in the company, its subsidiary company or associate company at a monthly remuneration exceeding one lakh rupees as mentioned in clause (f) of sub-section (1) of section 188; or

(c) is for a remuneration for underwriting the subscription of any securities or derivatives thereof of the company exceeding ten lakh rupees as mentioned in clause (g) of sub-section (1) of section 188;

except with the prior approval of the company by a special resolution.

CHAPTER 16:  PREVENTION OF OPPRESSION AND MISMANAGEMENT

The minimum size of class in a ‘class action’ is exactly the same strength of members/depositors that could move Sec 397/398 in the Companies Act, 1956. Just saying…

16.1 (a)…the number of members that may file an application for class action as provided in sub-section (1) shall be, in the case of a company having share capital, not less than one hundred members of the company or not less than ten per cent. of the total number of its members, whichever is less, or any member or members singly or jointly holding not less than ten percent of the issued share capital of the company, subject to the condition that the applicant or applicants have paid all calls and other sums due on his or their shares.

(b) For the purposes of sub-clause (ii) of sub-section (3) of section 245, the number of depositors that may file an application for class action as provided in sub-section(1) shall be not less than one hundred depositors or not less than ten per cent. of the total number of depositors, whichever is less or any depositor or depositors singly or jointly holding not less than ten percent of the total value of outstanding deposits of the company.

Coming Up - Installment 3: Chapters 18, 19, 22…

 
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