Specific Issues under

Companies Act, 2013

By:
CA Kamal Garg
[B. Com (H), FCA, DISA (ICAI), LLB]
 Part I
Borrowing Powers of the Company
under Companies Act, 2013
 Borrowing Powers of Company
[Section 180(1)(c)]
If: Borrowings [Present (+) Proposed] > [Paid-up Share
Capital (+) Free Reserves];
Then: SR Approval required
(words used in Section are exercise the powers only
with the consent by SR)
Companies Covered: Public as well as Private;
Borrowings Exclusion: Temporary Loans obtained
from Companies Bankers in ordinary course of Business
 Case Study
Particulars Case I Case 2 Case 3 Case 4
(Rs. In Cr.) (Rs. In Cr.) (Rs. In Cr.) (Rs. In Cr.)
Equity Share 100 100 100 100
Capital
Pref. Share 50 50 50 50
Capital
Free Reserves 20 20 20 20
Total 170 170 170 170
Present 120 120 120 120
Borrowings
Proposed 30 40 50 60
Borrowings
Total 150 160 170 180
Resolutions BOD BOD BOD BOD (+) SR
 Particulars Case I Case 2 Case 3 Case 4
(Rs. In Cr.) (Rs. In Cr.) (Rs. In Cr.) (Rs. In Cr.)
Paid up Capital 150 150 150 150

Free Reserves 20 20 20 20
Total 170 170 170 170
Working Capital loan 50 50 50 50
(repayable on demand -
Existing) from GE Capital Ltd.
CC from PNB (repayable on 120 120 120 120
demand - Existing)
6 Months loan for Plant & 30 40 50 60
Mach. from PNB (Proposed)
24 Months loan for Plant & 10 20 30 40
Mach. from PNB (Proposed)
Total 210 230 250 270
Eligible Borrowings 90 110 130 150
Resolutions BOD BOD BOD BOD
 Part II

Debt Due from Directors

under Companies Act, 2013
 Debt due from Director
[Section 180(1)(d)]
SR Approval required to:
Remit; or
Give time for the repayment of
any debt due from a director
 Part III
Contribution to charitable funds, etc.
under Companies Act, 2013
 Contribution to charitable funds, etc.
[Section 181]
If: contribution to charitable & other funds > 5% [Past 3
years average profits];
Then: Prior SR Approval required
Companies Covered: Public as well as Private;
Exclusion: NIL; Unlike 1956 Act, now donations to charitable
and other funds directly relating to the business of the
company or the welfare of its employees are not excluded;
CSR Contributions: Covered by this Section, hence SR
(Prior) Approval Required [Section 181 read with Section 135]
 Part IV

Loans to Directors, etc.

under Companies Act, 2013
 Loans to Directors, etc.
[Section 185]
Save as otherwise provided in this Act,
Prohibition to advance any loan: a company shall not directly or
indirectly advance any loan, including any loan represented by a
book debt, to
(i) any of its directors; or
(ii) any other person in whom such director is interested
Prohibition to provide any guarantee or security: a company shall
not directly or indirectly:
(i) give any guarantee; or
(ii) provide any security
in connection with any loan taken by him or such other person.
 Loans to Directors, etc.
[Section 185]
Provisions not to apply in the following cases:
(i) giving of any loan to a managing or whole-time director-
(a) as part of the conditions of service extended by the
company to all its employees; or
(b) pursuant to any scheme approved by the members
by a SR
(ii) a company which in the ordinary course of its business
provides loans or gives guarantee or securities for the
due repayment of any loan and interest on such loans is charged
at a rate not less than the bank rate declared by the RBI
 Loans to Directors, etc.
[Section 185]
Any other person in whom director is interested meaning thereof:
1. any director of the lending company, or of a company which is its
holding company or any partner or relative of any such director; or
2. any firm in which any such director or relative is a partner; or
3. any private company of which any such director is a director or
member; or
4. any body corporate at a general meeting of which not less than 25%
of the total voting power may be exercised or controlled by any such
director, or by two or more such directors, together; or
5. any body corporate, the Board of directors, managing director or
manager, whereof is accustomed to act in accordance with the
directions or instructions of the Board, or of any director or directors, of
the lending company.
 Case Studies whether covered by Sec. 185
1. ABC Limited proposes to give a loan to Mr. Rajneesh who is a director
of its subsidiary company, PQR Limited.
2. ABC Limited proposes to give a loan to M/s XYZ & Associates, a
partnership firm in which Mr. Rajneesh (who is a director of its
subsidiary company PQR Limited) is a partner.
3. Mr. Rajneesh is a director of ABC Limited and also DEF Limited. ABC
Limited proposes to give a loan to DEF Limited.
4. Mr. Rajneesh is a director of ABC Limited and also a member of DEF
Limited. ABC Limited proposes to give a loan to DEF Limited.
5. Mr. Rajneesh is a director of ABC Pvt. Limited and also a member of
DEF Limited. ABC Pvt. Limited proposes to give a loan to DEF Limited.
6. Mr. Rajneesh is a member of ABC Limited and also a member of DEF
Pvt. Limited. ABC Limited proposes to give a loan to DEF Pvt. Limited.
7. Mr. Rajneesh is a member of ABC Limited and also a director of DEF
Pvt. Limited. ABC Limited proposes to give a loan to DEF Pvt. Limited.
 Loans to Directors, etc.
[Section 185]
Exemption to subsidiary companies conditions thereof: As per Rule
10 of the Companies (Meetings of Board and Its Powers) Rules, 2014:
Wholly owned Subsidiary: Section not to be complied for:
1. Any loan made by a holding company to its wholly owned subsidiary
company; or
2. Any guarantee given or security provided by a holding company in
respect of any loan made to its wholly owned subsidiary company
Subsidiary: Section not to be complied for:
1. Any guarantee given or security provided by a holding company in
respect of loan made by any bank or financial institution to its subsidiary
company
Cardinal Condition for Exemptions: Such loans are utilised by the
subsidiary company for its principle business activities.
 Loans to Directors, etc.
[Section 185]
Section 295 (1956 Act) vs. Section 185 (2013 Act):
Section 185 applicable even on private companies.
Under section 295, loans made to or security provided or guarantee
given required previous approval of CG in that behalf. Under section
185, there is total prohibition on such transactions;
Banking companies were exempt from the ambit of section 295.
Exemption is now available from section 185 to company which in
ordinary course of business providing loans etc. and interest is
charged at a rate not less than RBI's bank rate;
Under section 295 imprisonment could be avoided by fully repaying
the loan. Section 185 does not contain such a provision.
 Part IV
Loans and Investments by Company
under Companies Act, 2013
 Loans And Investments By Company
[Section 186]
Investment through two layers of companies only [Section
186(1)]: A company shall, unless otherwise prescribed, make
investment through not more than two layers of investment
companies.
Exception: However, this provision shall not affect
(i) a company from acquiring any other company incorporated
in a country outside India if such other company has
investment subsidiaries beyond two layers as per the laws of
such country;
(ii) a subsidiary company from having any investment subsidiary for
the purposes of meeting the requirements of any law or
under any rule or regulation framed under any law for the time
being in force.
H Ltd.

S1 Ltd. Investment Company

S2 Ltd. Investment Company

S3 Ltd.

Chart - 1
 H Ltd. Soda Ash Business

S1 Ltd. S2 Ltd.-
Textiles Salt
Business Business

S3 Ltd. S4 Ltd.
Spinning Herbal
Business Business

S5 Ltd. S6 Ltd.
Cotton Raw Salt
Process Producer

Chart - 2
 Loans And Investments By Company
[Section 186]
Limit for making inter-corporate loan, guarantee, providing
security or investment [Section 186(2)]:
A company can not, directly or indirectly-
(a) give loan to any person or other body corporate.
(b) give any guarantee or provide security in connection with a loan
to any body corporate or person; or
(c) acquire by way of subscription, purchase or otherwise, the
securities of any other body corporate.
Exceeding:
1. 60% of [Paid Up Share Capital (+) Free Reserves (+) Securities
Premium Account]; or
2. 100% of [Free Reserves (+) Securities Premium Account],
whichever is more
 Loans And Investments By Company [Section 186]
If: Amounts Involved (supra) > Specified Limit
Then: Prior SR Approval is required [Section 186(3)]
Disclosure in F.S.: Particulars & purposes of such loans,
investments etc. required to be disclosed [Section 186(4)];
BOD Approval always required: All the directors present in
the BOD Meeting;
PFI Approval when required: if any term loan is subsisting;
PFI Approval when not required: If:
1. Amounts Involved [present (+) proposed] < Ceiling Limit
(supra); and
2. No default in repayment of their loan instalments or payment of
interest thereon
 Loans And Investments By Company [Section 186]
Default in the repayment of any deposits: Company
prohibited to give any loan or give any guarantee or provide
security or make an acquisition till such default is subsisting;
Register of loan, guarantee, security, or acquisition: To be
kept at the registered office, in manual or e-mode, in Form
MBP 2;
S. 186(2) to (10) not to apply in certain cases:
1. Loan, Guarantee, Security by Banking Co./ Insurance Co./
HFC/ Company engaged in business of financing companies
or providing infra facilities;
2. Acquisitions made by NBFC in ordinary course of business;
3. Acquisitions through Right Issue
 Loans And Investments By Company [Section 186]
Exemption to subsidiary company/joint ventures
conditions thereof: As per Rule 11(1) of the Companies
(Meetings of Board and Its Powers) Rules, 2014:
Where a loan or guarantee is given or where a security has
been provided by a company to its:
(i) wholly owned subsidiary company, or
(ii) a joint venture company, or
Where an acquisition is made by a holding company, by
way of subscription, purchase or otherwise of, the securities of
its wholly owned subsidiary company,
the requirement of sub-section (3) of section 186 shall not
apply.
 Part V

Related Party Transactions

under Companies Act, 2013
Related Party with reference to a Company - Meaning
1. a Director or his relative;
2. a KMP or his relative;
3. a Firm, in which a director, manager or his relative is a partner;
4. a Pvt. Co. in which a director or manager is a member or director;
5. a Public Co. in which a director or manager is a director or holds along
with his relatives, more than 2% of its paid-up share capital;
6. any Body Corporate of which a director or manager of the company is
a shadow director;
7. any Shadow Director of the company;
8. any Company which is
(A) a holding, subsidiary or an associate company of such company; or
(B) a subsidiary of a holding company to which it is also a subsidiary.
9. such other person as may be prescribed
Related Party with reference to a Company - Meaning
As per Rule 3 of the Companies (Specification of
definitions details) Rules, 2014, for the purposes of
sub-clause (ix) of clause (76) of section 2 of the Act:
1. a director of the holding company; or
2. KMP of the holding company; or
3. his relative
with reference to a company, shall be deemed to be
a related party.
 List of relatives
[Rule 4 of Companies (Specifications of Definitions) Rules, 2014
A person shall be deemed to be the relative of another, if he or she
is related to another in the following manner, namely:
1. Father: Provided that the term Father includes step-father;
2. Mother: Provided that the term Mother includes the step-mother;
3. Son: Provided that the term Son includes the step-son;
4. Sons wife;
5. Daughter;
6. Daughters husband;
7. Brother: Provided that the term Brother includes the step-
brother;
8. Sister: Provided that the term Sister includes the step-sister
 Consent of Board in case of
related party transaction
A company can enter into:
1. specified related party transaction
2. only with approval of Board and subject to prescribed
conditions - Section 188(1) of the 2013 Act;
The consent must be obtained in the Board meeting and not
by circular resolution;
Director interested with a related party shall not be
present at the Board meeting [Rule 15(2) of the
Companies (Meetings of Board and Its Powers) Rules, 2014]
 Consent of Board in case of
related party transaction.contd.
Specified Related Party Transactions:
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) related party's appointment to any office or place of profit (OPP) in
the Co., its Subsidiary Co. or Associate Co.; and
g) underwriting the subscription of any securities or derivatives
thereof, of the company
Prior approval in general meeting by special resolution
in case of large companies or large contracts

In the case of a company having:

1. paid-up share capital of > Rs. 10 crore, or
2. transactions not exceeding prescribed sums,
the contract or arrangement can be entered into by
company only after prior approval by special
resolution in general meeting
No member of the company shall vote on such
special resolution as above if such member is a
related party
 Prescribed Sums [Rule 15(1)]
sale, purchase or supply of any goods or materials >
25% of the annual turnover;
selling or otherwise disposing of, or buying, property
of any kind > 10% of net worth;
leasing of property of any kind > 10% of the net worth
or turnover;
availing or rendering of any services > 10% of the net
worth;
appointment to any OPP in the company, its subsidiary
company or associate company > Rs. 2.5 Lakhs p.m.;
remuneration for underwriting the subscription of any
securities or derivatives > 1% of the net worth
 The provisions relating to related party
transactions do not apply in certain situations
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 - Third proviso to section 188(1) of the 2013
Act;
 Disclosure in Board's report of related
party transactions
Every contract or arrangement entered into under
section 188(1) shall be referred to in the Board's
report to the shareholders along with the
justification for entering into such contract or
arrangement - Section 188(2) of the 2013 Act.
 Consequences if contract or arrangement is
not ratified by board/general meeting
Such contract or arrangement shall be voidable at the
option of the Board;
The directors concerned shall indemnify the
company against any loss incurred by it;
Company can recover losses from director or other
employee;
A director is disqualified for appointment, if he has
been convicted of the offence dealing with related party
transactions under section 188 at any time during the
last preceding five years
 Disclosures
Companies to maintain register for:
1. contracts or arrangements which directors are
interested;
2. related party transactions
Loans and advances from and to related parties
shall be disclosed - General Instructions for
Preparation of Balance Sheet - Schedule III of the
2013 Act;
Disclosures as per AS 18 also required
 Part VI

Auditors Liabilities
under Companies Act, 2013
 Services which auditor should not
provide to the auditee company
Statutory auditor shall not directly or indirectly
provide any of the prescribed "other services to
the:
1. auditee-company; or
2. its holding company; or
3. subsidiary company [Section 144]
 Services which auditor should not provide to
the auditee company.contd.
Prescribed Other Services:
1. accounting and book keeping services;
2. internal audit;
3. design and implementation of any financial information system;
4. actuarial services;
5. investment advisory services;
6. investment banking services;
7. rendering of outsourced financial services;
8. management services; and
9. any other kind of services as may be prescribed.
Requirement of highlighting certain comments
in audit report in thick type or italics omitted
Section 143(3)(f) omits requirement to highlight
comments in thick type or italics;
Section 143(3)(f) redrafts the requirement to provide
that auditor's report shall state the observations or
comments of the auditors on financial transactions
or matters which have any adverse effect on the
functioning of the company;
Section 143(i) of the 2013 Act requires the auditor's
report to state whether the company has adequate
internal financial controls system in place and the
operating effectiveness of such controls
 Auditor's duty to AGM
Section 146 provides that the auditor shall attend
any general meeting:
1. by himself, or
2. through his authorised representative who is
qualified to be an auditor.
Such attendance is compulsory unless
otherwise exempted by the company.
 Auditor's liabilities
Section 147(2) provides as under:
If an auditor of a company contravenes any of
the provisions relating to:
appointment of auditors (section 139),
contents of audit report (section 143),
compliance with auditing standards (section 143),
rendering prohibited services (section 144), and
signing of audit report (section 145),
the auditor shall be punishable with fine which shall
not be less than Rs. 25,000 but which may extend
to Rs. 5,00,000
 Auditor's liabilities.contd.
If an auditor has contravened such provisions
knowingly or wilfully with the intention to deceive:
1. the company, or
2. its shareholders; or
3. creditors; or
4. tax authorities,
he shall be punishable with:
1. imprisonment for a term which may extend to one
year; and
2. with fine which shall not be less than Rs. 1,00,000 lakh
but which may extend to Rs. 25,00,000 [proviso to
section 147(2)]
 Auditor's liabilities.contd.
Section 147(3) provides that where an auditor has been
convicted of an offence as above, he shall be liable to-
1. Refund the remuneration received by him to the
company; and
2. Pay for damages:
to the company,
to the statutory bodies or authorities,
to any other persons
for loss arising out of incorrect or misleading statements
of particulars made in his audit report
 Part VII

Immediate Action Points

under Companies Act, 2013
 Stationery requirements;
Appointment of a woman director;
Appointment of KMP;
Uniform Financial year;
Financial Statements (SFS and CFS);
Audit committee and Nomination & Remuneration committee;
Auditors report requirements;
Internal Audit;
Number of directorships;
CSR;
Increased powers of ROC;
Deposits;
Share Application Money
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