Study of newly enacted Company Act, 2013

INTRODUCTION
The recently enacted Companies Act 2013 (the 2013 Act) is a landmark legislation and is
likely to have far-reaching consequences on all companies operating in India. While a part of
the 2013 Act has already become effective.

An attempt has been made to reduce the content of the substantive portion of the related law in
the Companies Act, 2013 as compared to the Companies Act, 1956 (1956 Act). In the process,
much of the aforesaid content has been left, to be prescribed, in the Rules (340+) which are
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yet to be finalised and notified. As of the date of this publication, 282 sections and 38 Rules
( which includes recently notified rule on 03.11.2014) have been notified and a few circulars
have been issued clarifying the applicability of these.

Notification of Rule is still continued

even after passing the Act in August 2013.

This important legislation, that has been in the making for over 10 years, started off as an effort
in 2004 by the then government to make changes in Indian corporate law in the context of the
changing economic and business environment and to make Indian corporate environment more
transparent, simple and globally acceptable.

Since then, as this legislation has taken final

shape, it has been influenced significantly by other recent developments in the corporate sector,
especially those where stakeholder interests seemed to be compromised.

The erstwhile

Companies Act 1956 (the 1956 Act), which had been in existence for over fifty years,
appeared to be somewhat ineffective at handling some of these present day challenges of a
growing industry and the interests of an increasing class of sophisticated stakeholders.

Learning from these experiences, the 2013 Act promises to substantively raise the bar on
governance and in a comprehensive form purports to deal with relevant themes such as
investor protection and fraud mitigation, inclusive agenda, auditor accountability, reporting
framework, director responsibility and efficient restructuring.

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OBJECTIVES

To understand the new Provisions of Company Act 2013

To understand the difference between provisions of Company Act 1956 and Company

Act 2013.
To understand how new Company can be formed and its operation.
To understand the benefits of Companies Act and its Cons.
To understand effect of Company Act on Business environment

RESEARCH METHODOLOGY
The study focuses on extensive study of Secondary data collected from various books, National
Journals (ICAI & ICSI), government reports, publications from various websites which focused
on various aspects of Company Act, 2013.

NEW CONCEPTS
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One-person company:
The 2013 Act introduces a new type of entity to the existing list i.e. apart from forming a public
or private limited company, the 2013 Act enables the formation of a new entity a one-person
company (OPC). An OPC means a company with only one person as its member [section 3(1)
of 2013 Act].
Private company:
The 2013 Act introduces a change in the definition for a private company, inter-alia, the new
requirement increases the limit of the number of members from 50 to 200. [section 2(68) of
2013 Act].
Small company
A small company has been defined as a company, other than a public company. (i) Paid-up
share capital of which does not exceed 50 lakh INR or such higher amount as may be prescribed
which shall not be more than five crore INR (ii) Turnover of which as per its last profit-and-loss
account does not exceed two crore INR or such higher amount as may be prescribed which shall
not be more than 20 crore INR:
Dormant company:
The 2013 Act states that a company can be classified as dormant when it is formed and
registered under this 2013 Act for a future project or to hold an asset or intellectual property and
has no significant accounting transaction. Such a company or an inactive one may apply to the
ROC in such manner as may be prescribed for obtaining the status of a dormant company.
[Section 455 of 2013 Act]
Class Action Suit
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A class action or a class suit is a lawsuit that allows a large number of people with a common
interest in a matter to sue or be sued as a group. The concept is common in developed countries
such as the US, UK and Singapore but has till now, not existed in the Indian Law. The
provision of class suit gives stakeholders an edge in retrenching their rights.
Mergers and acquisitions
The 2013 Act has streamlined as well as introduced concepts such as reverse mergers (merger of
foreign companies with Indian companies) and squeeze-out provisions, which are significant.
The 2013 Act has also introduced the requirement for valuations in several cases, including
mergers and acquisitions, by registered valuers.
Corporate social responsibility
The 2013 Act makes an effort to introduce the culture of corporate social responsibility (CSR)
in Indian corporates by requiring companies to formulate a corporate social responsibility policy
and at least incur a given minimum expenditure on social activities.
Officer
The definition of officer has been extended to include promoters and key managerial personnel
[section 2(59) of 2013 Act].

Key managerial personnel

The term key managerial personnel has been defined in the 2013 Act and has been used in
several sections, thus expanding the scope of persons covered by such sections [section 2(51) of
2013 Act].
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Promoter
The term promoter has been defined in the following ways: A person who has been named as
such in a prospectus or is identified by the company in the annual return referred to in Section
92 of 2013 Act that deals with annual return; or who has control over the affairs of the
company, directly or indirectly whether as a shareholder, director or otherwise; or in
accordance with whose advice, directions or instructions the Board of Directors of the company
is accustomed to act.
The proviso to this section states that sub-section (c) would not apply to a person who is acting
merely in a professional capacity. [section 2(69) of 2013 Act]
Independent Director
So far only listed public companies were required to appoint independent directors under the
listing Agreement.

Companies Act, 2013 extend such requirement to cover big public

companies also. The term Independent Director has now been defined in the 2013 Act, along
with several new requirements relating to their appointment, role and responsibilities. Further
some of these requirements are not in line with the corresponding requirements under the equity
listing agreement [section 2(47), 149(5) of 2013 Act].

Secretarial Audit
The companies Act 2013 provides for compulsory Secretarial Audit by Certain class of
companies and annexing the same with the Board Report. With the introduction of Secretarial
Audit, the scope of already existing compliance certificate stands widened.

The Board of
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Directors also has to explain in its Board report to every qualification, reservation or adverse
remark or disclaimer made by the Company Secretary in his Secretarial Audit Report.

IMPORTANT CHANGES /HIGHLIGHTS OF

COMPANY ACT, 2013
Following are some of important changes / highlights of Company Act, 2013.
1. Setting up of a company
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2. Share capital and debentures

3. Reporting Framework (Annual Accounts)
4. Higher Auditors Responsibility
5. Wider Director and Management Responsibility
6. Corporate social responsibility
7. Investor Protection
8. Compromises, arrangements and amalgamations
9. Revival and rehabilitation of sick companies

Setting up of a company
The 2013 Act specifies the mandatory content for the memorandum of association which is
similar to the existing provisions of the 1956 Act.

However, as against the existing

requirement of the 1956 Act, the 2013 Act does not require the objects clause in the
memorandum to be classified between the main object of the company and other company.

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The 2013 Act introduces the entrenchment provisions in respect of the articles of association
of a company. An entrenchment provision enables a company to follow a more restrictive
procedure than passing a special resolution for altering a specific clause of articles of
association. A private company can include entrenchment provisions only if agreed by all its
members or, in case of a public company, if a special resolution is passed.
Where a company has changed its name in the last two years, the company is required to
paint, affix or print its former names along with the new name of the company on business
letters, bill heads, etc. However, the 2013 Act is silent on the time limit for which the former
name needs to be kept.
The 2013 Act mandates inclusion of declaration to the effect that all provisions of the 1956
Act have been complied with, which is in line with the existing requirement of 1956 Act.
Additionally, an affidavit from the subscribers to the memorandum and from the first directors
has to be filed with the ROC, to the effect that they are not convicted of any offence in
connection with promoting, forming or managing a company or have not been found guilty of
any fraud or misfeasance, etc., under the 2013 Act during the last five years along with the
complete details of name, address of the company, particulars of every subscriber and the
persons named as first directors. The 2013 Act further prescribes that if a person furnishes
false information, he or she, along with the company will be subject to penal provisions as
applicable in respect of fraud i.e. section 447 of 2013 Act.
The existing provisions of the 1956 Act as set out in section 149 which provide for
requirement with respect to the commencement of business for public companies that have a
share capital would now be applicable to all companies:

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The 2013 Act imposes additional restriction on the alteration of the object clause of the
memorandum for a company which had raised money from the public for one or more objects
mentioned in the prospectus and has any unutilised money.
The 2013 Act includes a new section to enable the issue of depository receipts in any foreign
country subject to prescribed conditions [section 41 of 2013 Act]. Currently, the provisions of
section 81 of the 1956 Act relating to further issue of shares are being used in conjunction
with the requirements mandated by SEBI for the issuance of depository receipts. In several
aspects across the 2013 Act, it appears that the 2013 Act supplements the powers of SEBI by
incorporating requirements already mandated by SEBI.
The 2013 Act includes a new section under which members of a company, in consultation
with the board of directors, may offer a part of their holding of shares to the public. The
document by which the offer of sale to the public is made will be treated as the prospectus
issued by the company. The members shall reimburse the company all expenses incurred by it.

Share capital and debentures

The provisions of 2013 Act regarding voting rights are similar to the existing section 87 of
the 1956 Act. The only change noted in the 2013 Act is the removal of distinction provided
by the 1956 Act with respect to the entitlement to vote in case the company fails to pay
dividend to its cumulative and non-cumulative preference share holders.

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The 2013 Act restricts the application of securities premium for a certain class of companies
if they fail to comply with the accounting standards. The 2013 Act continues to state that
securities premium amount can be utilised for purpose of writing off preliminary expenses.

Companies would no longer be permitted to issue shares at a discount. The only shares that
could be issued at a discount are sweat equity wherein shares are issued to employees in lieu
of their services.

The 2013 Act reiterates the existing requirement that a company cannot issue preference
shares with a redemption date of beyond 20 years. However, it gives an exemption for cases
where preference shares have been issued in respect of infrastructure projects.

The existing requirement of section 81 of the 1956 Act in regard to further issue of capital
would no longer be restricted to public companies and would be applicable to private
companies also. Further, the 2013 Act provides that a rights issue can also be made to the
employees of the company who are under a scheme of employees stock option, subject to a
special resolution and subject to conditions as prescribed. Further, the price of such shares
should be determined using the valuation report of a registered valuer, which would be
subject to conditions as prescribed.

The 2013 Act includes a new section that provides for issue of fully paid-up bonus shares
out of its free reserves or the securities premium account or the capital redemption reserve
account, subject to the compliance with certain conditions such as authorisation by the
articles, approval in the general meeting and so on. However Section 23 does not permit
private companies to issue bonus shares.

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Reporting Framework (Annual Accounts)

Mandatory requirement for Consolidated Financial Statement (CFS)
The 2013 Act mandates preparation of consolidated financial statements for all companies that
have one or more subsidiaries. These would be in addition to the separate financial statements
and are required to be prepared in the same form and manner as the separate financial
statements. For the purpose of this requirement, the word subsidiary would include associate
companies and joint ventures. Currently preparation of consolidated financial statements is
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mandatory only for listed companies under the Securities and Exchange Board of India (SEBI)
regulations. Preparation of consolidated financial statements now required under the 2013 Act
would pose significant challenges for unlisted and private limited companies, who would be
preparing consolidated financial statements for the first time.
Revision in Financial Statement
Under the 1956 Act, companies are generally not permitted to revise or restate financial
information presented in their financial statements. Material misstatements in the accounts
related to previous years, whether due to occurrence of fraud or error are reported as a prior
period adjustment in the financial statements of the year / period in which such misstatements
are discovered. However as per New Act, if an order is passed by the court or tribunal to the
effect the relevant earlier accounts were prepared in fraudulent manner, re-opening of accounts
can be done. Further, If the Board feels that the financials or the Report do not comply with
the applicable provisions of clause 129 or 134, they may revise the aforesaid in respect of any of
the three preceding financial years after obtaining approval of the Tribunal.

Financial Year to be uniform

The 2013 Act also requires all companies to adopt a uniform financial year of 1 April to 31
March with limited exception to a company which is a holding company or subsidiary of a
company incorporated outside which may be required to follow a different financial year for
consolidation outside India.
Changes in Depreciation regulation
Schedule II to the 2013 Act requires systematic allocation of the depreciable amount of an asset
over its useful life unlike Schedule XIV of the Act (which specifies minimum rates of
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depreciation to be provided by a company). The depreciable amount is defined as the cost of an

asset, or other amount substituted for cost, less its residual value.

Useful life may be

considered as a period over which an asset is available for use or as the number of production or
similar units expected to be obtained from the asset by the entity. Amortisation of intangible
assets should be in accordance with notified accounting standards and is not specified in the
2013 Act.
Mandatory Internal Audit
Class/classes of companies to be prescribed in this behalf to mandatorily appoint an internal
auditor who shall be a chartered accountant or a cost accountant or such other professional as
may be decided by the Board. The objective of introduction of this requirement is to strengthen
the system of internal controls in the wake of allegations of recent corporate frauds.

Internal financial controls reporting

The 2013 Act also requires the Directors Report for listed companies and Auditors Report for all
companies to comment on whether the company has adequate internal financial controls system
in place and operating effectiveness of such controls.
Other Important Provisions
Companies permitted to keep books of account or other relevant papers in electronic mode in
the prescribed manner. The draft rules add that such electronic books shall remain accessible in
India for future reference.
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Annual financial statements of every company (except one person company, small company or
dormant company) to include a cash flow statement also.
The existing regulatory regime governing transfer of a specified percentage of profits to
reserves before declaring dividends dispensed with. However, declaration of dividends out of
reserves to be subject to rules as may be prescribed. Companies will be allowed to declare
dividends out of their current profits even when they have substantial accumulated losses of
earlier years.

Higher Auditor Accountability

Auditor Appointment and Rotation
As per the 2013 Act, instead of the present provision of appointment from one AGM to the next,
individual or a firm to be appointed as auditor for a five-year term. Change of auditors before
the five year term would require special resolution after obtaining the previous approval of the
Central Government. Further the auditor concerned would have to be given a reasonable
opportunity of being heard. However the appointment has to be ratified at every AGM. If the

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appointment is not ratified, it appears that the process for change of auditor would have to be
followed.
Listed companies or companies belonging to such class of companies as may be prescribed
cannot appoint or reappoint an audit firm (including an LLP) as auditor for more than two
consecutive terms of five years each (in case of an individual there would be one term of five
years).
Non-audit services
Company Act, 2013 provides Prohibition on auditor rendering specified non-audit services to
the auditee company/ its subsidiary/holding company e.g. accounting and book keeping
services, internal audit, design and implementation of any financial information system,
investment advisory services, investment banking services, management services etc.
Auditors report
The reporting requirements have been extended. Further, the Central Government, in
consultation with National Financial Reporting Authority, may direct inclusion of specified
matters for specified class/description of companies. As per the Act, the auditor has to report:
Where the company has failed to provide any information and explanations, the details of the
same and their effect on financial statements.
Whether the company has adequate internal financial controls in place and the operating
effectiveness of such controls.
Observations or comments on financial transactions or matters which have any adverse effect
on the functioning of the company.

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Any qualification, reservation or adverse remark relating to the maintenance of accounts and
other matters connected therewith (this is in addition to the assertion relation to maintenance of
proper books of account).
Reporting on Fraud
If in the course of performance of his duties as auditor, the auditor has reason to believe that an
offence involving certain fraud is being or has been committed against the company by officers
or employees, the matter should be reported to the Central Government within the prescribed
time and manner.
Auditing standards
Auditing standards have been given legal recognition under the Act which requires that every
auditor shall comply with the auditing standards notified by Central Government. The Central
Government may prescribe the standards of auditing 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
National Financial Reporting Authority
An independent authority, viz. National Financial Reporting Authority (NFRA) to be constituted
to make recommendations to Central Government on formulation and laying down of
accounting and auditing policies and standards, monitor and enforce compliance therewith and
oversee the quality of service of relevant professions. NFRA has been vested with quasi judicial
powers to investigate matters of professional or other misconduct (as defined in CA Act) by
chartered accountants for such class of bodies corporate or persons as may be prescribed. At
present matters relating to professional or other misconduct are handled by the Institute of
Chartered Accountants of India. The new provisions would raise a number of practical issues
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apart from questioning the validity of the concept that a professional should be judged by his
peers.

Wider Director and Management Responsibility

The 2013 Act increases the limit for number of directorships that can be held by an individual
from 12 to 15 [section 149(1) of 2013 Act].3. One director to be resident in India. Every
company shall have at least one Director who has stayed in India for a total period of not less
than 182 days in the previous calendar year.
In prescribed class or classes of companies, there should be 1 women director.

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One of the significant aspects of the 2013 Act is the effort made towards incorporating some
of the salient requirements mandated by the SEBI in clause 49 of the listing agreement in the
2013 Act itself. To this effect, the 2013 Act requires every listed public company to have at
least one-third of the total number of directors as independent directors.
The 2013 Act includes Schedule IV Code for Independent Directors (Code) which broadly
prescribes the conduct for independent directors.
In order to discourage inappropriate practices, the 2013 Act states that any person who fails
to get elected as a director in the general meeting can no longer be appointed as an additional
director by the board of directors
The requirements relating to audit committees was first introduced by the Companies
(Amendment) Act, 2000. As per the 2013 Act, the audit committee should have majority of
independent directors.

Chairman of the audit committee need not be an independent

director. A majority of the members of the audit committee should be financially literate, i,e.
should have the ability to read and understand the financial statements.
Company Act, 2013 provides for mandatory constitution of Nomination and Remuneration
Committee and Stakeholders Relationship Committee for prescribed companies.
The 2013 Act prescribes similar requirements with respect to the disclosure of interest by the
director as contained in the existing section 299 of the 1956 Act. The only change that could
be identified is where a contract or arrangement entered into by the company without
disclosure of interest by director or with participation by a director who is concerned or
interested in any way, directly or indirectly, in the contract or arrangement, shall be voidable
at the option of the company.

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Every company belonging to such class of description of companies as may be prescribed

shall have MD or CEO or Manager and in their absence, a WTD and a Company Secretary.
Individual not to be the Chairman of the Co. as well as the MD or CEO of the Co. at the
same time.
The 2013 Act provides for mandatory appointment of following whole time key managerial
personnel for every listed company and every other company having a paid-up share capital
of five crore INR or more*:
(i) Managing director, or chief executive officer or manager and in their absence, a
whole-time director
(ii) Company secretary
(iii) Chief financial officer

Corporate social responsibility

The Ministry of Corporate Affairs (MCA) had introduced the Corporate Social
Responsibility Voluntary Guidelines in 2009. These guidelines have now been incorporated
within the 2013 Act and have obtained legal sanctity. Section 135 of the 2013 Act, seeks to
provide that every company having a net worth of 500 crore INR, or more or a turnover of
1000 crore INR or more, or a net profit of five crore INR or more, during any financial year
shall constitute the corporate social responsibility committee of the board.

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As per Section 135 of the Act, companies with a specified net worth or turnover or net profit
are required to mandatorily spend 2 percent of average net profits of last 3 years to be spent
on CSR activities, otherwise reason for not spending to be given in Board's Report.
Under the draft CSR rules, net profit is defined to mean net profit before tax as per books of
accounts and shall not include profits arising from branches outside India.
Every qualifying company needs to constitute a CSR committee of the Board consisting of 3
or more directors.
The mandate of the said CSR committee shall be:
To formulate and recommend a CSR policy to the Board;
To recommend amount of expenditure to be incurred on CSR activities;
To monitor the CSR policy of the company from time to time.
The Board of every qualifying company is required to hold following responsibilities:
To approve the CSR policy recommended by the CSR committee and disclose the
contents of such policy in its report and place it on companys website;
To ensure the CSR activities are undertaken by the company;
To ensure 2 percent spending on CSR activities;
To report CSR activities in Boards report and disclose non-compliance (if any) with
the CSR provisions.

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The draft CSR rules provide the format in which all qualifying companies shall
report the details of their CSR initiatives in the Directors report and in the
companys website
Activities which may be considered as eligible CSR spend are provided in Schedule VII of
the Act. The specified activities are as under:
Environment sustainability
Empowering women and promoting gender equality
Education
Poverty reduction and eradicating hunger
Social business projects
Reducing child mortality & improving maternal health
Improvement of health
Imparting of vocational skills
Contribution towards Central & State Government funds for socioeconomic
development and relief
Such other matters as may be prescribed
The companies shall give preference to the local area and area around it where it operates for
spending the amounts earmarked for CSR activities.
CSR projects / programs may also focus on integrating business models with social and
environmental priorities and processes in order to create shared value.
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CSR activities shall not include activities exclusively for the benefit of employees and their
family members.
Companies may also collaborate or pool resources with other companies to undertake CSR
activities.

Investor Protection
The Companies Act, 2013 has made significant amendments vis--vis related party
transactions making this a significant focus area. The responsibilities are rather onerous with
strict consequences in cases of non-compliance.
The transactions of a company with its related parties which are not in the ordinary course of
business and which are not arms length would require the consent of the Board of Directors
of the Company.
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The scope of related Parties transactions has widened which now includes leasing of
property, appointment of agent for the sale or purchase, related partys appointment to any
office or place of profit in the company, its subsidiary or associate company.
Provisions relating to caps on inter corporate loans and investments extended to include loan
to any person. The rate of interest on inter corporate loans not to be lower than the prevailing
yield of one year, three year, five year or ten year Government security closest to the tenor of
the loan.
Loans (as also guarantees/securities in respect thereof) and investments by a private company
or by a holding company to or in its wholly owned subsidiary would also be covered by the
provisions.
The concept of class action suits introduced empowering a specified number of shareholders
and depositors to take legal action in case of any fraudulent action by the company or if the
affairs of the company are being conducted in a manner prejudicial to the interests of the
company or its members or depositors. Class actions suits have been prevalent in US,
Australia and some EU countries. The provision is a significant step towards protecting
shareholders and depositors.
Specific definition of fraud has been introduced.

Fraud includes any act, omission,

concealment of any fact or abuse of position committed by any person, 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.

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Compromises, arrangements and amalgamations

The 2013 Act features some new provisions in the area of mergers and acquisitions, apart
from making certain changes from the existing provisions. While the changes are aimed at
simplifying and rationalising the procedures involved, the new provisions are also aimed at
ensuring higher accountability for the company and majority shareholders and increasing
flexibility for corporate.
The section dealing with compromises and arrangements, deals comprehensively with all
forms of compromises as well as arrangements, and extends to the reduction of share capital,
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buy-back, takeovers and corporate debt restructuring as well. Another positive inclusion
within this section is that objection to any compromise or arrangement can now be made only
by persons holding not less than 10% of share holding or having an outstanding debt
amounting to not less than 5% of the total outstanding debt as per the latest audited financial
statements
The current procedural requirements in case of a merger and acquisition in any form are quite
cumbersome and complex. There are no exemptions even in the case of mergers between a
company and its wholly owned subsidiaries. The 2013 Act now introduces simplification of
procedures in two areas, firstly, for holding wholly owned subsidiaries and secondly, for
arrangements between small companies (section 233 of the 2013 Act). Small companies is a
new category of companies, introduced within the 2013 Act, with defined capital and
turnover thresholds, which has been given certain benefits, including simplified procedures.
The 1956 Act, allows the merger of a foreign company with an Indian company, but does not
allow the reverse situation of merger of an Indian company with a foreign company. The
2013 Act now allows this flexibility, with a rider that any such mergers can be effected only
with respect to companies incorporated within specific countries, the names of which will be
notified by the central government. With prior approval of the central government,
companies are now allowed to pay the consideration for such mergers either in cash or in
depository receipts or partly in cash and partly in depository receipts as agreed upon in the
scheme of arrangement. (section 234 of the 2013 Act). These new provisions can be greatly
beneficial to Indian companies which have a global presence by providing them structuring
options which do not exist currently.
The 2013 Act has introduced new provisions for enabling the acquirer of a company (holding
90% or more shares) by way of amalgamation, share exchange, etc to acquire shares from the
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minority holders subject to compliance with certain conditions. This has also introduced the
requirement for registered valuers, since the price to be offered by majority shareholder
needs to be determined on the basis of valuation by a registered valuer (section 236 of the
2013 Act).

Revival and rehabilitation of sick companies

Chapter XIX of the 2013 Act lays down the provisions for the revival and rehabilitation of
sick companies. The chapter describes the circumstances which determine the declaration of
a company as a sick company, and also includes the rehabilitation process of the same.
Although it aims to provide comprehensive provisions for the revival and rehabilitation of
sick companies, the fact that several provisions such as particulars, documents as well as
content of the draft scheme in respect of application for revival and rehabilitation, etc. have
been left to substantive enactment, leaves scope for interpretation.

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The coverage of Sick Industrial Companies Act, 1985 (SICA) is limited to only industrial
companies, while the 2013 Act covers the revival and rehabilitation of all companies,
irrespective of their sector. The determination of whether a company is sick, would no longer
be based on a situation where accumulated losses exceed the net worth. Rather it would be
determined on the basis whether the company is able to pay its debts. In other words, the
determining factor of a sick company has now been shifted to the secured creditors or banks
and financial institutions with regard to the assessment of a company as a sick company.
The 2013 Act does not recognise the role of all stakeholders in the revival and rehabilitation
of a sick company, and provisions predominantly revolve around secured creditors. The fact
that the 2013 Act recognises the presence of unsecured creditors, is felt only at the time of the
approval of the scheme of revival and rehabilitation. In accordance with the requirement of
section 253 of the 2013
Act, a company is assessed to be sick on a demand by the secured creditors of a company
representing 50% or more of its outstanding amount of debt under the following
circumstances:
The company has failed to pay the debt within a period of 30 days of the service of the
notice of demand
The company has failed to secure or compound the debt to the reasonable satisfaction of
the creditors
To speed up the revival and rehabilitation process, the 2013 Act provides a one year time
period for the finalisation of the rehabilitation plan.

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SHORTCOMINGS IN THE NEW COMPANIES BILL

After more than 10 years of discussions, drafting and delays, and five different ministers
heading it, the government has been able to replace the 57-year-old law with new definitions
and a host of other things. However, there are certain shortcomings in the New Bill which can
be read as follows:
1. Independent directors: There are pitfalls in the provision of Independent Directors for three
reasons. Firstly, how independent can Independent Directors be when they are appointed and
paid for by the promoters? Will promoters appoint truly independent people on boards?
Secondly, are there enough persons available to be appointed as Independent Directors? Once
the prospective person is told about the responsibilities he will have to bear, the actual
number of competent and willing Independent Directors diminishes. Most Independent
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Directors diminish; in fact, end up adorning corporate boards without the time or
commitment to work in the interests of shareholders. Third, if eligible Independent Directors
end up taking up 20 directorships each, how can they really serve each of those companies
shareholders diligently? To sum it up, although the concept of Independent Directors is
good, corporate governance will need to have a heavy dose of regulation.

2. Corporate social responsibility: The New Companies Bill makes no effort whatsoever to
define CSR. The only obligation is to set aside the funds, form a committee, formulate a CSR
policy, and spend the cash. If members dont spend the money, they will have to explain the
reason for not doing it in the annual report.

3. Excessive bureaucracy: In order to make directors accountable, the new Companies Bill
mandates that every director shall register himself or herself with the government and obtain
a Director Identification Number (DIN). Like the UID, which is supposed to give every
Indian resident a unique identity and prevent fraud, the DIN will enable the government to
monitor the number of directorships any person holds and also his/her track record.
Considering Indias track record, where bureaucratic supervision of corporate affairs more
often than not leads to corruption and bribery, how many directors will want to risk being on
the governments watch list? Will DIN discourage more competent people from taking up
directorships or encourage them?

4. Class action suits: The best new provision in the Companies Bill is the enabling of tort
action and class action suits. The most important point is whether shareholders of
government-owned companies can sue the government for squashing minority interests. It is
worth recalling that Coal India has been sued by a minority shareholder (The Childrens
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Investment Fund) for following the governments diktat to lower coal prices in 2012. There is
plentiful scope for class action suits against ONGC, Oil India and GAIL, which are
subsidizing losses in the oil marketing companies. Class action suits have to be filed before
the National Company Law Tribunal first, but banking companies are excluded from such
action.

CONCLUSION
The new Companies Act 2013 is a welcome step. It is more stringent and requires strict
compliance by corporate sector. The non compliance or irregularity in compliances may
attract heavy penalties. The Companies Act, 2013 marks a paradigm shift in Indias corporate
law regime, and has far reaching implications for both domestic Indian companies and
overseas investors with a presence in India. Some provisions, however, continue to remain
inoperative and are likely to be made effective by the Indian government in due course. This
piece makes it easier to understand the changes in the 2013 Act that affect multinational
corporations having Indian companies or those looking to make investments in India.

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REFERENCES
Helps from M/s. Ankit Chokshi & Co., A Chartered Accountant Firm
Website of Ministry of Corporate Affairs
Journal of ICSI as well as ICAI
Report of PWC Firm on Company Act, 2013
Report of KPMG on Company Act, 2013.

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