Tag: All Companies

Companies Amendment Bill 2016: Analysis

An attempt is made to present an analysis of the Companies Amendment Bill, 2016.

Posting analysis of definitions only. Analysis on other provisions would be posted in staggering mode.

CLC = Companies Law Committee of Ministry of Corporate Affairs (MCA) which submitted its report in February 2016.

LODR = Securities and Exchange Board (Listing Obligations and Disclosure Requirements) Regulations, 2015.

After taking into consideration suggestions made by a high level panel on further possible changes to the law, the government came up with the Bill as part of larger efforts to address difficulties faced by stakeholders and improve the the ease of doing business in the country.

Lok Sabha Speaker Sumitra Mahajan has referred the Bill to the Standing Committee on Finance, which is chaired by senior Congress leader Veerappa Moily.

The Speaker has referred the Companies (Amendment) Bill, 2016, as introduced in the Lok Sabha to the Standing Committee on Finance for examination and report within three months, according to intimation published in Bulletin-Part II, dated 12 April, 2016, vide para No. 3288.

Thus, relaxations (inter alia private placement process, remove restrictions on layers of subsidiaries and investment companies, amend CSR (Corporate Social Responsibility) provisions to bring greater clarity and exempt certain class of foreign entities from the compliance regime under this law.) to Corporate is deferred for atleast 3 months. It also results in further delay in formation of National Company Law Tribunal (NCLT) and Appellate Tribunal (NCLAT) which will transfer powers of High Court in relation to winding-up and compromise or arrangements to NCLT. Also proceedings before BIFR / AAIFR would abate. Thus, large part of Companies Act 2013 would not be brought to force until the Bill is enacted by Parliament.

PROVISIONS UNDER COMPANIES (Amendment) Bill, 2016 PROVISIONS UNDER COMPANIES ACT,2013 Remarks
Section 2(6) Associate Company

Explanation.—For the purpose of this clause—

(a) the expression “significant influence” means control of at least twenty per cent. of total voting power, or control of or participation in business decisions under an agreement;

(b) the expression “joint venture” means a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement;

Section 2(6)

In relation to another company, means a company in which the other company has a significant influence, but is not a subsidiary company of the company having such influence, and includes a joint venture company.

Explanation-For the purpose of this clause “significant influence” means control of at least twenty percent of total share capital or business decisions under an agreement;

It may be noted that the term “total share capital” has been defined in Rule 2(1) (r) of the Companies (Specification of Definitions Details) Rules, 2014, to mean the aggregate of (a) paid-up equity share capital; and (b) convertible preference share capital.

 

 

Amendment is as per recommendation of the CLC.

 

To ascertain whether a company is associate or not, determining factor would be total voting power instead of total share capital.

 

It may be noted that LODR also refers to definition of ‘associate’ as under Companies Act or accounting standards.

 

The term “joint venture” is now defined and is in line with Indian Accounting Standard 28 on Investments in Associates and Joint Ventures.

 

However, the terms ‘associate’ and ‘significant influence’ under the Companies Act and Indian Accounting Standards continue to differ.

 

 

Section 2(28)

“Cost Accountant” means a cost accountant as defined in clause (b) of sub-section (1) of section 2 of the Cost and Works Accountant Act, 1959 and who holds a valid certificate of practice under sub-section (1) of section 6 of that Act

Section 2(28)

“cost accountant” means a cost accountant as defined in clause (b) of sub-section (1) of section 2 of the Cost and Works Accountant Act ,1959 (23 of1959)

Term Cost Accountant wherever appears in Companies Act has been assigned meaning of Practising Cost Accountant.
Section 2(30) Debenture

ADDITION: “Provided that-

(a)   The instruments referred to in Chapter III-D of the Reserve Bank of India Act, 1934;and

(b)   Such other instrument as may be prescribed by the Central Government in consultation with Reserve Bank of India, issued by a company,

Shall not be treated as Debenture.”

Amendment is as per recommendation of the CLC.

Certain instruments like commercial papers and other money market instruments, which are often used as an important short-term fund raising source by eligible companies; and are well regulated under RBI regulations.

MCA had recognizing this, had clarified that Commercial Papers and similar instruments if issued as per guidelines of RBI would not attract debentures related provision under Rule 18 of the Companies (Share Capital and Debenture) Rules, 2014.

 

Now, the Bill provides to exclude all instruments specified in Chapter III-D of RBI Act 1934 from the definition of ‘Debenture’. Thus, money market instruments (which includes call or notice money, term money, repo, reverse repo, certificate of deposit, commercial usance bill, commercial paper and such other debt instrument of original or initial maturity up to one year as may be specified by RBI from time to time),  derivatives, repo, reverse repo.

 

The Bill also authorizes MCA to exclude other instruments also from the purview of Debenture in consultation with RBI.

It is not clear whether Bonds of Central Government, State Government and local bodies would be outside the purview of ‘debenture’.

Section 2(41) Financial Year

In the first proviso, after the word “subsidiary” the words “or associate company” shall be inserted.

Amendment is as per recommendation of the CLC.

 

An associate company of a foreign company may follow different financial year (other than 01 April to 31 March) if it is required to follow different financial year for consolidation of its accounts outside India. And for this purpose it need to approach National Company Law Tribunal.

 

Section 2(46) Holding Company

the following Explanation shall be inserted, namely:—

‘Explanation.—For the purposes of this clause, the expression “company” includes any body corporate;’

Amendment is as per recommendation of the CLC.

 

While foreign company is treated as subsidiary company for the purpose of Companies Act 2013 but similar provision for holding company was not present. This anomaly is now being rectified.

 

With the new explanation, a company incorporated outside India could be considered to be the holding company of another company, for the purpose of the Companies Act 2013.

 

Section 2(49)

omitted

Section 2(49)

“interested director” means a director who is in any way, whether by himself or through any of his relatives or firm, body corporate or other association of individuals in which he is or any of the relatives is a partner, director or member, interested in a contract or arrangement, or proposed contact or arrangement, entered into or to be entered into by or on behalf of a company.

Amendment is as per recommendation of the CLC.

Definition of the term ‘interested director’ is being omitted.

The only reference to the term ‘interested director’ in the Act was in Section 174 (3) (relating to quorum at Board meeting), and an Explanation to that provision clarified that the meaning of the term ‘interested director’ would be the same as for the purposes of Section 184 (2).

And Section 184 (2) provides nature of interests to be disclosed by directors, but does not use the phrase ‘interested director’.

 

However, despite omission of the definition, no change in effect from governance or legal perspective would be on Directors, as wordings of section 184 are similar to erstwhile definition of interested director u/s.2(49).

Section 2(51) (iv)

The word “and” shall be omitted AND

The following shall be substituted-

“(v) such officer, not more than one level below the directors who is in whole-time employment, designated as Key managerial personnel by the Board; and

(vi) such other officer as may be prescribed”

Section 2(51)

“key managerial personnel”, in relation to a company, means—

(i) the Chief Executive Officer or the managing director or the manager;

(ii) the company secretary;

(iii) the whole-time director;

(iv) the Chief Financial Officer; and

(v) such other officer as may be prescribed;

Amendment is as per recommendation of the CLC.

 

The J.J. Irani Committee observed that “stakeholders / Board look towards certain key managerial personnel for formulation and execution of policies.”

The definition of KMP is now being modified to give flexibility to the Board of Companies to designate its whole time officers, who are one level below the directors, as KMP.

 

 

 

 

 

 

 

 

 

Section 2(57) Net worth

For the words “and securities premium account”, the words “,securities premium account and debit or credit balance of profit and loss account,” shall be substituted

Section 2(57)

“net worth” means the aggregate value of the paid up share capital and free reserves created out of profits and securities premium account, after deducting the aggregate value of accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of assets, written back of depreciation and amalgamation;

Amendment is as per recommendation of the CLC.

 

An obvious error in the definition is being recified.

Section 2(71)

In sub-clause (a) after the word “company”, the word “and” shall be inserted.

Section 2(71)

“public company” means a company which—

(a) is not a private company;

(b) has a minimum paid-up share capital, as may be prescribed:

Provided that a company which is a subsidiary of a company, not being a private company, shall be deemed to be public company for the purposes of this Act even where such subsidiary company continues to be a private company in its articles ;

Conjunction ‘and’ is being inserted to ensure that it is not a private company AND has a minimum prescribed capital.
Section 2(76)

For sub-clause (viii) the shall be substituted, namely-

“(viii) any body corporate which is-

(A)   a holing, subsidiary or an associate company of such company;

(B)   a subsidiary of a holding company to which it is also a subsidiary; or

(C)   an investing company or the venture of a company,”

Section 2(76)

“related party”, with reference to a company, means—

(i)                 a director or his relative;

(ii) a key managerial personnel or his relative;

(iii) a firm, in which a director, manager or his relative is a partner;

(iv) a private company in which a director or manager or his relative is a member or  director;

(v) a public company in which a director or manager is a director and holds along with his relatives, more than two per cent. of its paid-up share capital;

(vi)any body corporate whose Board of Directors, managing director or manager is accustomed to act in accordance with the  advice, directions or instructions of a director or manager;

(vii) any person on whose advice, directions or instructions a director or manager is accustomed to act:

Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice,

directions or instructions given in a professional capacity;

(viii) 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;

(ix) such other person as may be prescribed;

 

Amendment is as per recommendation of the CLC.

 

Scope of related party is expanded.

 

Substitution of the words ‘body corporate’ for the word ‘company’ in the definition of ‘related party’ has expanded the scope of related party, which now includes foreign company which is holding, subsidiary or an associate of Indian Company.

Further sister subsidiary in India or abroad would also be a related party.

 

It seems term ‘investing company’ would mean investor company which could be Indian or foreign and would be treated as related party.

 

 

Section 2(85) Small Company

In sub-clause (i), for the words “five crore rupees” the word “ten crore rupees” shall be substituted

 

In sub-clause (ii)-

(A)   For the words “as per its last profit and loss account”, the words “as per  profit and loss account for the immediately presiding financial year” shall be substituted;

(B)   For the words “twenty crore rupees” the words “one hundred crore rupees” shall be substituted;

 

Section 2(85)

‘‘small company’’ means a company, other than a public company,—

(i) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than five crore rupees; or

(ii) turnover of which as per its last profit and loss account does not

exceed two crore rupees or such higher amount as may be prescribed which shall not be more than twenty crore rupees:

Provided that nothing in this clause shall apply to—

(A) a holding company or a subsidiary company;

(B) a company registered under section 8; or

(C) a company or body corporate governed by any special Act;

Amendment is as per recommendation of the CLC.

 

Criteria for a private company to be treated as small company includes paid-up share capital or turnover.

Limits for both are being expanded.

 

Drafting error corrected to ascertain turnover from its profit and loss account of the preceding financial year.

Section 2(87) Subsidiary Company

(a)   In sub-clause (ii) for the words “total share capital”, the words “total voting power” shall be substituted;

(b)   The proviso shall be omitted

(c)    In the explanation, item (d) shall be omitted;

 

 

Section 2(87)

“subsidiary company” or “subsidiary”, in relation to any other company

(that is to say the holding company), means a company in which the holding company—

(i) controls the composition of the Board of Directors; or

(ii) exercises or controls more than one-half of the total share capital

either at its own or together with one or more of its subsidiary companies:

Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed.

Explanation.—For the purposes of this clause,—

(a) a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding company;

(b) the composition of a company’s Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors;

(c) the expression “company” includes any body corporate;

(d) “layer” in relation to a holding company means its subsidiary or

subsidiaries;

Amendment is as per recommendation of the CLC.

 

In defining ‘subsidiary company’ anomaly arose due to inclusion of preference share capital in total share capital. The same is now being rectified by making reference to total voting power. Thus, where holding company controls more than one-half of total voting power, it becomes subsidiary.

 

Companies are free to have any number of subsidiaries and restrictions on layers of subsidiaries as provided in the proviso is being omitted. Also consequential explanation (d) is being omitted.

It is pertinent to note that the said proviso was not brought to force by MCA.

Corresponding amendment is being made in Section 186(1) also so that companies can make investments in layers of subsidiaries.

 

The J. J. Irani Report also noted that proper disclosures accompanied by mandatory consolidation of financial statements should address the concern attendant to the lack of transparency in holding-subsidiary structure.

A register of beneficial owners of a company, which would address the need to know the ultimate beneficial owners in complex corporate structures.

 

 

Section 2(91) Turnover

“turnover” means the gross amount of revenue recognized in the profit and loss account from the sale, supply, or distribution of goods or on account of services rendered, or both, by a company during a financial year,

Section 2(91)

“turnover” means the aggregate value of the realisation of amount made from the sale, supply or distribution of goods or on account of services rendered, or

both, by the company during a financial year;

Amendment is as per recommendation of the CLC.

The new definition of turnover is verbatim as recommended by CLC.

Earlier definition created practical difficulty of taxes being excluded to arrive at ‘turnover’.

New Section 3A Members serverally liable in certain cases

The following shall be inserted after section 3

 

“3A.If at any time the number of members of a company is reduced, in the case of a public company, below seven, in the case of a private company, below two, and the company carries on business for more than six months while the number of members is so reduced, every person who is a member of the company during the time that it so carries on business after those six months and is cognisant of the fact that it is carrying on business with less than seven members or two members, as the case may be, shall be severally liable for the payment of the whole debts of the company contracted during that time, and may be severally sued therefor.”.

Amendment is as per recommendation of the CLC.

 

New provision is same as section 45 of the Companies Act 1956, which was not part of new Companies Act 2013.

 

It makes members knowing that number of members of a company is below minimum required and the company carries on business for more than six months, then such members are personally liable for the debt contracted during such period.

Note on amendment to the Companies (Share Capital and Debenture) Rules, 2014 made from 18 march 2015

Note on amendment to the Companies (Share Capital and Debenture) Rules, 2014

by MCA vide notification no. G.S.R. 210(E) dated 18 March 2015.

 

EXISTING AMENDMENT COMMENT
Rule 3 of the Companies (Share Capital and Debentures)Application.- The provisions of these rules shall apply to –

(a) all unlisted pubic companies:

(b) all private companies: and

(c) listed companies

 

so far as they do not contradict or conflict with any other regulation framed in this regard by the Securities and Exchange Board of India

Rule 3 has been substituted, the provisions of this rule shall apply to all unlisted public companies, private companies and listed Companies if so far as they do not contradict or conflict with any other regulation framed in this regard by the Securities and Exchange Board of India. As per the amendment, provision of this rules shall apply to all listed companies so far they do not contradict with any other regulation of SEBI. Which means, where there is conflict between the MCA Rules and SEBI Regulations, SEBI Regulations shall prevail (for listed companies).
Earlier the conditions was applicable to all unlisted companies, all private companies and listed companies.
Clause (b) of sub-rule (3) of Rule 5 (certificate of shares) “The first provisoprovided that, in companies wherein a Company Secretary is appointed under the provision of the Act, he shall deemed to be authorized for the purpose of this rule

 

Second Proviso:

Provided further that, if the composition of the Board permits of it, at least one of the aforesaid two directors shall be a person other than the managing or Whole time director

 

 

Third proviso

Provided also that, in case of a one person company, every share certificate shall be issued under the seal of the Company, which shall be affixed in the presence of and signed by one director or a person authorized by the Board of Directors of the Company for the purpose and the Company Secretary or any other person authorized by the board for the purpose

Clause (b) of sub-rule (3) of Rule 5 (certificate of shares)and

the first proviso

are omitted by this notification

 

 

 

 

 

Provided that, if the composition of the Board permits of it, at least one of the aforesaid two directors shall be a person other than the managing or Whole time director

 

 

 

 

Provided further that, in case of a one person company, every share certificate shall be issued under the seal of the Company, which shall be affixed in the presence of and signed by one director or a person authorized by the Board of Directors of the Company for the purpose and the Company Secretary or any other person authorized by the board for the purpose

 

 

Since the clause (b) of sub rule (3) of Rule 5 are omitted by this notification, so companies wherein a Company Secretary is appointed, he is not required to sign the share certificate. It can be signed by any person authorised by the Board or Secretary.The first proviso has been omitted so the wordings of second proviso substituted accordingly hence there is no effect. 

 

The first proviso has been omitted so the wordings of third proviso substituted accordingly hence there is no effect.

In clause c of sub-rule 2 of Rule 6 (Issue of renewed or duplicate share certificate)In case of listed companies renewed or duplicate certificate shall be issued within 15 days from the date of submission of complete documents with the company respectively In clause (c) of sub-rule 2 of Rule 6 (Issue of renewed or duplicate share certificate)As per notification , listed companies renewed or duplicate certificate can be issued within 45 days from the date of submission of complete documents with the company respectively The time limit for issue of duplicate share certificates has been extended from 15 days to 45 days.
In clause (c) of sub-rule 1 of Rule 12,“Employee means(a) permanent employee of the company who has been working in India or outside India; or

(b) a director of the company, whether a whole time director or not but excluding an independent director

(c) an employee as defined in clauses (a) or (b) of a subsidiary, in India or outside India, or of a

holding company of the company and or of an associate company”

In clause (c) of sub-rule 1 of Rule 12,the explanation of the word “employee” has been amended

 

“Employee refers to

(a) permanent employee of the company who has been working in India or outside India; or

(b) a director of the company, whether a whole time director or not but excluding an independent director

(c) an employee as defined in clauses (a) or (b) of a subsidiary, in India or outside India, or of a

holding company of the company

 

Since the word “of an associate company” has been omitted, now employee means employees of a subsidiary and holding company and the employees of the associate company shall not be considered for the purpose of offering ESOP.
In Rule 13 first proviso states thatProvided that the price of shares to be issued on a preferential basis by a listed company shall not be required to be determined by the valuation report of a registered valuer In Rule 13, MCA has inserted following new proviso before the existing proviso“Provided that in case of any preferential offer made by a company to one or more existing members only , the provisions of sub rule (1) and proviso to sub rule (3)of rule 14 of Companies (prospectus and allotment of securities)Rules, 2014 shall not apply” 

 

As per notification, in case of any preferential allotment made by a company to existing members, there is no requirement of making open offer in Form PAS 4 and filling thereof with the ROC/SEBI is not required.However, complete record of private placement offers in Form PAS 5 is required to be maintained.

 

The first proviso has been newly inserted so the wordings of first proviso substituted to “Provided further” that accordingly hence there is no effect.

 

existing clause (d) of Rule 18(1) states that(d) the security for the debentures by way of a charge or mortgage shall be created in favour of the debenture trustee on-(i) any specific movable property of the company (no being in the nature of pledge ); or

(ii) any specific immovable property wherever situate, or any interest therein.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MCA has amended existing clause (d) of Rule 18(1),(d) the security for the debentures by way of a charge or mortgage shall be created in favour of the debenture trustee on-(i) any specific movable property of the company; or

(ii) any specific immovable property wherever situate, or any interest therein.

Provided that in case of non-banking financial company, the charge or mortgage under sub clause (i) may be created on any movable property.

Provided further that in case of any issue of debentures by a government company which is fully secured by the guarantee given by the Central Government or one or more State Government or by both, the requirement for creation of charge under this sub-rule shall not apply.

 

Provided also that in case of any loan taken by a subsidiary company from any bank or financial institution the charge or mortgage under this sub-rule may also be created on the properties or assets of the holding company.

 

As per the notification, now the security for the debenture can be created on any specific movable property including pledge of specific movable property.However, in case of non-banking financial company, the charge or mortgage may be created on any movable property (need not be specific).

 

Further notification states that the issue of debentures by a government company which is fully secured by the guarantee given by the Central Government or one or more State Government or by both, the requirement for creation of charge under this sub-rule shall not apply.

 

And where any loan is availed by a subsidiary company from any bank or financial institution, its holding company are allowed to offer its property as security –i.e. the charge or mortgage may also be created on the properties or assets of the holding company.

Use of words ‘may also’ suggests ‘in addition’ and not ‘alternatively’. Thus, where debentures are issued by a subsidiary, it need to create charge on its own assets. In addition, charge over assets of holding company is permitted where debenture issuing subsidiary company has availed loan from bank or financial institution.

 

In Sub rule 5 of Rule 18A trust deed in Form No SH 12 shall be executed by the company in favour of debenture trustees within 60 days of allotment of debentures Now trust deed in Form SH.12 shall be executed by the company in favour of the debenture trustees within three months of closure of the issue or offer of debentures This provision has been amended in line with clause 15(1) of SEBI (Issue and listing of Debt Securities) Regulations, 2008.
Following new rules has been inserted after existing sub-rule (8) of Rule 18 of Companies (Share Capital and Debenture)9. Nothing contained in this rule shall apply to any amount received by a company against issue of commercial paper or any other similar instrument issued in accordance with the guidelines or regulations or notification issued by the Reserve Bank of India. 

10.In case of any offer of foreign currency convertible bonds or foreign currency bonds issued in accordance with the Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 or regulations or directions issued by the Reserve Bank of India, the provisions of this rule shall not apply unless otherwise provided in such Scheme or regulations or directions

 

Rule 18 is made not applicable to companies raising funds by issue of commercial paper or any other similar instrument (i.e. money market instruments) or FCCB or FCB.
Form SH 13 for nomination and Form SH 14 for cancellation or variation in nomination As per the notification , in the Form SH 13 and Form SH 14 “particulars of nominee in case minor nominee dies before attaining age of majority” has been inserted Format of Form SH 13 and Form SH14 has been revised – now it includes details of nominee, in case minor nominee dies before attaining age of majority.

 

Section 74: Repayment of deposits, etc., accepted before commencement of this Act.

Provisions on repayment of deposits, etc., accepted before commencement of Companies Act, 2013 is reproduced below:

74. (1) Where in respect of any deposit accepted by a company before the commencement of this Act, the amount of such deposit or part thereof or any interest due thereon remains unpaid on such commencement or becomes due at any time thereafter, the company shall—
(a) file, within a period of three months from such commencement or from the date on which such payments, are due, with the Registrar a statement of all the deposits accepted by the company and sums remaining unpaid on such amount with the interest payable thereon along with the arrangements made for such repayment, notwithstanding anything contained in any other law for the time being in force or under the terms and conditions subject to which the deposit was accepted or any scheme framed under any law; and
(b) repay within one year from such commencement or from the date on which such payments are due, whichever is earlier.
(2) The Tribunal may on an application made by the company, after considering the financial condition of the company, the amount of deposit or part thereof and the interest payable thereon and such other matters, allow further time as considered reasonable to the company to repay the deposit.
(3) If a company fails to repay the deposit or part thereof or any interest thereon within the time specified in sub-section (1) or such further time as may be allowed by the Tribunal under sub-section (2), the company shall, in addition to the payment of the amount of deposit or part thereof and the interest due, be punishable with fine which shall not be less than one crore rupees but which may extend to ten crore rupees and every officer of the company who is in default shall be punishable with imprisonment which may extend to seven years or with fine which shall not be less than twenty-five lakh rupees but which may extend to two crore rupees, or with both.

[highlight]Section 74 (1) is brought to force from April 01, 2014. Sub-sections (2) and (3) of Section 74 is not yet brought to force.[/highlight]

This provision is covered by Chapter V ACCEPTANCE OF DEPOSITS BY COMPANIES [Sections 73 to 76].

For this chapter, the Companies (Acceptance of Deposit) Rules, 2014 (‘the Rules’) are notified with effect from April 01, 2014.

Corresponding provisions of the Companies Act, 1956:
No such provision.

Corresponding provisions of the English Companies Act, 2006:
No such provision.

Applicability:
[highlight] Section 74 is applicable to all companies. [/highlight]

What is the difference from the Companies Act, 1956:
Only private companies were prohibited under the Companies Act, 1956 from accepting public deposits. Private companies were permitted to accept deposits from shareholders / members, directors and their relatives. All public companies were permitted to accept deposits from public, subject to the Companies (Acceptance of Deposits) Rules, 1975.
Under the Companies Act, 2013, entire landscape of ‘deposits’ is changed. Accordingly it mandates all companies to repay deposits within 1 year. All companies can accept deposits from its members / shareholders, subject to compliance of stricter norms under section 73. Only public companies can invite or accept deposits from public, subject to strict procedure under the Rules and section 76. All companies can accept money, which does not fall within the definition of ‘deposit’ under the Rules.

The term “deposit” includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India ((Section 2(31), not yet brought to force)).

However, for the purpose of sub-section (1) of section 74, term ‘deposit’ has to be read as ‘deposit’ within the meaning of the Companies Act, 1956. This is so because (a) definition of ‘deposit’ under the Companies Act, 2013 is subject to context in which it is used; and (b) sub-section (1) refers to ‘deposit accepted by a company before the commencement of this Act’.
Where any deposit is accepted by a company, before the commencement of the Act, and any amount thereof or interest due thereon has remained unpaid (though due) then such companies shall, after the commencement of the Act:

(a) notwithstanding anything contained in any other law for the time being in force or under the terms and conditions subject to which the deposit was accepted or any scheme framed under any law, [highlight]file with the Registrar of Companies,

(i) within three months of commencement of the Act (in respect of deposit and interest thereon which became due but remained unpaid) ((date extended by MCA till 31st August 2014)) or

(ii) within three months of due date for repayment of deposits and interest thereon (where they are not due fore repayment at the time of commencement of the Act),

a statement ((in Form DPT-4)) [/highlight] of all the deposits accepted by the company and sums remaining unpaid with interest payable thereon. Such statement shall also give details of arrangements made by the Company for its repayment.

AND

Where any deposit is accepted by a company, before the commencement of the Act, and any amount thereof or interest due thereon has remained unpaid (though due) then such companies shall, after the commencement of the Act,

(b)

(i) repay the amount of deposit and interest thereon which became due but remained unpaid, within one year of commencement of the Act, or

(ii) the amount of deposit and interest thereon which has not yet became due for repayment, repay the same on their due date(s),

whichever is earlier.

Where a company comprehends its inability to repay as per (b) above, it may approach National Company Law Tribunal (‘NCLT’) ((power delegated by MCA to Company Law Board)), for seeking more time to repay deposit.

NCLT may allow reasonable more time to repay the deposits with interest after considering, inter alia, its financial position, amount of deposits and interest thereon. ((Section 74(2) )). [highlight]This provision is brought to force from 06 June 2014. [/highlight]

It is clarified by way of an explanation under the Rules ((Explanation to Rule 19 of the Rules)), that in case of a company which had accepted or invited public deposits under the relevant provisions of the Companies Act, 1956 and rules made under that Act (hereinafter known as “Earlier Deposits”) and has been repaying such deposits and interest thereon in accordance with such provisions, and if the following conditions are fulfilled by the company then it need not repay deposits within a year:
(i) the Company complies with requirements under the Act and the rules and
(ii) the Company continues to repay such deposits and interest due thereon on due dates for the remaining period of such deposit in accordance with the terms and conditions and period of such Earlier Deposits and in compliance with the requirements under the Act and the rules.

Both above conditions requires compliance with the requirements under the Act and the rules. It means if a company is a public company and is also a ‘eligible company’ within the meaning of the Rules and complies with other requirements of acceptance of deposits from public, then only it need not comply with section 74(1)(b).

Penalty:
The provision relating to penalty under section 74(3) is brought to force from 06 June 2014. It provides as under:

Where a company fails to repay deposits and interest thereon or part thereof within aforesaid time, or within extension of time given by NCLT:
(a) the company is liable to minimum fine of Rs.1,00,00,000/- (Rupees one crore) and which may extend upto Rs.10,00,00,000/- (Rupees ten crore). Despite payment of fine, the company continues to be liable to repay deposits with interest.

(b) Besides the company, every officer of the company who is in default is liable to minimum fine of Rs.25,00,000/- (Rupees twenty five lakh) and which may extend upto Rs.2,00,00,000/- (Rupees two crore) or with imprisonment upto seven years or with both (fine and imprisonment). ((Section 74(3) )).

(c) Any suit, proceedings or other action may be taken by any person, group of persons or any association of persons who had incurred any loss as a result of failure of the company to repay deposits and interest thereon or part thereof. ((Section 75(2) ))

(d) Where it is proved that the [highlight]deposits have been accepted with intent to defraud the depositors or for any fraudulent purpose[/[highlight] every officer of the company [highlight]who was responsible for the acceptance of such deposit shall be personally responsible, without limitation of liability, for all or any of the losses or damages that may have been incurred by the depositors. In addition, action under section 447 may be taken (which provides punishment for fraud by way of minimum imprisonment of 6 months and upto 10 years as also minimum fine equivalent to amount involved in the fraud and upto three times thereof. ((Section 75(1) ))

[pullquote-right]Damages are generally an award of money, to be paid as compensation for loss or injury.[/pullquote-right]
The term ‘compensation’ as stated in the Oxford Dictionary, signifies that which is given in recompense, an equivalent rendered. ‘Damages’ on the other hand constitute the sum of money claimed or adjudged to be paid in compensation for loss or injury sustained, the value estimated in money, of something lost or withheld. ((The Divisional Controller, KSRTC vs Mahadeva Shetty And Anr. AIR 2003 SC 4172: (2003) 7 SCC 197))

Nature of offence:
Since officers of company may be punished with imprisonment, it is necessary to decide nature of offence.

Since offence is punishable with imprisonment for a term exceeding two years, it is treated as warrant case under section 2(x) of the Code of Criminal Procedure Code, 1973.

Adjudication:
Under Section 454, the officer appointed by the Central Government, not below the rank of Registrar of Companies, may adjudicate and impose monetary penalty for violation of this section, where it decides that no prosecution be launched. However, before imposing penalty, an opportunity of hearing shall be given to the Company and its officers.Compounding:
The offence is not compoundable under section 441 of the Act.
Summary of forms and records:
Statement regarding deposits existing as on April 01, 2014 shall be in form DPT-4.

Section 73. Prohibition on acceptance of deposits from public.

Prohibition on acceptance of deposits from public – as contained under section 73 of the Companies Act, 2013 is reproduced below:

73. (1) On and after the commencement of this Act, no company shall invite, accept or renew deposits under this Act from the public except in a manner provided under this Chapter:

Provided that nothing in this sub-section shall apply to a banking company and non-banking financial company as defined in the Reserve Bank of India Act, 1934 (2 of 1934) and to such other company as the Central Government may, after consultation with the Reserve Bank of India, specify in this behalf.

(2) A company may, subject to the passing of a resolution in general meeting and subject to such rules as may be prescribed in consultation with the Reserve Bank of India, accept deposits from its members on such terms and conditions, including the provision of security, if any, or for the repayment of such deposits with interest, as may be agreed upon between the company and its members, subject to the fulfillment of the following conditions, namely:-

(a) issuance of a circular to its members including therein a statement showing the financial position of the company, the credit rating obtained, the total number of depositors and the amount due towards deposits in respect of any previous deposits accepted by the company and such other particulars in such form and in such manner as may be prescribed;

(b) filing a copy of the circular along with such statement with the Registrar within thirty days before the date of issue of the circular;

(c) depositing such sum which shall not be less than fifteen per cent. of the amount of its deposits maturing during a financial year and the financial year next following, and kept in a scheduled bank in a separate bank account to be called as deposit repayment reserve account;

(d) providing such deposit insurance in such manner and to such extent as may be prescribed;

(e) certifying that the company has not committed any default in the repayment of deposits accepted either before or after the commencement of this Act or payment of interest on such deposits; and

(f) providing security, if any for the due repayment of the amount of deposit or the interest thereon including the creation of such charge on the property or assets of the company:

Provided that in case where a company does not secure the deposits or secures such deposits partially, then, the deposits shall be termed as “unsecured deposits” and shall be so quoted in every circular, form, advertisement or in any document related to invitation or acceptance of deposits.

(3) Every deposit accepted by a company under sub-section (2) shall be repaid with interest in accordance with the terms and conditions of the agreement referred to in that sub-section.

(4) Where a company fails to repay the deposit or part thereof or any interest thereon under sub-section (3), the depositor concerned may apply to the Tribunal for an order directing the company to pay the sum due or for any loss or damage incurred by him as a result of such non-payment and for such other orders as the Tribunal may deem fit.

(5) The deposit repayment reserve account referred to in clause (c) of sub-section (2) shall not be used by the company for any purpose other than repayment of deposits.

This provision is covered by Chapter V on ACCEPTANCE OF DEPOSITS BY COMPANIES [Sections 73 to 76].

For this chapter, the Companies (Acceptance of Deposit) Rules, 2014 (‘the Rules’) are notified with effect from April 01, 2014.

Section 73 is applicable to all companies. [Section 73 is brought to force w.e.f. 01 April 2014].
For this provision, rules called the Companies (Acceptance of Deposit) Rules, 2013 are notified.

Corresponding provisions of the Companies Act, 1956:
Section 58A.
The Companies (Acceptance of Deposit) Rules, 1975.

Corresponding provisions of the English Companies Act, 2006:
No such provision.

Applicability:

This provision applies to all companies, except the following:

(a) banking company,

(b) a non-banking finance company, as defined in the Reserve Bank of India Act, 1934 and registered with the Reserve Bank of India,

(c) a housing finance company registered with the National Housing Finance Bank established under the National Housing Finance Bank Act, 1987; and

(d) such companies as may be specified by the Central Government.

What is the difference from the Companies Act, 1956:

Major difference is as under:

Companies Act 2013

Companies Act 1956

Private company cannot accept deposit from public. Private company cannot accept deposit from public.
Only eligible companies can accept deposit from public. All public companies could accept deposits from public.
Private companies can accept deposit only from its directors, relatives of directors (( relatives of directors w.e.f.15 September 2015 )) and members. However, acceptance of deposit by a private company as well as public company from its members is subject to provisions of section 73 and the Rules.

 

Private companies could accept deposit only from its members, directors and their relatives without any limit or restrictions, except that declaration by a Director was required that the Director has not borrowed funds for giving as deposit to the Company.

Public companies could accept deposits from its members, subject to the Companies (Acceptance of Deposit) Rules, 1975.

Private companies and ineligible public companies can accept deposit from its members upto 25% of its aggregate paid-up share capital, free reserves and securities premium account (( w.e.f. 15 September 2015 )), in compliance of the prescribed procedure.
Eligible companies can accept deposit from its members upto 10% of its aggregate paid-up share capital, free reserves and securities premium account (( w.e.f. 15 September 2015 )), in compliance of the prescribed procedure.
Private companies could accept deposits from its members without any limit. Public companies could accept deposit from its members upto 10% of its aggregate paid-up share capital and free reserves, in compliance of the prescribed procedure.

Comments:
The Chapter V prohibits acceptance of deposits from public by companies, mandates repayment of already accepted public deposits and also provides that only ‘eligible companies’ can accept public deposits. Briefly,
Section 73 prohibits acceptance of deposits from public by companies (except banking companies, NBFCs and other companies to be specified by the Government). It also provides for acceptance of deposits from members.
Section 76 permits acceptance of deposits by public companies with specified net worth, turnover etc.
Section 74 mandates repayment of deposits accepted before commencement of the Act of 2013.
Section 75 provides for damages payable if the deposits accepted with intent to defraud the depositors or for any fraudulent purpose.

Section 73 provides for acceptance of deposits from members and prohibits acceptance of deposits from public. However, certain eligible public companies are permitted to accept deposits from public as per provisions of section 76.

The term “deposit” includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India ((Section 2(31), brought to force from April 01, 2014. Also Rule 2(1)(c) of the Rules)).

Acceptance of deposits from public:
Companies are generally prohibited from accepting (including inviting and renewing) deposits from public. Only public companies, meeting eligible criteria and subject to compliance of several conditions as specified in section 76, are permitted to invite, accept or renew deposits from public.

[mks_highlight color=”#eeee22″]The Rules defines “eligible company” means a public company having a networth of Rs.100 crore (INR 1 billion) or turnover of Rs.500 crore (INR 5 billion) and which has obtained the prior consent of its members by way of special resolution at general meeting and has files the said resolution with the Registrar of Companies before making invitation to the public for acceptance of deposits. However, where such public company accepts deposits within the limits specified under section 180(1)(c) (aggregate of paid-up share capital and free reserves) then consent of members by ordinary resolution suffices. ((Rule 2(1)(e) )) [/mks_highlight]
However, the general prohibition is not applicable to Banking Companies, non-banking financial companies, housing finance companies and other companies, which the Government may specify in consultation with the Reserve Bank of India.

Acceptance of deposits from members:
A company may accept deposits from its members by fulfilling requirements specified in the Act and the rules, which the Central Government has framed in consultation with the Reserve Bank of India.

A company may accept deposits from its members, subject to terms and conditions, including the provision of security, if any, or for the repayment of such deposits with interest, as may be [mks_highlight color=”#eeee22″] agreed upon between the company and its members [/mks_highlight].
Following requirement shall be fulfilled by a company to accept deposits from its members ((Section 73(2) )).

  1. Obtaining consent of members by ordinary resolution. However, where borrowing of a company has exceeded limit specified in clause (c) of section 180(1) of the Act, consent of members by way of special resolution is required.
  2. filing a circular with the Registrar of Companies (before issuing it to members). Such circular to state financial position of the company, credit rating (if any) obtained, total number of depositors from which the company has already accepted deposits, deposit amount due for repayment and other details as the Government may prescribe. Circular shall be approved by the Board of Directors and signed by majority of directors of the Company (majority of directors as were on the date of approval of Circular by the Board). ((Rule 3(5) ))
  3. issuing aforesaid circular to members of the company [mks_highlight color=”#eeee22″]within 30 days of filing with the Registrar [/mks_highlight]. The Rules states that the Circular shall be issued [mks_highlight color=”#eeee22″] after 30 days of filing the same with the Registrar [/mks_highlight]. ((Rule 4(5) )) Circular shall be sent to all members of the company either by registered post acknowledgement due or speed post or by electronic mode in Form DPT-1. ((Rule 4(1) )) Such circular [mks_highlight color=”#eeee22″] may be advertised [/mks_highlight] in an English newspaper and in Vernacular language in a vernacular newspaper having wide circulation in the State in which the registered office of the company is situated. ((proviso to Rule 4(1) )) Copy of circular shall be uploaded on website of the Company, if any. ((Rule 4(3) ))
  4. maintaining liquid asset by depositing minimum of 15% of the amount of deposits maturing during the current and next financial year (i.e. two financial years). Such liquid asset shall be kept in a separate bank account with any of the scheduled commercial banks. Such bank account shall be called [mks_highlight color=”#eeee22″]deposit repayment reserve account [/mks_highlight]. For example, if name of company is XYZ Private Limited, then it shall have a bank account called ‘XYZ Pvt Ltd – deposit repayment reserve account’. The deposit repayment reserve account shall not be used by the company for any purpose other than repayment of deposits. ((Section 73(5) ))
  5. provide deposit insurance upto such extent and in a prescribed manner.
  6. certifying that the company has not committed any default in the repayment of deposits accepted either before or after the commencement of the Act of 2013 or payment of interest on such deposit.
  7. optionally providing security, including creation of charge on assets of the company, for due repayment of the deposit amount or interest thereon. And where no security is provided for the repayment, such deposits shall be termed as “unsecured deposits”. And words “unsecured deposits” shall be quoted in every circular, form, advertisement or in any document related to invitation or acceptance of deposits.

Where a company fails to repay the deposit or part thereof or any interest thereon in accordance with the terms and conditions of the agreement between the company and its members, the depositor concerned may apply to the National Company Law Tribunal for an order directing the company to pay the sum due or for any loss or damage incurred by him as a result of such non-payment and for such other orders as the Tribunal may deem fit ((Section 73(3) and (4) )).

Some of the terms and conditions for acceptance of deposits as mandated by the Rules:
(a) A private company and ineligible public companies can accept or renew deposits from its members upto 25% of aggregate of its paid-up share capital and free reserves. ((Rule 3(3) of the Rules.))

(b) Period of deposit for acceptance or renewal:
Companies cannot accept deposits repayable on demand.
Minimum period of deposit shall be of 6 months.
Maximum period of deposit shall be of 36 months. ((Rule 3(1)(a) of the Rules.))
For meeting short-term requirements of funds, companies may accept deposits upto 10% of the aggregate paid-up share capital and free reserves and period for such short-term deposit
Minimum period of 3 months and maximum period of 6 months. ((Proviso to rule 3(1)(a) of the Rules.))

(c) Rate of interest and brokerage:  Companies can pay interest on deposits to depositors and brokerage to agent not above the rates prescribed by the Reserve Bank of India for acceptance of deposit by a non-banking finance company. Agent means a person who is authorised by a company in writing to solicit deposits in its behalf and through whom deposits are actually procured. ((Rule 3(6) ))

(d) Prohibition on unilateral right to modify terms: Companies cannot reserve right to alter terms and conditions of deposit, deposit trust deed and deposit insurance contract which are to the prejudice or disadvantage of the depositor. ((Rule 3(7) ))

Section 135: Corporate Social Responsibility.

Corporate Social Responsibility:

135. (1) Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.
(2) The Board’s report under sub-section (3) of section 134 shall disclose the composition of the Corporate Social Responsibility Committee.
(3) The Corporate Social Responsibility Committee shall,—
(a) formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company as specified in Schedule VII;
(b) recommend the amount of expenditure to be incurred on the activities referred to in clause (a); and
(c) monitor the Corporate Social Responsibility Policy of the company from time to time.
(4) The Board of every company referred to in sub-section (1) shall,—
(a) after taking into account the recommendations made by the Corporate Social Responsibility Committee, approve the Corporate Social Responsibility Policy for the company and disclose contents of such Policy in its report and also place it on the company’s website, if any, in such manner as may be prescribed; and
(b) ensure that the activities as are included in Corporate Social Responsibility Policy of the company are undertaken by the company.
(5) The Board of every company referred to in sub-section (1), shall ensure that the company spends, in every financial year, at least two per cent. of the average net profits of the company made during the three immediately preceding financial years, in pursuance of its Corporate Social Responsibility Policy:
Provided that the company shall give preference to the local area and areas around it where it operates, for spending the amount earmarked for Corporate Social Responsibility activities:
Provided further that if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount.
Explanation.—For the purposes of this section “average net profit” shall be calculated in accordance with the provisions of section 198.

This provision is covered by Chapter IX on Accounts of Companies [Sections 128 to 138].

Section 135 is brought to force from April 01, 2014.

For this chapter, the Companies (Corporate Social Responsibility Policy) Rules, 2014 (here after referred to as “the Rules”) are notified with effect from April 01, 2014.

Corresponding provision under Companies Act, 1956: No such provision.

Provisions of section 135 and the Rules will come into force with effect from 01 April 2014 ((Rule 1(2) )).

Section 135 of the Companies Act, 2013 provides social responsibility of companies and the rules to be followed for fulfilling the responsibility.

Corporate Social Responsibility (CSR) means and includes but is not limited to:
1. Projects or programs on activities specified in Schedule VII to the Act; or
2. Projects or programs on activities undertaken by the Board of Directors of a company in pursuance of recommendation of the CSR Committees of the Board as per declared CSR Policy of the company subject to condition that such policy will cover subjects enumerated in Schedule VII of the Act ((Rule 2(1)(c) )).

Applicability:
Provision relating to Corporate Social Responsibility is applicable to all companies. However, some relaxation is given to private companies, certain unlisted public companies and foreign companies with respect to requirement of constitution of Corporate Social Responsibility Committee.

Every company, including its holding company or subsidiary; also a foreign company ((as defined under section 2(42) of the Act and having its branch office or project office in India)) fulfilling the following criteria is required to comply with section 135 of the Act and the Rules ((Rule 3(1) )). This, inter alia, includes –
(a) constituting a Corporate Social Responsibility (“CSR”) Committee of the Board of Directors,
(b) spending in every financial year, at least two per cent. of the average net profits of the company made during the three immediately preceding financial years, in pursuance of the CSR Policy.

Definition of “foreign company” is given under section 2(42) of the Act and reference of foreign company is made under Rule 3(1). Provision of section 2(42) is brought to force from April 01, 2014.

With regard to foreign companies, issues need clarification from the Ministry of Corporate Affairs:
Meaning of the expression “branch office or project office in India” is not defined under the Rules or the Act. Though the term “branch office” is defined under section 2(14) of the Act, the context does not suggest that it is meant for a foreign company. Further, as per the golden rule of interpretation of statutes, if a term is not defined then its general meaning may be resorted. However, even such interpretation is not warranted as it may give absurd meaning. In my view, meaning of expression “branch office or project office in India” shall be the same as used under Foreign Exchange Management Act, 1999.

As per Section 135(1), CSR apply to every “company” who qualify as per mentioned thresholds criteria. As per Section 2(20) “company” means a company incorporated under this Act or under any previous company law. It seems that by this reading, we cannot infer that every “company” also includes foreign company. However, as per CSR Rule 3 (1) every “company” including its holding or subsidiary, and a foreign company defined under clause (42) of section 2 of the Act having its branch office or project office in India, which fulfils the criteria specified in sub-section (I) of section 135 of the Act shall comply with the provisions of section 135 of the Act and these rules. By the combined reading of above provisions of the section and rules together, it can be said that CSR provisions are also applicable to Foreign Companies having branch office or project office in India. However, the legal question is, can rule making power under Section 469, relax (exemption for Pvt. Companies from independent director requirement in CSR committee) or enhance the scope (CSR provisions applicable to Foreign Companies) of the provision of Section 135?

Foreign companies having a branch office or project office in India are required to undertake CSR activities need to take approvals under the Foreign Contribution Regulation Act 2010 (FCRA). Such approvals under FCRA are administered by Ministry of Home Affairs. This CSR spend requirement will also trigger an amendment in the Foreign Exchange Management (FEMA) Regulations, as Indian branch of a foreign company can undertake only eight specific activities and CSR isn’t being part of those one of the specific activities, requires Reserve Bank of India (RBI) approval. Also worth noting is that Foreign Direct Investment (FDI) isn’t permitted in case of a trust or societies.

Clarification of MCA on following is also required:

There is a provision in the CSR rule((Rule 4(6) )) which says that companies may build on CSR capacities from their own personnel, subject to a maximum limit of 5% of the total CSR expenditure of the company in a financial year. It is not clear as to whether the time-value of the company’s personnel for CSR activities is allowed under this 5% limit.

 

Criteria ((given under section 135(1) of the Act)):
During any financial year, a company is either having
(a) net worth of rupees 5,000,000,000/- (five hundred crore or 5 billion) or more, or
(b) turnover of rupees 10,000,000,000/- (thousand crore or 10 billion) or more or
(c) a net profit of rupees 50,000,000/- (five crore or 50 million) or more.

Term “net worth” means the aggregate value of the paid-up share capital and all reserves created out of the profits and securities premium account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets, write-back of depreciation and amalgamation. ((Section 2(57) of the Act, brought to force w.e.f. 12 September, 2013))

Term “turnover” means the aggregate value of the realisation of amount made from the sale, supply or distribution of goods or on account of services rendered, or both, by the company during a financial year. ((Section 2(91) of the Act, brought to force w.e.f. 12 September, 2013))

Term “Net profit” for the purpose is defined ((under Rule 2(f) )) as net profit as per financial statement prepared in accordance with the applicable provisions of the Act. However, following shall not be included in determining “net profit”.
(i) Any profit arising from any overseas branch(es) of the company, whether operated as a separate company or otherwise; and
(ii) Any dividend received from other companies in India, which are covered under and complying with the provisions of section 135 of the Act.

Where financial statement is prepared in accordance with the applicable provisions of the Companies Act, 1956 then net profit of a company (except foreign company) shall be as stated therein, and the company need not re-calculate net profit as per the provisions of the Companies Act, 2013 ((first proviso to Rule 2(f) )).

In case of a foreign company,
1. net profit and turnover shall be computed in accordance with the profit and loss account of such company, and
2. net worth shall be computed in accordance with the balance-sheet of such company
prepared in accordance with provisions of clause (a) of sub-section (1) of section 381 and section 198 of the Companies Act, 2013 ((second proviso to Rule 2(f) and proviso to Rule 3(1) )).

What if criteria fulfilled in one financial year but not in subsequent financial year?
If a company once fulfills the aforesaid criteria in a financial year then it shall comply with section 135 and the Rules even if in a subsequent year it ceases to comply with the aforesaid criteria. However, if for three consecutive financial years it ceases to comply with the aforesaid criteria, then it shall not:
(a) Constitute a CSR Committee; and
(b) Comply with the provisions of section 135 (2) to (5)
until it meets the aforesaid criteria again ((Rule 3(2) )).

Constitution of CSR Committee:
In case of a listed company and unlisted public company, CSR Committee shall comprise of three or more directors. Atleast one of them shall be an independent director.

However, where an unlisted public company which is not required to have an independent director on its Board ((as per section 149(4) of the Act)), then such company is also not required to have an independent director in its CSR Committee ((Rule 5(1)(i) )). By implication it also means an unlisted public company which is required to have an independent director on its Board ((as per section 149(4) of the Act)) is also required to have an independent director in its CSR Committee.

In case of a private company, it is not required to have an independent director in its CSR Committee ((Rule 5(1)(i) )). And where a private company is having only two directors, it shall constitute CSR committee with its two such directors only ((Rule 5(1)(ii) )).

In case of a foreign company, CSR committee shall comprise of at least two persons. One of such persons shall be nominated by the foreign company and other person shall be the one, who is resident in India and authorised to accept (on behalf of the foreign company) service of process and any notices or other documents required to be served on the foreign company under the Act and whose name and address is delivered to the Registrar of Companies for registration under section 380(1)(d) of the Act ((Rule 5(1)(iii) )).

Role of CSR Committee:

1. CSR Committee shall formulate CSR Policy and recommend it to the Board ((Section 135 (3)(a) )),
2. Recommend to the Board about amount of expenditure to be incurred on CSR activities ((Section 135 (3)(b) )), and
3. Monitor CSR Policy from time to time ((Section 135 (3)(c) )). CSR Committee shall setup a transparent monitoring mechanism for implementation of the CSR project or programs or activities undertaken by the company ((Rule 5(2) )).
4. CSR Committee shall give a responsibility statement that implementation and monitoring of the CSR Policy is in compliance with CSR objectives and policy of the company ((item 7 of Annexure to the Rules)).

Role of the Board of Directors:
The Board is required to approve the CSR Policy, after considering recommendations of CSR Committee ((Section 135 (4)(a) )).

The Board shall make sure that
(i) the activities as included in CSR Policy of the Company are related to the activities included in Schedule VII of the Act ((second proviso to Rule 6(1) )).
(ii) the activities as included in CSR Policy of the Company are undertaken by the Company ((Section 135 (4)(b) )).
(iii) the company spends, in every financial year, at least two per cent. of the average net profits of the company made during the three immediately preceding financial years, in pursuance of the CSR Policy ((Section 135 (5) )). Average net profit needs to be calculated as per section 198 of the Companies Act, 2013 ((Explanation to Section 135 (5) )).
(iv) it gives preference to the local area and areas around it where it operates, for spending the amount earmarked for CSR activities ((first proviso to Section 135 (5) )).

CSR Policy:
CSR Policy shall indicate the activities to be undertaken by the company as specified in Schedule VII to the Act and the expenditure thereon. It shall not include activities undertaken in pursuance of normal course of business of a company. ((Rule 2(1)(e) and first proviso to Rule 6(1) )).

CSR Policy shall include, inter alia, the following:
(a) a list of CSR projects or programs which a company plans to undertake falling within the purview of the Schedule VII of the Act,
(b) specify modalities of execution of CSR projects or programs,
(c) implementation schedule, and
(d) monitoring process ((Rule 6(1) )).

CSR Policy shall specify that the surplus arising out of the CSR projects or programs or activities shall not form part of the business profit of a company ((Rule 6(2) )).

Disclosure:
The Board’s report shall disclose:
1) Composition of CSR Committee ((Section 135(2) )),
2) CSR Policy, as approved by the Board ((Section 135 (4)(a) )),
3) Where a company fails to spend 2% of average net profits, it shall state the reasons for the same ((second proviso to Section 135 (5) )),
4) An annual report on CSR containing particulars specified in Annexure to the Rules ((Rule 8(1) )); and
5) Report of directors’ of a company shall include responsibility statement of CSR Committee ((Rule 9)).

In case of a foreign company, the balance sheet filed with the Registrar of Companies shall contain a report on CSR containing details specified in an Annexure to the Rules ((Rule 8(2) )).

CSR Policy, as approved by the Board, shall be placed on the Company’s website ((Section 135 (4)(a) )). The details to be displayed on website of a company shall contain particulars specified in an Annexure to the Rules ((Rule 9 )).

Website of a company shall include responsibility statement of CSR Committee ((Rule 9)).

CSR Activities:
The CSR activities shall be undertaken by the company, as per its stated CSR Policy, as projects or programs or activities. Such projects or programs or activities can be either new or ongoing. Activities undertaken by the company in its normal course of business is not treated as CSR activities ((Rule 4(1) )).

The Board of a company may decide to undertake its CSR activities through a registered trust or a registered society or a company established under section 8 of the Act or otherwise. Such trust, society or company can be either established by the company itself or by its holding company or subsidiary company or an associate company ((Rule 4(2) )). Use of words “or otherwise”, suggests that the company may undertake CSR activities itself or through section a company established under section 25 of the Companies Act, 1956.

Where a company intends to undertake its CSR activities through a registered trust or a registered society or a company established under section 8 of the Act and such trust, society or company which is not established by the company itself or by its holding company or subsidiary company or an associate company, then the company shall ensure that such trust, society or company have an established track record of three years in undertaking similar programs or projects ((proviso (i) to Rule 4(2) )).

Where a company undertakes CSR activities through aforesaid entities the company shall ensure to specify the projects or programs to be undertaken, the modalities of utilization of funds for the same and the monitoring and reporting mechanism ((proviso (ii) to Rule 4(2) )).

A company may also collaborate with other companies for undertaking its CSR activities. In such case it shall be ensured that CSR Committees of respective companies are in a position to report separately CSR projects or programs as required under the Rules ((Rule 4(3) )).

CSR projects or programs or activities that benefit only the employees and their families shall not be considered as CSR activities for the purpose of section 135 of the Act ((Rule 4(5) )).

CSR expenditure shall include all expenditure and contribution to corpus for projects or programs relating to CSR activities approved by the Board. Any expenditure on item not in conformity with activities which fall within the purview of Schedule VII of the Act ((Rule 7)).

Expenditure incurred by a company towards CSR projects or programs or activities undertaken in India are only counted towards minimum 2% of CSR expenditure ((Rule 4(4) )).

A company may spend amount to build CSR capacities of their employees as well as those of implementing agencies through institutions. Provided such institutions should have established track records of at least three financial years. Such expenditure of company shall be treated as CSR activities upto 5% of total CSR expenditure in one financial year ((Rule 4(6) )).

Any contribution to a political party shall not be considered as CSR activity ((Rule 4(7) )).

Section 20: Service of documents.

Service of documents.

20. (1) A document may be served on a company or an officer thereof by sending it to the company or the officer at the registered office of the company by registered post or by speed post or by courier service or by leaving it at its registered office or by means of such electronic or other mode as may be prescribed:
Provided that where securities are held with a depository, the records of the beneficial ownership may be served by such depository on the company by means of electronic or other mode.
(2) Save as provided in this Act or the rules made thereunder for filing of documents with the Registrar in electronic mode, a document may be served on Registrar or any member by sending it to him by post or by registered post or by speed post or by courier or by delivering at his office or address, or by such electronic or other mode as may be prescribed:
Provided that a member may request for delivery of any document through a particular mode, for which he shall pay such fees as may be determined by the company in its annual general meeting.
Explanation.—For the purposes of this section, the term “courier” means a person or agency which delivers the document and provides proof of its delivery.

This provision is covered by Chapter II on INCORPORATION OF COMPANY AND MATTERS INCIDENTAL THERETO [Sections 3 to 20].

Section 20 is brought to force from April 01, 2014.

For this chapter, the Companies (Incorporation) Rules, 2014 (‘the Rules’) are notified with effect from April 01, 2014.
Rule 35 of the Rules is the relevant.

Corresponding provisions of the Companies Act, 1956:
Sections 51, 52 and 53.

Corresponding provisions of the English Companies Act, 2006:
Sections 1068 to 1071, 1139 to 1142, 1143, 1144, 1146, 1147, 1148, Schedules 4 and 5

Applicability:
This section is applicable to all companies.

Comments:
It provides where and how to serve a document to:
(i) a company or its officers,
(ii) Registrar of Companies; and
(iii) members of a company.

The term ‘document’ is defined under section 2(36) as follows:

“document” includes summons, notice, requisition, order, declaration, form and register, whether issued, sent or kept in pursuance of this Act or under any other law for the time being in force or otherwise, maintained on paper or in electronic form.

The term, ‘officer’ is defined under section 2(59) as follows:

“officer” includes any director, manager or key managerial personnel or any person in accordance with whose directions or instructions the Board of Directors or any one or more of the directors is or are accustomed to act.

The term ‘Registrar’ is defined under section 2(75) as follows:

“Registrar” means a Registrar, an Additional Registrar, a Joint Registrar, a Deputy Registrar or an Assistant Registrar, having the duty of registering companies and discharging various functions under this Act.

The term ‘member’ is defined under section 2(55) as follows:

“member”, in relation to a company, means—
(i) the subscriber to the memorandum of the company who shall be deemed to have agreed to become member of the company, and on its registration, shall be entered as member in its register of members;
(ii) every other person who agrees in writing to become a member of the company and whose name is entered in the register of members of the company;
(iii) every person holding shares of the company and whose name is entered as a beneficial owner in the records of a depository.

Though the term ‘Courier’ is defined for the purpose of section 20, by way of an explanation to the section, rule 35(5) also says that ‘courier’ means a document sent through a courier which provides proof of delivery !

To serve a document on company or its officer:
It shall be sent to registered office of the company.
It shall be sent either by registered post or by courier service or by leaving it at its registered office or by prescribed electronic mode or by other prescribed mode.

Rule 35(1) when read with rule 35 (2), the electronic mode of delivery of document on a company or its officer is prescribed as delivery through ‘electronic transmission’. And ‘electronic transmission’ is explained as a communication –
(a) delivered by any of the following modes and in respect of which the company or the officer has put in place reasonable systems to verify that [highlight]the sender is the person purporting to send the transmission [/highlight]

(i) facsimile telecommunication or electronic mail when directed to the facsimile number or electronic mail address, respectively, which the company or the officer has provided from time to time for sending communications to the company or the officer, respectively ;
(ii) posting of an electronic message board or network that the company or the officer has designated for such communications, and which transmission shall be validly delivered upon the posting; or
(iii) other means of electronic communication,

AND
(b) that creates a record that is capable of retention, retrieval and review, and which may thereafter be rendered into clearly legible tangible form.

The rules requires that to send documents electronically (by fascimile, email, electronic message board or electronic network or other electronic communication) to a company or its officers, the company or its officers must have put in place a reasonable systems to verify that the sender is the person purporting to send the transmission. Thus, where such a system is not put in place by a company or its officers, documents cannot be legally served on the company or its officers.

And where a company or its officers have put in place a reasonable systems to verify that the sender is the person purporting to send the transmission, a communication must creates a record that is capable of retention, retrieval and review, and which may thereafter be rendered into clearly legible tangible form.
Where even though a reasonable systems to verify that the sender is the person purporting to send the transmission is put in place by a company or its officers, if the communication doses not creates a record that is capable of retention, retrieval and review then also documents cannot be legally served on the company or its officers.

[pullquote-right] In my view, the rule 35, as they are worded, renders sections 11, 12 and 13 of the Information Technology Act 2000 to nullity. It would lead to litigation and difficult to communicate legally using electronic mode with a company or its officers by any person, including investors and the Government (particularly serving legal notice).[/pullquote-right]

The above prescribed procedure for electronic communication does not apply to service of the records of beneficial ownership by a depository to the company – as proviso to section 20(1) specifies that such records may be served on the company ‘by electronic or other mode’ and it does not use words ‘such electronic or other mode as may be prescribed’.

To serve a document to a Registrar of Companies:
Document may be sent to a Registrar (except where electronic filing is prescribed) by sending it either by ordinary post or registered post or speed post or courier or delivering at his office or address or ‘by such electronic or other mode as may be prescribed’.

The effect of opening line of sub0section (2) of section 20 ‘Save as provided in this Act or the rules made thereunder for filing of documents with the Registrar in electronic mode,’ is that where any provision of the Companies Act 2013 or the rules framed thereunder provides for filing of documents with the Registrar of Companies in electronic mode, the the filing shall be done according to such other provision of the Act and Rules in electronic mode and filing in any other mode is not legally valid.

To serve a document to a member:
The legal mode of serving a document to a member of the company can be in the manner prescribed below.
Document may be sent to a member by sending it either by ordinary post or registered post or speed post or courier or delivering at his office or address or ‘by such electronic or other mode as may be prescribed’.

Where a member makes a request for delivery of any document through a particular mode, he he shall pay such fees as may be determined by the company in its annual general meeting for delivering by such mode.

Procedure for service document electronically on the Registrar or any member of a company:

Rule 35 (3) and (4), prescribes the electronic mode of delivery of document on the Registrar or any member of a company similar to serving of document on a company. It is prescribed as delivery through ‘electronic transmission’. And ‘electronic transmission’ is explained as a communication –
(a) delivered by any of the following modes and in respect of which the Registrar or the member of a company has put in place reasonable systems to verify that the sender is the person purporting to send the transmission–

(i) facsimile telecommunication or electronic mail when directed to the facsimile number or electronic mail address, respectively, which the Registrar or the member has provided from time to time for sending communications to the Registrar or the member respectively;
(ii) posting of an electronic message board or network that the Registrar or the member has designated for such communications, and which transmission shall be validly delivered upon the posting; or
(iii) other means of electronic communication,

AND
(b) that creates a record that is capable of retention, retrieval and review, and which may thereafter be rendered into clearly legible tangible form.

Section 2(87): Subsidiary company or subsidiary.

Subsidiary company or subsidiary.
Unless the context requires otherwise, the term ‘subsidiary company’ or ‘subsidiary’ wherever appearing in the Companies Act, 2013 shall have the following meaning:

“subsidiary company” or “subsidiary”, in relation to any other company (that is to say the holding company), means a company in which the holding company –
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary companies:
Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed.
Explanation – For the purposes of this clause, –
(a) a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding company;
(b) the composition of a company’s Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors;
(c) the expression “company” includes any body corporate;
(d) “layer” in relation to a holding company means its subsidiary or subsidiaries;

Chapter I is on PRELIMINARY [Sections 1 and 2].

Section 2(87) is brought to force with effect from September 12, 2013, except the proviso and explanation (d).
Explanation (d) is brought to force from April 01, 2014. The proviso is not yet brought to force.

The Companies (Specification of definitions details) Rules, 2014 notified with effect from April 01, 2014, is relevant.

Corresponding provisions of the Companies Act, 1956:
Section 2(47) and section 4.

Corresponding provisions of the English Companies Act, 2006:
Section 1159 and Schedule 6.

Comments:
Where the composition of the Board of Directors of a company (including body corporate), say S Ltd., is controlled by another company (holding company), say H Ltd., either directly (on its own) or together with its one or more subsidiaries, then such company (or body corporate) [S Ltd.] is said to be subsidiary of the other company, H Ltd. Such control can also be through any subsidiary of the holding company, H Ltd. .

The composition of a company’s Board of Directors shall be deemed to be controlled by another company, evenif he same is not actually so controlled, if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors .

The term ‘control’ is defined u/s.2(27) as under:

‘Control’ shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.

Where more than one-half of the total share capital of a company (including body corporate), S Ltd., is controlled by another company (holding company), H Ltd., either directly (on its own) or together with is one or more subsidiaries, then such company (or body corporate), S Ltd., is said to be subsidiary of the other company, H Ltd. Such control can be through any one or more subsidiary / subsidiaries of the holding company .

‘Total share capital’:
The term ‘total share capital’ is not defined under the Companies Act, 2013.

However, the term ‘share’ is defined u/s.2(84) to mean a share in share capital of a company and includes stock. U/s. 43 share capital can be of two kinds, equity share capital and preference share capital.

The term ‘total share capital’ is defined under the Rules ((Rule 2(1)(r) )) as:

In these rules, unless the context otherwise requires, “Total Share Capital”, for the purposes of sub-sections (6) and (87) of section 2, means aggregate of the:-
(a) paid-up equity share capital-
and
(b) convertible preference share capital.

Thus, where more than one-half of the aggregate of

(i) paid-up equity share capital, and

(ii) convertible preference share capital

of a company (including body corporate) is exercised or controlled by another company, the former company becomes subsidiary company.

This is in deviation from definition of ‘subsidiary company’ under:
(i) Section 4 of the Companies Act, 1956 as well as
(ii) definition (Para 5) of Accounting Standard 21 (‘AS21’) on Consolidated Financial Statement.

Under Act of 1956 emphasis was only on equity share capital and in AS 21 emphasis is on voting power.

 

The Central Government (Ministry of Corporate Affairs or MCA) have authority to limit number of layers of subsidiary companies that certain kinds of companies can have. MCA to specify number of subsidiary companies that a subsidiary of certain kinds of companies can have. .

 

List of some of the provisions where the term ‘subsidiary company’ is used in the Companies Act, 2013:

  1. Associate company does not include subsidiary company. ((Section 2(6) ))
  2. To seek approval of NCLT for following different financial year than April 01 to March 31, where an Indian company is either a holding company or a subsidiary company of a company incorporated outside India and is required to follow different financial year for consolidation of accounts. ((first proviso to section 2(41) ))
  3. A subsidiary of a government company is treated as government company. ((Section 2(45) ))
  4. A company which is subsidiary of a public company, shall be deemed to be a public company. ((Section 2(71) ))
  5. A subsidiary company is treated as related party. ((Section 2(76)(viii) ))
  6. A subsidiary company cannot be a small company. ((proviso to Section 2 (85) ))
  7. Certain class of holding companies can have only limited number of layers of subsidiary companies. ((proviso to section 2(87) )) Layer means subsidiary of subsidiary. ((Explanation (d) to Section 2(87) )).
  8. Subsidiary company is prohibited from holding shares (directly or through nominee) of its holding company. ((Section 19(1) ))
  9. Company shall not give financial assistance for purchase of its shares or shares of its holding company to any person. ((Section 67(2) )). An exception being ESOP ((Section 67(3)(b) )) or loan to employees upto 6 months of salary for beneficial ownership ((Section 67(3)(c) ))
  10. Companies are prohibited to buy-back its securities through, inter alia, its subsidiaries. ((Section 70(1)(a) ))
  11. Inspection of books of accounts of a subsidiary company is not open to directors of holding company and is open only to such persons, as may be authorised by a resolution of the Board of holding company. ((proviso to Section 128(3) ))
  12. Auditor of holding company can access records of its subsidiary (including its associates and joint ventures) for consolidated financial statement purpose. ((proviso to Section 143(1) ))
  13. An individual can be director of maximum 10 public companies and in reckoning 10 public companies, directorship held in private companies which are either holding or subsidiary company of a public company shall be included. ((Explanation to Section 165(1) ))
  14. A company shall make investment through not more than two layers of investment companies. However, if investor company is a subsidiary company, it can have more than two layers of investment companies for the purposes of meeting the requirements under any law or under any rule or regulation framed under any law for the time being in force. ((proviso to Section 186(1) ))
  15. Shorter procedure for merger or amalgamation of holding company and its wholly owned subsidiary company. ((section 233(1) ))
  16. Section 185 do not apply to loan by holding company to its wholly owned subsidiary company; any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary ((Rule 10(1) of the Companies (Meetings of Board and its Powers) Rules, 2014 ))
  17. Section 185 do not apply to 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 ((Rule 10(2) of the Companies (Meetings of Board and its Powers) Rules, 2014 ))

Section 18: Conversion of companies already registered.

Chapter II
INCORPORATION OF COMPANY AND MATTERS INCIDENTAL THERETO

Provisions of the Companies Act, 2013:
Section 18: Conversion of companies already registered.
For this provision, no rules are prescribed the Companies Rules, 2013.
[Section 18 is not yet brought to force.]
Section 18 is not a procedural provision. It confers right on companies to convert itself into any other class of company.

Corresponding provisions of the Companies Act, 1956:
Section 21 (conversion of private company into public company or vice versa)
Section 31 (conversion of public company into private company)
Section 32 (conversion of unlimited company into limited company)

Corresponding provisions of the English Companies Act, 2006
Part 7: Sections 90 to 96 re-registration of private company as public
Part 7: Sections 97 to 101 re-registration of public company as private
Part 7: Sections 102 to 104 re-registration of private limited company as unlimited
Part 7: Sections 105 to 108 re-registration of unlimited private company as limited
Part 7: Sections 109 to 111 re-registration of public company as private and unlimited

Applicability:
This section is applicable to all companies.

Section 18 confers right on companies to convert itself into other class by altering its memorandum and articles of association. Such alteration shall made in the manner prescribed in Chapter II of the Companies Act 2013. It may be noted that section 13 provides for alteration of memorandum and section 14 provides for alteration of articles, whereby a company can be converted into another class of company (say private company to public company etc.).

The company shall make application for conversion into other class of company to the Registrar of Companies (‘ROC’). ROC shall satisfy itself that the Company has complied with the requisite provisions for registration of company. If so satisfied, ROC shall close the former registration and issue fresh certificate of incorporation, after registering the documents submitted for change in class of company.

It is clarified that conversion of company does not affect any debts, liability, obligations or contracts incurred or entered into, by the company or on behalf of the company before conversion. And such debts, liability, obligations or contracts shall be enforceable in the same manner as if such conversion has not been done.

Though the law misses out on enforceability and ownership of its rights and assets, the same shall remain with the company in the same manner as if the conversion has not been done. [case law confirming this contention to be stated]

Section 17: Copies of memorandum, articles, etc., to be given to members.

Chapter II
INCORPORATION OF COMPANY AND MATTERS INCIDENTAL THERETO

Provisions of the Companies Act, 2013:
Section 17: Copies of memorandum, articles, etc., to be given to members.
Rule 2.31 of the Companies Rules, 2013
[Section 17 is not yet brought to force and the Companies Rules, 2013 is not yet brought to force].

Corresponding provisions of the Companies Act, 1956:
Section 39
[There is no difference between section 39 of 1956 Act and section 17 of 2013 Act, except that the fees payable by a member is being increased].

Corresponding provisions of the English Companies Act, 2006
Section 229

Applicability:
This section is applicable to all companies.

Members of a company have a right to ask for copies of:
(a) Memorandum of association;
(b) Articles of association, and
(c) every agreement and resolutions as specified un section 117 (1) [similar to section 192 of 1956 Act], if the same is not embodied in the memorandum or articles.Under rule 2.31, a members is required to pay fee. Upon receipt of request along with prescribed fees from a member, within seven days the company shall send  a copy as required by him.

Penalty:
For each default, the company and every officer of the company who is in default shall be liable to a penalty of Rs.1,000/- for each day during which such default continues or Rs.100,000/-, whichever is less.

Adjudication:
Under Section 454, the officer appointed by the Central Government, not below the rank of Registrar of Companies, may adjudicate and impose monetary penalty for violation of this section. However, before imposing penalty, an opportunity of hearing shall be given to the Company and its officers.

Compounding:
It may be noted that under section 441, where offence is punishable with fine only, the same may be compounded by the National Company Law Tribunal or where the fine does not exceed Rs.5,00,000/- by the Regional Director or any other officer authorised by the Central Government.

Summary of forms and records:
No format of application to by members to company is prescribed.

Preservation:
Company may preserve records of application received from members, receipts issued to members upon receipt of fees along with the application and proof of sending the requisite document to members.

The Act does not prescribe period for which correspondence with investors be preserved. Receipt issued by company and payment received from member forms part of accounts and hence the same may be preserved for the period prescribed for preserving accounting records. Section 128(5) prescribes that accounting records shall be preserved for previous 8 financial years.

Section 22 Execution of bills of exchange, etc.

Chapter II
INCORPORATION OF COMPANY AND MATTERS INCIDENTAL THERETO
[Sections 3 to 22]

Provisions of the Companies Act, 2013:
Section 22: Execution of bills of exchange. etc.
For this provision, no rules are prescribed the Companies Rules, 2013.
[Section 22 is brought to force with effect from September 12, 2013.]

Corresponding provisions of the Companies Act, 1956:
Sections 47 and 48.

Corresponding provisions of the English Companies Act, 2006:
Sections 47 and 52.

Applicability:
This section is applicable to all companies.

Execution of bill of exchange, hundi or promissory note for and on behalf of company:
Where a bill of exchange, hundi or promissory note is made, accepted, drawn, or endorsed in the name of the company, or on behalf (or on account) of the company, by any person acting under its authority, then it shall bind the company. The person so executing bill of exchange, hundi or promissory note may have authority of company expressly, i.e. by resolution of its Board of Directors or by delegated authority of officers (generally managing director or CFO). Even implied authority given to a person so executing bill of exchange, hundi or promissory note shall bind the company. Implied here means by necessary implication, which can be judged from actions of such person and acceptance / honour by the company of such action done from time to time.

Execution of contract for and on behalf of company:
A company may authorise any person as its attorney to execute deeds (other than bill of exchange, hundi or promissory note) on its behalf, in any place either in or outside India. Further, such authorisation by a company may relate to specific subject matter, as in case of a specific or special power of attorney or it may be given generally, as in case of general power of attorney. A person in whose favour authority is given by a company can be any person and need not be officer of the company. However, such authorisation given by a company to its attorney shall be in writing and under its common seal.

Use of words ‘other deeds’ in sub-section (2) suggests deeds other than bill of exchange, hundi or promissory note referred in sub-section (1).

Use of word ‘may’ suggests that this procedure is optional. And a company may follow its own or other procedure than prescribed under section 22. However, a memorandum or an articles of association of a company shall contain such other procedure.

Where a company follows the aforesaid procedure, i.e., it authorises any person as its attorney, in writing and under its common seal, to execute deeds (other than bill of exchange, hundi or promissory note) on its behalf, then execution of any deed by such attorney for and on behalf of the company, shall bind the company and have the effect as if it were made under its common seal (though attorney might not have affixed its common seal on deed so executed).