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Companies Act, 2013 - Rules 1

Published on Wed, Sep 11,2013 | 15:23, Updated at Thu, Sep 12 at 18:12Source : 


On the auspicious day of Ganesh Chaturthi, the Ministry for Corporate Affairs posted on its website the first set of draft rules for comment. The timing may be an attempt to seek obstacle-free acceptance but before you say Morya...consider this

I may grudge the MCA for making me work on a holiday but that has not coloured my view of the rules I managed to read. Sleep may have affected my analysis...this is not very exciting work. Also it’s tedious, so if I have missed important points please feel free to add to this list. It’s a list of interesting points that stood out as I eye-balled Chapters 1,2,9,10 & CSR. My comments precede the rule portions.


Free lunch in the CNBC TV18 canteen for those of you who understand 1.3 (2) in the first reading! That’s if your appetite survives this...

Related party
1.3. For the purposes of clause (ix) of sub-section (76) of section 2, the following persons, with reference to a company, shall be deemed to be a related party-
(1) a director or key managerial personnel of the holding, subsidiary or associate company of such company or his relative;
(2) any person appointed in senior management in the company or its holding, subsidiary or associate company i.e. personnel of the company or its holding, subsidiary or associate company who are members of core management team excluding Board of directors comprising all members of management one level below the executive directors, including the functional heads.

Your son’s son is a relative but your daughter’s daughter is not. Yup. That’s how the definition of relative reads. This from an Act that makes it mandatory to have a woman on board. All those old hindi film dialogues on ‘beti to parayi amaanat hoti hai’ are playing in my head!

List of relatives
1.4. For the purposes of sub-clause (iii) of sub-section (77) of section 2, a person shall be deemed to be the relative of another, if he or she is related to another in the following manner:
(1) Spouse
(2) Father (including step-father)
(3) Father’s father
(4) Father’s mother
(5) Mother (including step-mother)
(6) Mother’s mother
(7) Mother’s father
(8) Son (including step-son)
(9) Son’s wife
(10) Son’s son
(11) Son’s daughter
(12) Daughter (including step-daughter)
(13) Daughter’s husband
(14) Brother (including step-brother)
(15) Sister (including step-sister)


What about ABB? L&T? JAYPEE? NDTV? It’s a good thing my employer is TV18 and not CNBC! Oh wait – TV18 is vague and abbreviated? The Act says no undesirable names...
(2) For the purposes of sub-clause (ii) of clause (b) of sub-section (2) of section 4:
(b) a name shall also generally be considered undesirable if:-

(x) the proposed name is vague or an abbreviated name such as ‘ABC limited’ or ‘23K limited’ or ‘DJMO’ Ltd: abbreviated name based on the name of the promoters will not be allowed. For example:- BMCD Limited representing first alphabet of the name of the promoter like Bharat, Mahesh, Chandan and David.

Provided that existing company may use its abbreviated name as part of the name for formation of a new company as subsidiary or joint venture or associate company but such joint venture or associated company shall not have an abbreviated name only e.g. Delhi Paper Mills Limited can get a joint venture or associated company as DPM Papers Limited and not as DPM Limited

However the companies well known in their respective field by abbreviated names are allowed to change their names to abbreviation of their existing name after following the requirements of the Act;

This could be tough on Sahara! It adds on/changes businesses quite frequently!

(3) If any company has changed its activities which are not reflected in its name, it shall change its name in line with its activities within a period of six months from the change of activities after complying with all the provisions as applicable to change of name.

Bonanza time for all Lakshmis, Rams, Krishnas and all other god-related, now common names, that humans bear as well, unless one of your ‘blood relatives’ responds to the same tag! What? No rules for how to obtain a NOC?

(4) In case the key word used in the name proposed is the name of a person other than the name(s) of the promoters or their close blood relatives, No objection from such other (s) shall be attached with the application for name. In case the name includes the name of relatives, the proof of relation shall be attached. It shall be mandatory to furnish the significance and proof thereof for use of coined words made out of the name of the promoters or their relatives.

No, you can’t name your country Garden of Eden! And pray that no country or city adopts your company’s name!

(xviii) the proposed name includes name of any foreign country or any city in a foreign country, the same shall be allowed if the applicant produces any proof of significance of business relations with such foreign country like MOU with a company of such country .Provided further the name combining the name of a foreign country with the use of India like India Japan or Japan India shall be allowed if, there is a government to government participation or patronage. No company shall be incorporated using the name of an enemy country. (Enemy country means so declared by the Central Government from time to time).


Does this mean that an Indian subsidiary of a foreign company has to consolidate its parent’s statement with its own? Serious question.

9.4 For the purpose of the second proviso to sub-section (3) of section 129 of the Act, the Consolidation of financial statements of the company shall be made in accordance with the Accounting Standards, subject however, to the requirement that if under such Accounting Standards, consolidation is not required for the reason that the company has its immediate parent outside India, then such companies will also be required to prepare Consolidated Financial Statements in the manner and format as specified under Schedule III to the Act.


This is a biggie! Auditor rotation is being applied with retrospective effect. So if a company has had the same audit firm for say, 10 years, then upon notification of the Act & and these rules, it will have to start work on moving to another audit firm. It’s a double whammy for the Big 4. If they were hoping that network firms would be considered distinct at the time of rotation...then they are going to be very disappointed. Companies cannot rotate from one EY network firm to another or one KPMG network firm to another.

(4) For the purpose of the rotation of auditors
(i) In case of an auditor (whether an individual or audit firm), the period for which he or it has been holding office as auditor prior to the commencement of the Act shall be taken into account in calculating the period of five consecutive years or ten consecutive years, as the case may be.
(ii) The incoming auditor or audit firm shall not be eligible if such auditor or audit firm is associated with the outgoing auditor or audit firm under the same network of audit firms or is operating under the same trade mark or brand.

Does this mean an audit firm cannot provide any other (non-audit) service to the company its audits? Good news. This is a restriction many countries are imposing!

10.7 Disqualification of an Auditor
(4) For the purpose of clause (e) of sub-section (3) of section 141, the term “business relationship” shall construe any transaction entered into for a commercial purpose except those which are in the nature of professional services as permitted to be rendered by an auditor or audit firm under the Act and the Chartered Accountants Act and the rules and the regulations made under such Act.

Please fill Form 10.3 if you notice fraud or suspect one is brewing but only if its material!

Reporting of Frauds by auditor
10.10 (1) For the purpose of sub-section (12) of section 143, in case the auditor has sufficient reason and information to believe that an offence involving fraud which is likely to materially affect the company, is being or has been committed against the company by officers or employees of the company, he shall report the matter to the Central Government immediately but not later than thirty days of his knowledge or information, with a copy to the audit committee or in case the company has not constituted an audit committee, to the Board.
(2) For the purpose of sub rule (1), materiality shall mean:
(a) fraud(s) that is or are happening frequently; or
(b) fraud(s) where the amount involved or likely to be involved is not less than five percent of net profit or two percent of turnover of the company for the preceding financial year.

(3) In all other cases, auditors shall send a report in writing to the audit committee and where the company has not constituted an audit committee, to the Board, and the audit committee or the Board, as the case may be, shall reply to the auditors in writing as to steps taken by the audit committee or the Board in addressing the issues of fraud, including systemic issues.

(7) The report shall be in the form of a statement as given in Form No. 10.3:


The good news is the Government has allowed considerable latitude in how companies fulfil CSR. Here are some of the relevant points

(d) ‘Net Profit’ for the section 135 and these rules shall mean, net profit before tax as per books of accounts and shall not include profits arising from branches outside India.

4. A company may also conduct/implement its CSR programmes through Trusts, Societies, or Section 8 companies operating in India, which are not set up by the company itself.

5. Such spends may be included as part of its prescribed CSR spend only if such organizations have an established track record of at least three years in carrying on activities in related areas.

6. Companies may collaborate or pool resources with other companies to undertake CSR activities and any expenditure incurred on such collaborative efforts would qualify for computing the CSR spending.

7. Only such CSR activities will be taken into consideration as are undertaken within India.

Chapters 11, 12, 16, 18 & 19 will be analysed tomorrow.
Fun and jokes is not my intention to take these rules lightly. I’m just trying to highlight the more interesting portions in an engaging fashion. Serious debate will take place on The Firm...tune in on Friday at 10.30pm!


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