Explained_ Companies Act 2013, Types of Companies
Content
Mrunal (http://mrunal.org/)
[Economy] Companies Act 2013: Salient features, types of Companies,
public ltd. vs private ltd, Independent Directors, SFIO, SEBI Corporate
governance norms
Economy (http://mrunal.org/category/economy) / 6 months Ago /
39 Comments (http://mrunal.org/2014/08/economy-companies-act-2013-types-companies-private-lt
1.
Prologue
2.
What is corporate governance
3.
Type of companies
4.
Holding, Subsidiary and Associate companies
5.
Board of Directors
1.
Independent directors (ID)
2.
SEBI norms: Independent directors
3.
Board meetings- duration and quorum
4.
BoD: Committee
6.
Annual General Meeting (AGM)
7.
Audit related provisions
8.
9.
1.
Audit Committee
2.
External Auditors terms and responsibility
3.
Company Secretary
4.
Company’s Loans
4 new statutory bodies
1.
#1: National Company Law Tribunal (NCLT)
2.
#2: National Financial Reporting Authority (NFRA)
3.
#3: Investor and Education Protection AUTHORITY
4.
#4: Serious Fraud Investigation Office (SFIO)
2% Corporate Social responsibility (CSR)
10.
SEBI’s corporate governance norms
11.
Appendix: Related party transactions (RPT)
Prologue
As such I’m writing summaries of Economic survey 2013. But Companies Act, 2013 is a recurring
term in many chapters. Therefore, needs to be covered parallel.
What is corporate governance
Many definitions, you need to memorize at least one- for the GS4.
Corporate governance is a way of directing the company
1. To protect stakeholders’ interest. Observe the word “stakeholder” not “Shareholders”.
Meaning, company should look after its customers, raw material suppliers, wholesales,
dealers, employees, shareholders…all for them
2. To comply with legal-regulatory requirements. Not just from technical / audit point of view
but from ethical point of view as well- for example misleading ads, harmful products,
environmentally unsustainable production methods etc.
3. Absence of corporate governance – leads to fraud, mismanagement, embezzlement and
harm to society and environment.
To recent initiatives to enforce corporate governance
Companies Act
original act made in 1956
new act passed in August 2013
Has total 470 sections, Government began phase wise
SEBI norms
2012: Adi Godrej
Committee
2014, April: SEBI
published
notification from Feb 2014.
will be effective from
I’m not going into the ‘technical’ parts related to merger,
1 October 2014 (i.e.
acquisition, takeover etc. but just focusing on areas having
one day before
connection with ethics, corporate governance, CSR & allied
Gandhi’s B’day)
topics.
Type of companies
Have to register with Ministry of Corporate Affairs
Companies Act
1956
Companies act 2013
One Person Company.
minimum capital one lakh rupees
no such thing
But has to convert to public or private limited company IF
turnover >2cr or capital >50 lakhs.
private limited: 2 to 50
members
2 to 200 members.minimum capital Rs.one lakh
public limited: same in
both acts
7 to unlimited membersminimum capital Rs.FIVE lakhswithin that,
two subgroups
Listed company- if shares listed on any Indian stock exchange e.g. Infosys, TCS etc.
Unlisted company: self-explanatory. e.g. Nokia India, Sahara’s those two Housing finance
companies*.
* which were selling OFCDs & got Subrato in Jail, for he did not get SEBI permission before
selling OFCDs and did not repay investors’ money when SEBI ordered him to.
overall, 9 lakh companies in India
>90% of Indian companies are private limited.
Holding, Subsidiary and Associate companies
Holding company = itself owns 20% or more shares of another company
.
that “Another company” is further classified into:
subsidiary company
If 50% shares owned by holding
company.
Board of Directors
associate company
If 20% or more shares owned by holding
company.
COMPANIES ACT 2013: SALIENT FEATURES FOR CORPORATE GOVERNANCE
democratic country
voters => parliament =>executive
companies
Shareholders (AGM) =>board of directors => CEO, executives.
Board of directors consists of
1. Chairman
2. executive directors / full time directors
3. nominated directors (By banks or central Government- e.g. during mega scam like Satyam)
4. Independent directors: to protect the interests of minority shareholders.
Now let’s check provisions of Companies act 2013 for directors
Minimum directors in each company
One person company
1
private ltd.
2
public ltd.
3
Maximum 15 directors
Can add even more directors by resolution in AGM (Annual general meeting of
shareholders).
One person can serve as director in maximum 20 companies
One director must be Indian resident (i.e. staying in India for 182 days or more)
One director Woman in the board. (SEBI norms says the same)
If director remains absent for 12 months- consider his position vacant, and get new guy.
Means Sachin and Rekha will have to think twice before becoming directors in any company.
Anyways, these are provisions for directors, in general. Now let’s check specific provisions for
Independent directors
Independent directors (ID)
Job of Independent director = protect the interests of shareholders, particularly the minority
shareholders. He has to fulfill following criteria:
1. He is not a Promoter of the company, NOT nominated by the Chairman
2. He has no pecuniary interest in the company, except salary as director. (meaning company’s
wholesaler, retailer etc. cannot become independent directors)
3. He is not an employee of the company
Companies Act 2013- ID requirements
rd
1/3rd directors in public ltd. company must be Independent directors. (so, if company takes
15 directors, 5 must be ID)
They’ll have 2 terms of five years each = total 10 years
But their performance will be reviewed in shareholders’ Annual General Meeting (AGM).
Means again Sachin and Rekha will have to think twice before becoming Independent
directors of any company.
After 10 years’ service, if they want to join same company as ID again, they’ll have to wait for
3 years cooling period.
SEBI norms: Independent directors
Let’s pause from companies act for a while. We know that
Companies Act
SEBI norms
new act passed in August 2013
2014, April: SEBI published
will be effective from 1st October 2014
so, what does SEBI norms say about these independent directors?
10 years term yes BUT from retrospective effect. Meaning, if I were an Independent Director
in a company since 2010, then my “retirement” is 2020. (and not 2014+10=2024).
One person can become Independent director of seven companies at most.
If he is a ‘full time’ director in a single company, then he can become ID in 3 companies at
most.
Enough of directors, moving to next topic:
Board meetings- duration and quorum
Doesn’t apply to one person companies.
Company must hold minimum 4 meetings per year
must not have more than 120 days gap between two meetings
Quorum: 1/3rd strength or two directors, whichever is max.
If directors cannot give physical presence, video conferencing is permitted.
Directors must be given 7 days prior notice. (So they can make prior travel arrangements.)
BoD: Committee
just like parliament has PAC, estimate Committee, departmental standing Committee etc. same
way, Companies will be required to make following Committees out of their board members
1. Audit committee
2. Stakeholder relationship committee (SRC)
3. CSR committee (CSRC)
4. Nomination and Remuneration committee (NRC)- they’ll observe following
1. MD/Directors’ salary doesn’t exceed 11% of company’s profit
2. Pay rise of CEO, directors etc. vs company performance
3. They’ll present this data in AGM.
So far, we checked provisions related to directors and board meetings. Mock questions can be
formed by twisting the facts, for example
Which of the following statements are correct as per the new companies Act?
1. 1/3rd directors must be Indian residents
2. atleast one woman director must be Indian
3. atleast one independent director must be a woman
4. none of above (Correct answer)
Moving to next topic
Annual General Meeting (AGM)
One person company: no need
Public & pvt LTD. companies…yes they’ve to hold AGM.
General notice can be sent by letter / email to shareholders.
Proxy voting permitted.
Electronic Voting also permitted (as per SEBI’s corporate governance norms).
Quorum depends on number of shareholders.
Data not important except for MBA interviews
members
quorum
private ltd company
2 members
public ltd company upto 1000 shareholders
5 members
public ltd >1000 upto 5000
15 members
public ltd. >5000 shareholders
30 members
Audit related provisions
Audit Committee
Have to make an audit Committee from board of directors.
Its chairman must be an independent director.
Provision for internal audit by CA, Accountants, even other (non-CA) persons. ICAI is
opposing this.
Companies will have to setup whistleblower mechanism.
External Auditors terms and responsibility
One auditor can audit maximum of 20 companies.
If he finds any fraud- he must report to both Union Government (ministry of corporate
affairs) and during the AGM.
Auditor cannot audit the same company forever
individual auditor
5 years
audit firm
2 terms x 5 years = 10 years
After that cooling off period of 5 years.
Why? Well, same reason why Government officials should be transferred after 3-5 years so they
don’t develop nexus with local thugs.
Company Secretary
Company Secretary acts as a link between board of directors and shareholders.
He arranges BoD meetings, AGM, ensure quorum, minutes of the meeting etc.
Companies above certain share capital, have to compulsorily hire company Secretary.
Companies act
2013
Companies Act 1956
Companies above capital of Rs. 5 crore => have to compulsorily hire
company Secretary.
10 crore
There are hardly ~7000 companies in India having share capital of 10 crore or above. (While
there are >20,000 people doing this course).
For remaining companies- not necessary to hire company Secretary = less jobs available for
company Secretaries.
Therefore company Secretaries and their national body, are opposing this new provision.
Company’s Loans
Company cannot give loan to director / related persons
If company gives loan to anyone- then its minimum interest rate must be higher than that of
Government securities (G-sec). (Otherwise CEO might pass loan to his own “puppet” driver at
2% interest and then use It for betting in cricket or share market!)
Company must get Credit rating (“A”, BB, C etc.) before accepting public deposit (in collective
investment schemes)
Companies have to appoint a chief finance office to look after audit and account.
4 new statutory bodies
Not 1, not 2, not 3 – total 4 new statutory bodies will be created under Companies Act 2013.
In other words, if any ministry wants to learn how to harass UPSC aspirants- they should take
COACHING from babus @ministry of corporate affairs.
List of Statutory Bodies under Companies Act
Matter
Statutory body
tribunal / litigations
1. National Company Law Tribunal (NCLT)
accounting norms
2. National Financial Reporting Authority (NFRA)
awareness generation
3. Investor and Education Protection Fund
fraud detection
4. SFIO
Let’s check their features one by one
#1: National Company Law Tribunal (NCLT)
Composition
Judicial + technical members
Deadline
have to finish case in 3 months
Hearing
You can present case by your own, via lawyer, CA or company Secretary.
Appeal
If either party is unsatisfied with NCLT verdict, they can approach NCLAT
(national company law APPEALATE tribunal).
Disputes where NCLT will adjudicate:
1. Company fails to comply with any provisions of the act (e.g. quorum not maintained,
auditors not changed after deadline etc.)
2. Merger and acquisition disputes
3. Converting Public ltd. To private ltd.
4. Filing Class action suits (e.g. Satyam’s US shareholders filled such suit in USA and recovered
money. But Indian shareholders couldn’t because 56’s act had no such provision)
#2: National Financial Reporting Authority (NFRA)
1 Chairman + 15 members
Will set Accounting standards for companies
Will have Powers of civil court.
Aggrieved party can appeal at NFRAA (National Financial Reporting APPELATE Authority)
Can debar CA and accountants for professional misconduct.
ICAI unhappy with this provision- because under Chartered Accountants Act, 1949, they’ve
the powers to take action against CAs.
#3: Investor and Education Protection AUTHORITY
As the name suggests, this fund money is used for awareness generation, financial literacy
so investors don’t fall into traps like Saradha chit fund, Sahara OFCD etc.
Where do they get money? Ans. Companies have to pay dividend, interest and principal to
their investors.
But if any money remains unclaimed (death, disappearance of investor etc.)=> Money goes
to corporate affairs ministry => into this fund.
This is not a new thing. Already exists, But 2013’s act gives it statutory status, with following
provisions
HQ at Delhi. Regional offices across India.
Chairman: Secretary of Corporate affairs ministry
Membership: executive directors from RBI, SEBI; experts from legal and financial sector.
#4: Serious Fraud Investigation O⤀ꀈce (SFIO)
Not a new body, already setup in 2003 under corporate affairs ministry (based on Naresh
Chandra report)
It has solved- Saradha chitfund, Satyam scam etc.
Then what’s new in Companies Act 2013?
SFIO is made a statutory body.
It’ll have power to Search seize arrest (until now, it could only examine documents)
SFIO investigators will have same powers under CrPC, like a police officer.
Once SFIO gets case, other agencies can’t proceed.
State police, ED, CBI etc. will have to handover documents, witness and cooperate in further
investigation.
2% Corporate Social responsibility (CSR)
Under the new act, Companies will have to spend 2% of their last three years’ average profit on
CSR activities. (e.g. schools, slum redevelopment, “chowkidari” to prevent junta
(http://mrunal.org/2014/08/economic-survey-ch11-railway-budget-infrastructure-tariffauthority-biodiesel-biotoilets-fdi.html#492) from urinating/defecating around railway station
etc.)
2% CSR rule applies to only following companies
Net profit
5 crore (before tax)
Net worth
500 crore
turnover
1000 core
2% rule doesn’t apply to income earned from foreign branches of the above companies.
Above companies have to setup CSR Committee made up of 3 board of directors.
Committee will formulate & monitor CSR policy.
SEBI’s corporate governance norms
2012: Adi Godrej Committee
2014, Feb: SEBI notified the norms
2014, 1st October: these rules will become effective.
They run parallel to what is already given under companies act.
Following diagram summarizes it- just write two lines on each of them and you’re done with
100-200 words question in mains.
Appendix: Related party transactions (RPT)
Lengthy topic, not important for prelims. But will be important for (MBA) interviews because this
Maruti-Suzuki controversy will drag on for long.
Maruti Suzuki India ltd
majority shareholder
Suzuki Japan
minority shareholder
HDFC, Reliance Capital, ICICI, SBI etc.
2012: Strike in Manesar plant, Haryana. Manager died, more than 3000 crore lost due to halt
in production.
After this, Suzuki (Japan) registered a separate company “Suzuki Motors, Gujarat” to setup
separate factory in Mehsana, Gujarat.
Suzuki itself will manufacture the cars in this Gujarat plant, will hand It over to Maruti Suzuki
for selling through its showrooms.
before
after
Maruti Suzuki
manufactured cars, sold
them = profit to
themselves.
Then they distributed
dividend to Suzuki and
Suzuki will keep profit on car manufacture.
Maruti (India) will end up like a ‘car-distributor’
company=> less profit for Indian company => less
dividend to its minority shareholders.
other shareholders.
So in this case, we’ve two parties
Holding Company Suzuki (Japan) that owns ~56% in Maruti Suzuki India ltd.(Subsidiary
company).
Now one party (Japan) is taking an action (of setting plant in Gujarat), which will have negative
ramification for the investors in other party (Indian Maruti).
This is one type of “related party transaction”.
As per companies Act 2013, Related party transactions require voting-approval from majority OF
the minority shareholders.Therefore, Suzuki has decided following:
First they’ll do roadshows and seminars for awareness generation among shareholders
(about the benefits of Gujarat plant)
(Rumors) They have even hired investment bankers to influence the FIIs who own shares in
Maruti Suzuki India.
Voting will be done probably in September 2014’s AGM
At that time, Suzuki can’t vote (because majority shareholder) but IF from the remaining
shareholders, if 3/4th vote in favor, then Suzuki can proceed in setting up Gujarat plant.
Tags: Economic Survey 2013 (http://mrunal.org/tag/economic-survey-2013), EcoPill2Finance (http://mrunal.org/tag/ecopill2-finance)
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So far 39 Comments posted
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Bheemanna
Thanks sir.
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priyanka
Thanku Mrunal sir!!
Anyone please tell from where to prepare thoroughly about Ethics and
Integrity, Economic Survey, International Relations, Economic And Social
Development Issues? (Apart from Mrunal Sir’s article and Indian Year
Book)
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Anand Singh
Thx sir
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naveen
Sir u r doing a great work !!!!!!!!
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manish aryan
very nice–need of hour
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shekhar
thank you sir
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Jassi
Thank you sir
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sumegha
Thanks sir..
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VIkAS
Graph are very helpful to memories some imp feature and a very
balanced information abt new company acts.
Thnx
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B+ve
CSR is also applicable to foriegn companies with a branch or project
office in India.
More specifically CSR Activities
1.womene empowerment and gender equality
2.protecting environment
3.promotion of art, culture and sports
4.welfare of weaker section
5.rural development and technology incubation
6.PM National relief fund
and annual report of the company should include a report on CSR
Cheers;
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vinay kumar
development of agriculture market for farmer
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sudhir...
thanks sir …
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shikha
THANKS SIR……..
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Akhilesh Kumar
Thanks Sir
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shashi
sir plz help I am in Allahabad and thinking for ias 2015 will any body
suggests me best coaching for gs mains in hindi medium and my
optional is public administration. thanks
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Prasanna
Great appreciation for the collection of the relevant data.
But , does all this is required as part of civils preparation? I don think so
Mrunal.
Kindly scrutinise once . Knowing this much depth is not really required
just because the composition of the committee,board of directors are all
dynamic in nature.
Adding to this, CSR could have been elaborated little more, bringing out
the consequences of the same and how best other norms can be
included under CSR.
Thanks
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Mrunal (http://mrunal.org)
Prasanna,
Ofcourse UPSC is not going to ask all trivial things.
But this is the latest fashion among certain (biased) panelists in
Bank and MBA interviews.
They deliberately ask this type of trivial GK, especially when they
want to begin “Stress” interview (depending on which graduation
stream, caste, region or religion they hate.
If you can’t answer, they verbally humiliate you OR ask the next
board member to take over. And even if next board member asks
easy questions, still you will fumble because of the “Shockers” from
previous member. Thus, your entire interview will be ruined.
Of Couse there is no end to trivial GK, but you must keep adapting
according to the game and be prepared as much as you canespecially things related to commerce and economy.
I run this site to help maximum people clear any competitive exam
without coaching. There are hardly ~1200 vacancies in UPSC, the
rest will have to try their luck in other bank/SSC/MBA etc fields. But
for every given topic, I can’t create one article for UPSC prelims,
one for UPSC mains, and other for non UPSC exam. Therefore
everything running parallel in this Ganga, Pick whatever you need
for whatever exam you’re competing for. Like Modi says “Sabkaa
saath, Sabkaa Vikaas”.
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Naveen Kumar Mavi
Well answered Mrunal Ji – “Pick the best leave the rest…”
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prasanna
Hi Mrunal,
I am a constant follower of your blog. I love the kind of
presentation you are known for. This i felt ,little deviated wit
the actual path of content , since I have been following your
blog and have enjoyed your presentation style. Yes of course
, you are the backbone of many aspirants.
As u said, it might be useful for other competitive exams. I do
accept this. But may be least likely for civils. Indeed , thankful
for your great consistent efforts Mrunal ji.
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Gautam Singh
Sir your article has a error in respect of appointment of Company
Secretary. There was an amendment and limit for appoinment of CS in
brought down to Rs. 5 crore in new act
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manisha
Thanx a lot sir…..
u r great
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ravi
Sir, which fundamental rights are applicable to person of indian origin
(PIO), Overseas Citizen of India (OCI), and NRI?
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Maharaj
@RAVI
As NRI are Indian citizens they have same fundamental rights like a
normal Indian citizen but with a caveat that he/she has stayed out
of India for 7 continuous years and have not even one conveyed at
Indian embassy his/her willingness to stay Indian citizen – this is
called loss of citizenship by deprivation and hence he/she loses
Indian citizenship and no longer enjoys all fundamental rights as
few are available to only Indian citizens (such as under article
15,16,19,29,30 + voting+ standing in election + eligibility in
constitutional posts and public offices)
OCI and PIO are are not Indian citizens how ever they enjoy certain
benefits like exemption from visa(student + employment etc) but
they do not enjoy all fundamental rights enshrined in our
constitution. Above mentioned list applies to them also. However if
the acquire citizenship as per provisions defined in OCI act 2002
/citizenship act 1955/by naturalization they are treated as Indian
citizens and are guaranteed all fundamental rights
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Arun
good article …..thankss
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gur
hello mrunal sir i just needed an information regarding recent
recommendations in which government asked the UPSC not to include
English comprehension marks into the merit list for csat paper. Has the
UPSC accepted the recommendations or not?? What is the actual
situation right now?? Thanks
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vikas sharma
thanks bhai.
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dileep
sir thanks for your dedication for us………
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Manish Singh
“Sabkaa saath, Sabkaa Vikaas”
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Sid
Thanks for the great efforts sir..
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SAKSHI
thanks sir!! no words can describe our gratitude for you.
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Jaysing Singal
Thanks
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kumar saurabh
Thanks Mrunal.We need people like you.Great article
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Keerthi
thanks mrunal ji
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Piyush
One person can become Independent director of ten (maximum 7 listed
companies and remaining out of 10 ~ unlisted ) companies at most.
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Pallavi
thank you sir for sharing your valuable knowledge in just simple way
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Biswajit Mishra
u r doing a great job sir, thank u…
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praveena
Sir, im confident about prelims result and taking commerce optional for
mains. For CA exams after november new company act 2013will be
followed. But what about UPSC mains?? 2013 act Or 1956??? Pls assist.
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praveena
Pls try to answer after enquiring from ur sources. It will be a great
help.
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Digvijay
thank you for sharing knowledge sir
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[Economy] Companies Act 2013: Salient features, types of Companies,
public ltd. vs private ltd, Independent Directors, SFIO, SEBI Corporate
governance norms
Economy (http://mrunal.org/category/economy) / 6 months Ago /
39 Comments (http://mrunal.org/2014/08/economy-companies-act-2013-types-companies-private-lt
1.
Prologue
2.
What is corporate governance
3.
Type of companies
4.
Holding, Subsidiary and Associate companies
5.
Board of Directors
1.
Independent directors (ID)
2.
SEBI norms: Independent directors
3.
Board meetings- duration and quorum
4.
BoD: Committee
6.
Annual General Meeting (AGM)
7.
Audit related provisions
8.
9.
1.
Audit Committee
2.
External Auditors terms and responsibility
3.
Company Secretary
4.
Company’s Loans
4 new statutory bodies
1.
#1: National Company Law Tribunal (NCLT)
2.
#2: National Financial Reporting Authority (NFRA)
3.
#3: Investor and Education Protection AUTHORITY
4.
#4: Serious Fraud Investigation Office (SFIO)
2% Corporate Social responsibility (CSR)
10.
SEBI’s corporate governance norms
11.
Appendix: Related party transactions (RPT)
Prologue
As such I’m writing summaries of Economic survey 2013. But Companies Act, 2013 is a recurring
term in many chapters. Therefore, needs to be covered parallel.
What is corporate governance
Many definitions, you need to memorize at least one- for the GS4.
Corporate governance is a way of directing the company
1. To protect stakeholders’ interest. Observe the word “stakeholder” not “Shareholders”.
Meaning, company should look after its customers, raw material suppliers, wholesales,
dealers, employees, shareholders…all for them
2. To comply with legal-regulatory requirements. Not just from technical / audit point of view
but from ethical point of view as well- for example misleading ads, harmful products,
environmentally unsustainable production methods etc.
3. Absence of corporate governance – leads to fraud, mismanagement, embezzlement and
harm to society and environment.
To recent initiatives to enforce corporate governance
Companies Act
original act made in 1956
new act passed in August 2013
Has total 470 sections, Government began phase wise
SEBI norms
2012: Adi Godrej
Committee
2014, April: SEBI
published
notification from Feb 2014.
will be effective from
I’m not going into the ‘technical’ parts related to merger,
1 October 2014 (i.e.
acquisition, takeover etc. but just focusing on areas having
one day before
connection with ethics, corporate governance, CSR & allied
Gandhi’s B’day)
topics.
Type of companies
Have to register with Ministry of Corporate Affairs
Companies Act
1956
Companies act 2013
One Person Company.
minimum capital one lakh rupees
no such thing
But has to convert to public or private limited company IF
turnover >2cr or capital >50 lakhs.
private limited: 2 to 50
members
2 to 200 members.minimum capital Rs.one lakh
public limited: same in
both acts
7 to unlimited membersminimum capital Rs.FIVE lakhswithin that,
two subgroups
Listed company- if shares listed on any Indian stock exchange e.g. Infosys, TCS etc.
Unlisted company: self-explanatory. e.g. Nokia India, Sahara’s those two Housing finance
companies*.
* which were selling OFCDs & got Subrato in Jail, for he did not get SEBI permission before
selling OFCDs and did not repay investors’ money when SEBI ordered him to.
overall, 9 lakh companies in India
>90% of Indian companies are private limited.
Holding, Subsidiary and Associate companies
Holding company = itself owns 20% or more shares of another company
.
that “Another company” is further classified into:
subsidiary company
If 50% shares owned by holding
company.
Board of Directors
associate company
If 20% or more shares owned by holding
company.
COMPANIES ACT 2013: SALIENT FEATURES FOR CORPORATE GOVERNANCE
democratic country
voters => parliament =>executive
companies
Shareholders (AGM) =>board of directors => CEO, executives.
Board of directors consists of
1. Chairman
2. executive directors / full time directors
3. nominated directors (By banks or central Government- e.g. during mega scam like Satyam)
4. Independent directors: to protect the interests of minority shareholders.
Now let’s check provisions of Companies act 2013 for directors
Minimum directors in each company
One person company
1
private ltd.
2
public ltd.
3
Maximum 15 directors
Can add even more directors by resolution in AGM (Annual general meeting of
shareholders).
One person can serve as director in maximum 20 companies
One director must be Indian resident (i.e. staying in India for 182 days or more)
One director Woman in the board. (SEBI norms says the same)
If director remains absent for 12 months- consider his position vacant, and get new guy.
Means Sachin and Rekha will have to think twice before becoming directors in any company.
Anyways, these are provisions for directors, in general. Now let’s check specific provisions for
Independent directors
Independent directors (ID)
Job of Independent director = protect the interests of shareholders, particularly the minority
shareholders. He has to fulfill following criteria:
1. He is not a Promoter of the company, NOT nominated by the Chairman
2. He has no pecuniary interest in the company, except salary as director. (meaning company’s
wholesaler, retailer etc. cannot become independent directors)
3. He is not an employee of the company
Companies Act 2013- ID requirements
rd
1/3rd directors in public ltd. company must be Independent directors. (so, if company takes
15 directors, 5 must be ID)
They’ll have 2 terms of five years each = total 10 years
But their performance will be reviewed in shareholders’ Annual General Meeting (AGM).
Means again Sachin and Rekha will have to think twice before becoming Independent
directors of any company.
After 10 years’ service, if they want to join same company as ID again, they’ll have to wait for
3 years cooling period.
SEBI norms: Independent directors
Let’s pause from companies act for a while. We know that
Companies Act
SEBI norms
new act passed in August 2013
2014, April: SEBI published
will be effective from 1st October 2014
so, what does SEBI norms say about these independent directors?
10 years term yes BUT from retrospective effect. Meaning, if I were an Independent Director
in a company since 2010, then my “retirement” is 2020. (and not 2014+10=2024).
One person can become Independent director of seven companies at most.
If he is a ‘full time’ director in a single company, then he can become ID in 3 companies at
most.
Enough of directors, moving to next topic:
Board meetings- duration and quorum
Doesn’t apply to one person companies.
Company must hold minimum 4 meetings per year
must not have more than 120 days gap between two meetings
Quorum: 1/3rd strength or two directors, whichever is max.
If directors cannot give physical presence, video conferencing is permitted.
Directors must be given 7 days prior notice. (So they can make prior travel arrangements.)
BoD: Committee
just like parliament has PAC, estimate Committee, departmental standing Committee etc. same
way, Companies will be required to make following Committees out of their board members
1. Audit committee
2. Stakeholder relationship committee (SRC)
3. CSR committee (CSRC)
4. Nomination and Remuneration committee (NRC)- they’ll observe following
1. MD/Directors’ salary doesn’t exceed 11% of company’s profit
2. Pay rise of CEO, directors etc. vs company performance
3. They’ll present this data in AGM.
So far, we checked provisions related to directors and board meetings. Mock questions can be
formed by twisting the facts, for example
Which of the following statements are correct as per the new companies Act?
1. 1/3rd directors must be Indian residents
2. atleast one woman director must be Indian
3. atleast one independent director must be a woman
4. none of above (Correct answer)
Moving to next topic
Annual General Meeting (AGM)
One person company: no need
Public & pvt LTD. companies…yes they’ve to hold AGM.
General notice can be sent by letter / email to shareholders.
Proxy voting permitted.
Electronic Voting also permitted (as per SEBI’s corporate governance norms).
Quorum depends on number of shareholders.
Data not important except for MBA interviews
members
quorum
private ltd company
2 members
public ltd company upto 1000 shareholders
5 members
public ltd >1000 upto 5000
15 members
public ltd. >5000 shareholders
30 members
Audit related provisions
Audit Committee
Have to make an audit Committee from board of directors.
Its chairman must be an independent director.
Provision for internal audit by CA, Accountants, even other (non-CA) persons. ICAI is
opposing this.
Companies will have to setup whistleblower mechanism.
External Auditors terms and responsibility
One auditor can audit maximum of 20 companies.
If he finds any fraud- he must report to both Union Government (ministry of corporate
affairs) and during the AGM.
Auditor cannot audit the same company forever
individual auditor
5 years
audit firm
2 terms x 5 years = 10 years
After that cooling off period of 5 years.
Why? Well, same reason why Government officials should be transferred after 3-5 years so they
don’t develop nexus with local thugs.
Company Secretary
Company Secretary acts as a link between board of directors and shareholders.
He arranges BoD meetings, AGM, ensure quorum, minutes of the meeting etc.
Companies above certain share capital, have to compulsorily hire company Secretary.
Companies act
2013
Companies Act 1956
Companies above capital of Rs. 5 crore => have to compulsorily hire
company Secretary.
10 crore
There are hardly ~7000 companies in India having share capital of 10 crore or above. (While
there are >20,000 people doing this course).
For remaining companies- not necessary to hire company Secretary = less jobs available for
company Secretaries.
Therefore company Secretaries and their national body, are opposing this new provision.
Company’s Loans
Company cannot give loan to director / related persons
If company gives loan to anyone- then its minimum interest rate must be higher than that of
Government securities (G-sec). (Otherwise CEO might pass loan to his own “puppet” driver at
2% interest and then use It for betting in cricket or share market!)
Company must get Credit rating (“A”, BB, C etc.) before accepting public deposit (in collective
investment schemes)
Companies have to appoint a chief finance office to look after audit and account.
4 new statutory bodies
Not 1, not 2, not 3 – total 4 new statutory bodies will be created under Companies Act 2013.
In other words, if any ministry wants to learn how to harass UPSC aspirants- they should take
COACHING from babus @ministry of corporate affairs.
List of Statutory Bodies under Companies Act
Matter
Statutory body
tribunal / litigations
1. National Company Law Tribunal (NCLT)
accounting norms
2. National Financial Reporting Authority (NFRA)
awareness generation
3. Investor and Education Protection Fund
fraud detection
4. SFIO
Let’s check their features one by one
#1: National Company Law Tribunal (NCLT)
Composition
Judicial + technical members
Deadline
have to finish case in 3 months
Hearing
You can present case by your own, via lawyer, CA or company Secretary.
Appeal
If either party is unsatisfied with NCLT verdict, they can approach NCLAT
(national company law APPEALATE tribunal).
Disputes where NCLT will adjudicate:
1. Company fails to comply with any provisions of the act (e.g. quorum not maintained,
auditors not changed after deadline etc.)
2. Merger and acquisition disputes
3. Converting Public ltd. To private ltd.
4. Filing Class action suits (e.g. Satyam’s US shareholders filled such suit in USA and recovered
money. But Indian shareholders couldn’t because 56’s act had no such provision)
#2: National Financial Reporting Authority (NFRA)
1 Chairman + 15 members
Will set Accounting standards for companies
Will have Powers of civil court.
Aggrieved party can appeal at NFRAA (National Financial Reporting APPELATE Authority)
Can debar CA and accountants for professional misconduct.
ICAI unhappy with this provision- because under Chartered Accountants Act, 1949, they’ve
the powers to take action against CAs.
#3: Investor and Education Protection AUTHORITY
As the name suggests, this fund money is used for awareness generation, financial literacy
so investors don’t fall into traps like Saradha chit fund, Sahara OFCD etc.
Where do they get money? Ans. Companies have to pay dividend, interest and principal to
their investors.
But if any money remains unclaimed (death, disappearance of investor etc.)=> Money goes
to corporate affairs ministry => into this fund.
This is not a new thing. Already exists, But 2013’s act gives it statutory status, with following
provisions
HQ at Delhi. Regional offices across India.
Chairman: Secretary of Corporate affairs ministry
Membership: executive directors from RBI, SEBI; experts from legal and financial sector.
#4: Serious Fraud Investigation O⤀ꀈce (SFIO)
Not a new body, already setup in 2003 under corporate affairs ministry (based on Naresh
Chandra report)
It has solved- Saradha chitfund, Satyam scam etc.
Then what’s new in Companies Act 2013?
SFIO is made a statutory body.
It’ll have power to Search seize arrest (until now, it could only examine documents)
SFIO investigators will have same powers under CrPC, like a police officer.
Once SFIO gets case, other agencies can’t proceed.
State police, ED, CBI etc. will have to handover documents, witness and cooperate in further
investigation.
2% Corporate Social responsibility (CSR)
Under the new act, Companies will have to spend 2% of their last three years’ average profit on
CSR activities. (e.g. schools, slum redevelopment, “chowkidari” to prevent junta
(http://mrunal.org/2014/08/economic-survey-ch11-railway-budget-infrastructure-tariffauthority-biodiesel-biotoilets-fdi.html#492) from urinating/defecating around railway station
etc.)
2% CSR rule applies to only following companies
Net profit
5 crore (before tax)
Net worth
500 crore
turnover
1000 core
2% rule doesn’t apply to income earned from foreign branches of the above companies.
Above companies have to setup CSR Committee made up of 3 board of directors.
Committee will formulate & monitor CSR policy.
SEBI’s corporate governance norms
2012: Adi Godrej Committee
2014, Feb: SEBI notified the norms
2014, 1st October: these rules will become effective.
They run parallel to what is already given under companies act.
Following diagram summarizes it- just write two lines on each of them and you’re done with
100-200 words question in mains.
Appendix: Related party transactions (RPT)
Lengthy topic, not important for prelims. But will be important for (MBA) interviews because this
Maruti-Suzuki controversy will drag on for long.
Maruti Suzuki India ltd
majority shareholder
Suzuki Japan
minority shareholder
HDFC, Reliance Capital, ICICI, SBI etc.
2012: Strike in Manesar plant, Haryana. Manager died, more than 3000 crore lost due to halt
in production.
After this, Suzuki (Japan) registered a separate company “Suzuki Motors, Gujarat” to setup
separate factory in Mehsana, Gujarat.
Suzuki itself will manufacture the cars in this Gujarat plant, will hand It over to Maruti Suzuki
for selling through its showrooms.
before
after
Maruti Suzuki
manufactured cars, sold
them = profit to
themselves.
Then they distributed
dividend to Suzuki and
Suzuki will keep profit on car manufacture.
Maruti (India) will end up like a ‘car-distributor’
company=> less profit for Indian company => less
dividend to its minority shareholders.
other shareholders.
So in this case, we’ve two parties
Holding Company Suzuki (Japan) that owns ~56% in Maruti Suzuki India ltd.(Subsidiary
company).
Now one party (Japan) is taking an action (of setting plant in Gujarat), which will have negative
ramification for the investors in other party (Indian Maruti).
This is one type of “related party transaction”.
As per companies Act 2013, Related party transactions require voting-approval from majority OF
the minority shareholders.Therefore, Suzuki has decided following:
First they’ll do roadshows and seminars for awareness generation among shareholders
(about the benefits of Gujarat plant)
(Rumors) They have even hired investment bankers to influence the FIIs who own shares in
Maruti Suzuki India.
Voting will be done probably in September 2014’s AGM
At that time, Suzuki can’t vote (because majority shareholder) but IF from the remaining
shareholders, if 3/4th vote in favor, then Suzuki can proceed in setting up Gujarat plant.
Tags: Economic Survey 2013 (http://mrunal.org/tag/economic-survey-2013), EcoPill2Finance (http://mrunal.org/tag/ecopill2-finance)
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So far 39 Comments posted
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Bheemanna
Thanks sir.
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priyanka
Thanku Mrunal sir!!
Anyone please tell from where to prepare thoroughly about Ethics and
Integrity, Economic Survey, International Relations, Economic And Social
Development Issues? (Apart from Mrunal Sir’s article and Indian Year
Book)
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Anand Singh
Thx sir
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naveen
Sir u r doing a great work !!!!!!!!
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manish aryan
very nice–need of hour
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shekhar
thank you sir
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Jassi
Thank you sir
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sumegha
Thanks sir..
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VIkAS
Graph are very helpful to memories some imp feature and a very
balanced information abt new company acts.
Thnx
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B+ve
CSR is also applicable to foriegn companies with a branch or project
office in India.
More specifically CSR Activities
1.womene empowerment and gender equality
2.protecting environment
3.promotion of art, culture and sports
4.welfare of weaker section
5.rural development and technology incubation
6.PM National relief fund
and annual report of the company should include a report on CSR
Cheers;
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vinay kumar
development of agriculture market for farmer
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sudhir...
thanks sir …
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shikha
THANKS SIR……..
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Akhilesh Kumar
Thanks Sir
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shashi
sir plz help I am in Allahabad and thinking for ias 2015 will any body
suggests me best coaching for gs mains in hindi medium and my
optional is public administration. thanks
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Prasanna
Great appreciation for the collection of the relevant data.
But , does all this is required as part of civils preparation? I don think so
Mrunal.
Kindly scrutinise once . Knowing this much depth is not really required
just because the composition of the committee,board of directors are all
dynamic in nature.
Adding to this, CSR could have been elaborated little more, bringing out
the consequences of the same and how best other norms can be
included under CSR.
Thanks
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Mrunal (http://mrunal.org)
Prasanna,
Ofcourse UPSC is not going to ask all trivial things.
But this is the latest fashion among certain (biased) panelists in
Bank and MBA interviews.
They deliberately ask this type of trivial GK, especially when they
want to begin “Stress” interview (depending on which graduation
stream, caste, region or religion they hate.
If you can’t answer, they verbally humiliate you OR ask the next
board member to take over. And even if next board member asks
easy questions, still you will fumble because of the “Shockers” from
previous member. Thus, your entire interview will be ruined.
Of Couse there is no end to trivial GK, but you must keep adapting
according to the game and be prepared as much as you canespecially things related to commerce and economy.
I run this site to help maximum people clear any competitive exam
without coaching. There are hardly ~1200 vacancies in UPSC, the
rest will have to try their luck in other bank/SSC/MBA etc fields. But
for every given topic, I can’t create one article for UPSC prelims,
one for UPSC mains, and other for non UPSC exam. Therefore
everything running parallel in this Ganga, Pick whatever you need
for whatever exam you’re competing for. Like Modi says “Sabkaa
saath, Sabkaa Vikaas”.
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Naveen Kumar Mavi
Well answered Mrunal Ji – “Pick the best leave the rest…”
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prasanna
Hi Mrunal,
I am a constant follower of your blog. I love the kind of
presentation you are known for. This i felt ,little deviated wit
the actual path of content , since I have been following your
blog and have enjoyed your presentation style. Yes of course
, you are the backbone of many aspirants.
As u said, it might be useful for other competitive exams. I do
accept this. But may be least likely for civils. Indeed , thankful
for your great consistent efforts Mrunal ji.
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Gautam Singh
Sir your article has a error in respect of appointment of Company
Secretary. There was an amendment and limit for appoinment of CS in
brought down to Rs. 5 crore in new act
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manisha
Thanx a lot sir…..
u r great
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ravi
Sir, which fundamental rights are applicable to person of indian origin
(PIO), Overseas Citizen of India (OCI), and NRI?
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Maharaj
@RAVI
As NRI are Indian citizens they have same fundamental rights like a
normal Indian citizen but with a caveat that he/she has stayed out
of India for 7 continuous years and have not even one conveyed at
Indian embassy his/her willingness to stay Indian citizen – this is
called loss of citizenship by deprivation and hence he/she loses
Indian citizenship and no longer enjoys all fundamental rights as
few are available to only Indian citizens (such as under article
15,16,19,29,30 + voting+ standing in election + eligibility in
constitutional posts and public offices)
OCI and PIO are are not Indian citizens how ever they enjoy certain
benefits like exemption from visa(student + employment etc) but
they do not enjoy all fundamental rights enshrined in our
constitution. Above mentioned list applies to them also. However if
the acquire citizenship as per provisions defined in OCI act 2002
/citizenship act 1955/by naturalization they are treated as Indian
citizens and are guaranteed all fundamental rights
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Arun
good article …..thankss
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gur
hello mrunal sir i just needed an information regarding recent
recommendations in which government asked the UPSC not to include
English comprehension marks into the merit list for csat paper. Has the
UPSC accepted the recommendations or not?? What is the actual
situation right now?? Thanks
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vikas sharma
thanks bhai.
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dileep
sir thanks for your dedication for us………
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Manish Singh
“Sabkaa saath, Sabkaa Vikaas”
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Sid
Thanks for the great efforts sir..
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SAKSHI
thanks sir!! no words can describe our gratitude for you.
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Jaysing Singal
Thanks
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kumar saurabh
Thanks Mrunal.We need people like you.Great article
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Keerthi
thanks mrunal ji
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Piyush
One person can become Independent director of ten (maximum 7 listed
companies and remaining out of 10 ~ unlisted ) companies at most.
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Pallavi
thank you sir for sharing your valuable knowledge in just simple way
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Biswajit Mishra
u r doing a great job sir, thank u…
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praveena
Sir, im confident about prelims result and taking commerce optional for
mains. For CA exams after november new company act 2013will be
followed. But what about UPSC mains?? 2013 act Or 1956??? Pls assist.
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praveena
Pls try to answer after enquiring from ur sources. It will be a great
help.
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Digvijay
thank you for sharing knowledge sir
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Lecture3] Banking Sector: Evolution, Classification, Narsimhan, New Bank...
(http://mrunal.org/2015/02/youtube-economy-l3-indian-banking-evolutionclassification.html/comment-page-1#comment-310909)
PRANEETH { sir, Please publish PIN january as soon as possible ..... waiting eagerly } –
[Economy Lecture3] Banking Sector: Evolution, Classification, Narsimhan, New Bank...
(http://mrunal.org/2015/02/youtube-economy-l3-indian-banking-evolutionclassification.html/comment-page-1#comment-310896)
RAJ { Mrunal bro, there are geography notes also located in the your folder by some Ratanjali
name, can we have you tube video for geography lectures... } – [Economy Lecture3] Banking
Sector: Evolution, Classification, Narsimhan, New Bank...
(http://mrunal.org/2015/02/youtube-economy-l3-indian-banking-evolution-
classification.html/comment-page-1#comment-310886)
PALASH GUPTA { Thank you Mrunal Sir... } – [Economy Lecture3] Banking Sector:
Evolution, Classification, Narsimhan, New Bank... (http://mrunal.org/2015/02/youtubeeconomy-l3-indian-banking-evolution-classification.html/comment-page-1#comment310881)
SRAJAN { sirjeee aap great ho kya lectures hai sir ase hi sari economy karwa do will be thankful
to u frever ' thanks } – [Economy Lecture1] Banking: Monetary Policy- Quantitative Tools: SLR,
CRR,... (http://mrunal.org/2015/01/youtube-economy-l1-monetary-policy-quantitativetools.html/comment-page-3#comment-310871)
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