Transcript Document

Companies Act 2013
Accounts and audit
By
CA. S. Ramakrishnan
30 Apr 2014
“Some changes look negative on the
surface but you will soon realize that space
is being created in your life for something
new to emerge.”
»Eckhart Tolle
Some basics
• These are strictly my views- not my firms nor my partners and
certainly not ICAI!
• The laws are evolving
– 282 sections (98+1+183) out of 470 in New act notified
• Out of these 10 sections of Old act still continue
• New Corporate governance guidelines of SEBI are not
covered here (Effective Oct 1,14)
• For Mar 14 accounts and audit, 1956 act still applies (General
circular 8 dated 4 Apr 14)
• New clarifications /amendments are quite likely
• In most cases we will have guidance from ICAI soon
• ICAI also in the process of making some representations/or
done
Matters of Concern
• Mandatory rotation should not be retrospective S 139 and
Rule 6
• Relatives should only include dependents S 141 and Rule 10
• Limit of 20 cos per auditor should not apply to private cos and
clarification required regarding branches /CFS S 141(3)g)
• Internal financial control system should be limited to those
related to financial statements (as done for Board) S 143
• Additional reporting like pending litigation, foreseeable losses
for Long term contracts and derivatives etc should be
dispensed with (rule 11 –chapter X)
Matters of Concern
• Reporting of fraud- auditor requires legislation protecting
auditor against criminal /civil liability; also should be limited to
frauds which have been investigated and concluded(S
143(12))
• Prohibited services for auditors-clarification required (S 144)
• Entire firm being debarred by NFRA should be reconsidered (S
132(4))
• Auditor should not be responsible to ‘any other person’. (S
147(3)(ii))
Understanding Grandfathering
• A grandfather clause is a provision in which an old rule
continues to apply to some existing situations, while a
new rule will apply to all future cases.
• Wikipedia
• This is one main issue with the New companies act and
Rules
• Some clarifications have come like accounts, audit,
Section 180 regarding Borrowing powers etc
• But in many cases this is the fundamental doubt
• Is old rule applicable or new!?
SOME KEY PROVISIONS –AUDIT-CHAPTER X
OF RULES
New audit landscape
• Some will lose existing audits
• Most will gain audits and do other work
• We will all benefit by the CHANGE
– Change anyway is the only constant in the world
Loss of audit to one/ gain to another-1
1. Because a member of auditor’s HUF, spouse, father/s,
mother/s, son/s, son’s wife, daughter, daughter’s husband,
brother/s, sister/s (/s for step)
• acquires /holds security >Rs 1 lakh face value
• Becomes indebted to company/subsidiary, holding,
associate, co-subsidiary for >Rs 5 lakhs
• Gives guarantee /provides security to above for >Rs 1
lakh
– And don’t take corrective action in 60 days
» Rule 10 –section 141(3)
Loss of audit to one/ gain to another-2
2. Because the auditor has business relationship with Company,
subsidiary, holding co, associate , associate or subsidiary of
holding co. and not in ordinary course, at arm’s length
– (he can use mobile service provider, travel in a plane, get
admitted in a hospital, stay in a hotel room /eat in a
restaurant of any of the above cos or do such other similar
business. he can also do what is permitted by ICAI)
• S 141(3) –Rule 10
Loss of audit to one/ gain to another-3
3. Because the auditor has a relative who is a CFO or Company
secretary (being KMP) in the Company
• S 141
Loss of audit to one/ gain to another-4
4. Because he has over 20 audits , he has two choices now
 leave the not so remunerative ones to smaller firms
 better still bring in a new partner!
– Best provision to help
• SMP auditors
• that manager in the firm who has slogged for 20 yearswho can get a partnership now!
– S 141
Loss of audit to one/ gain to another-5
5. Because the private limited consulting firm where he has
significant influence does Management services (one of the
prohibited services) for the holding co or subsidiary
– (If existing work he has one year to comply)
• S 144
Loss of audit to one/ gain to another-6
6. Because he has been an auditor from generation to
generation in a 112 year old co (formed originally under 1913
act- listed or with Public borrowing >=Rs 50cr, or Public co
with PUC >=Rs 10cr, or Private co with PUC>=Rs 20cr) he has
to retire after 3 more years!
– (and he has to wait on the wings only for 5 years to get
back!)
• S 139(2)
Loss of audit to one/ gain to another-7
7. Because the members of the Company say let’s have a joint
auditor because of the size of the Company and as existing
auditor has to retire in 3 years
• S 139(5)
8. Because the members do not ratify his appointment after say
the second AGM even though appointed for 5 years.
• Explanation to Rule 3(7)
Loss of audit to one/ gain to another-8
9. Because the firm where he practices is no longer a majority
CA firm (when multi-disciplinary firms are allowed) and
thankfully an MBA cannot sign FS as auditor!
• Proviso to S 141(1)
I am not considering normal removal, resignation etc.
Thus there are 9 different ways (may be more?) in which audits
will get distributed across a larger CA population and audits will
get a new look
To me that looks GOOD!
THE LEGAL PROVISIONS RELATING TO
AUDIT-NOT COVERED SO FAR
Auditor Appointment
- S 139 - (S 224)
• Audit appointment till conclusion of 6th AGM (against
conclusion of next AGM)
– Ratification at AGM every year by ordinary resolution
• If not ratified, Board shall appoint another auditor
• Company to inform auditor and ROC (auditor was filing F
23B); inform ROC in form ADT-1
• Audit committee to recommend auditor to Board and Board
in turn recommend to AGM
• Consecutive years mean all preceding financial years until
there has been a break by 5 years or more
Auditor Appointment
- S 139 - (S 224) contd...
• Rotation of auditors in listed and other prescribed cos
(contd.)
– No audit firm with common partner of firm whose tenure
has expired, to be appointed for 5 years
– For existing cos/auditors 3 years’ time provided to comply
– Members of Co. may decide on audit partner/ team
rotation and joint audit
– Prohibition applies to
• A partner who certifies FS resigns and joins another firm ,
the latter firm
• Other firms whose name, trade name, or brand is used
by the firm or any of its partners
– If Joint audit, all auditors not to complete term in same
year
• What will happen if auditor resigns after say 8 years and
Auditor Appointment
- S 141 - (S 224(1B)/ 226)
• Additional disqualifications:
– Partner can’t hold security or interest in company in the
Company/ subsidiary /holding co/ associate/ subsidiary of
holding co
– Person convicted by a court of
an offence involving fraud for 10 years
– Provision of specialized services u/s 144
• Previous extension of disqualification of an auditor disqualified
in subsidiary or holding company or a co-subsidiary –is
removed now
Auditor Appointment
- S 141 - (S 224(1B)/ 226) contd..
• Issues:
– The list is too long
– Relative or partner can’t owe money or hold shares but
can have business relations!
– As auditor includes firm , firm cannot hold shares or have
debts due also (expl. 2 S 140)
Independent Auditors Report
- S 143 - (S 227)
• Enquiry by auditor
– Good old 6 clauses u/s 227(1A) still there!
• Holding company auditor to have access to subsidiary
records so far as it relates to consolidation
– SA 600 is not yet mandatory in India but does this mean
holding co auditor is responsible for subsidiary also even if
audited by another CA?
– Auditor does not have access to associate/JV company
books still
Independent Auditors Report
- S 143 - (S 227) contd…
•
•
•
Italics /Bold for qualifications no longer exists
Report to have additionally:
– Observation or comments on financial transactions or matters which
have any adverse effect on functioning of the Company
– Any qualification, reservation or adverse remark relating to the
maintenance of accounts and other matters connected therewith
– Whether company has adequate internal financial control system in
place and the operating effectiveness of such controls (Back door entry
to SOX?)
Under Rule 11 to report further:
– Whether company had disclosed impact, if any, of pending litigations
on its financial position in financial statements
– Whether company had made provision as required under any law or
accounting standards for material foreseeable losses if any on long term
contracts including derivative contracts
– Whether there has been any delay in transferring amounts to IEPF by
company
Reporting fraud to Central Government
- S 143 rw Rule 12/ 13 (S 227)
• Applies to main auditor as well as branch auditor
• Presently only in respect of money laundering there is a
requirement to report to CG (Implementation of S 51A of
Unlawful activities (Prevention) Act 1969 ICAI circ. dated 22
Apr 2010)
• Now if an auditor has reason to believe that an offence
involving fraud is being or has been committed against the
company by officers or employees of the company he shall
report it to CG
• No duty of auditor regarded as contravened if such reporting
done in good faith
How to report fraud to CG
- S 143 rw Rule 12/ 13 (S 227)
• Time
- Within 60 days
• In
- Form ADI 4
• How?
– Auditor to forward report to Board/AC of Co. seeking reply within
45 days
– Forward his report and reply with his comments to CG within 15
days of receipt of reply
– If no reply, auditor to forward his report to CG with a note
containing details of report forwarded to Board or AC
• To
- Secretary, MCA
• By registered post ack due or speed post followed by email
• Branch auditor to have same duty related to the concerned
branch audited (Rule 12)
Reporting fraud to CG
- S 143 rw Rule 12/ 13 (S 227)
• Are we opening a Pandora’s box?
• Will aggrieved auditors report/ send reports to CG to take
revenge on management and not accept replies of
management?
• Board/ AC may call for the auditor after the report goes to
them and ‘persuade’ him aggressively
• No materiality is mentioned here!
• What about past frauds?
• Officers will include directors also!
Independent Auditors Report
- S 143 - (S 227)
• Other Issues:
– Equivalent of CARO u/s 227(4A) – S 143(11) what it will
contain we need to wait and see
– Observations on adverse effect on functioning of co- does
it mean propriety audit? Does it extend audit
responsibility?
– Reporting on adequacy of IC and effectiveness of IC is
going to be Herculean task! Not required anywhere in the
world! SA also does not require this! (Caro talked of only 2 –
sales and purchase)
Non audit services
- S 144 - new
•
Directly or indirectly to Company/ Holding /Subsidiary:
– To be approved by Board or audit committee other than following
which are banned:
• Accounting; Internal audit; Design and implementation of
Financial info system; Actuarial services; Investment advisory
;Outsourced financial services; Management services*; Others as
prescribed
– Existing work- To comply with before closure of first FY
– Prior approval does not seem necessary but what if Board
/Ac fail to approve after the event?
– Forensic audit does not seem prohibited?
– ICAI rule of fees for other services would still apply?
•
Applies to auditor, firm, partners, parent, subsidiary/ associate/ any
other entity where firm/partner has significant influence/ control or
common trade mark/ brand
* ICAI has stated what are permitted Management services
Non audit services
- S 144 - new – contd…
• Issues:
– List is too long but associate is not covered
– IFAC / IESBA code do not prohibit these services in all
companies; stricter rules apply to only Public interest
entities- so this is harsher than International standards
– If Company or subsidiary abroad obviously the restriction
can’t apply?
– What is management services? S141(3)(i) talks of
consulting and specialized services
– indirect recognition to multi national firms? (trade
mark/brand)
Penal provisions
• Penalties /prison time go up sky high! (In S 185/186 it is fine plus
imprisonment)
• Refund of remuneration/ paying damages etc contemplated
• Liability extends to concerned partner/ partners who have
acted in a fraudulent manner or abetted or as the case may
be colluded in the fraud (R 9).
– Will it cover, for instance, an engagement quality control
reviewer who may not have the full facts?
• Joint and several liability to firm/partners
• Action by NFRA/ Tribunal provided for
• Class action suits arrive in India
• Will an LLP help at all?
• Will audit be a very onerous and thankless job?
SOME KEY PROVISIONS-ACCOUNTS
Securities premium:
- S 52 - (S 78)
• For prescribed class of companies following set off against
securities premium will not be permitted:
– Issue of fully paid preference shares
– w/off expenses /commission/discount on preference
shares/debentures
– W/off of preliminary expenses
– Providing premium payable on redemption of redeemable
preference shares /debentures
Depreciation
- S 123- (S 205)
Schedule II
Schedule xiv
Useful life and residual value Minimum Depreciation
prescribed (generally not more prescribed
than 5%); where these differ
disclose justification in FS
rate
Useful
lives Generally lower rates;
increased/decreased
as
compared to Sch xiv- ex. ocean
going liners 25 years (20);
Furniture 10(15) –higher charge
will result in general esp. when
assets nearing end of life
Componentisation required
(note 4)
Componentisation was not
required; allowed under AS 10
Depreciation
- S 123- (S 205) contd..
Schedule II
Schedule xiv
No 100% depreciation
100% depreciation for
assets costing less than Rs
5000
No ESA rate- 50% more for 2 shifts;
100% more for 3 shifts for period
Rates specified for ESA
More sub divisions in individual assets
like for Buildings ; separate rates for
some industries;
Less sub divisions and less
industries
Where remaining useful life nil charge Always to Statement of
to Opening retained earnings
P&L
Revalued assets –depreciation to
P&L
The differential
depreciation was taken to
revaluation reserve
Consolidated Financial statements (CFS) S 129- Ch ix (S 211)
• Where any company has a subsidiary (which definition includes
associate or JV Co)
– CFS to be prepared and laid before AGM along with standalone FS
(now for all cos)
• If no subsidiary but associate/ JV is there, will consolidation
apply?
– Option to prepare under IFRS per listing agreement goes
• CG may provide rules for consolidation of accounts
– Statement containing salient features also continues! Form AOC 11(R5)
• Will apply to associates and JV also now
• Proviso to Rule 6 “In the case of a co. covered u/s 129(3)which is not
required to prepare CFS under AS, it shall be sufficient if the Co.
complies with provisions of CFS provided in Sch III of the Act.” This
possibly means only the additional information at the end of Sch III
need be provided; however not clear
Consolidated Financial statements (CFS) - S 129 (S 211) – contd..
• Total Share capital is Paid up equity share capital plus
Convertible preference share capital (Ch 1-R 2(r))
– What about partly convertible preference?
– Is it only Compulsorily convertible preference?
• Conflict between Co law and Accounting standard:
• Subsidiary definition in S 2(87) states ‘control of more
than one-half of total share capital’ whereas in AS 21 it
is “one-half of the voting power”
• Also S 2 (87) talks of control of composition of board of
directors only, whereas AS 21 has in addition “to
obtain economic benefits from its activities”
Consolidated FS issues
- S 129 (S 211)
• Do we have to give all disclosures per Sch III in CFS also?
– May be not.
• as Sch III states the schedule will be followed mutatis,
mutandis (ie with necessary changes)
• Also AS 21 gives exemption from statutory information
(Cl 6 exp c of AS 21)
• Such information on an aggregate basis may not really
help users of FS but confuse them!
– For instance: what is the earthly use of aggregating
audit fee of all group cos or disparate information
like raw materials or goods purchased which make
sense only for standalone cos; or imports and
expenditure in foreign currency of foreign
subsidiaries?
Reopening/recasting of accounts
- S 130 / S131 – new
• Court/Tribunal order (S 130) / Voluntary (S 131):
• Who can apply?
– CG
– IT authorities
– SEBI
– Any other statutory/regulatory authority
– Board/Company- S 131
• To
– Court /Tribunal – S 130
– Tribunal – S 131
Reopening/recasting of accounts
- S 130 / S131 – new – contd…
• Conditions for reopening S 130
– Accounts prepared in fraudulent manner
– Affairs of the company was mismanaged during the
relevant period casting a doubt on reliability of FS
• Conditions S 131
– FS or Board report not in compliance with S 129/S 134
Reopening/recasting of accounts
- S 130 / S131 – new – contd…
• Notice to same authorities only viz CG, IT, SEBI, other statutory
regulatory body S 130
• Notice to CG, IT S 131
• Reopening/recasting only on order by court/Tribunal S 130 /
Tribunal S 131
• Accounts so recast shall be final S 130
Reopening/recasting of accounts
- S 130 / S131 – new – contd…
• S 131 – revision of FS/Board report
– Revision for any of the 3 preceding FY
– Not more than once in a FY
– Detailed reasons to be disclosed in Board report
– Where already filed with ROC revision to be confined to
correction to the extent of non compliance with S 129/S
134 and consequential corrections
– CG to frame rules including functions of company auditor
• Recently SEBI issued circular which empowers it to order
revision of FS –thus there are 3 ways
• SEBI has power only to ask company to restate results and file
same with Stock exchanges and company has to give
impact to this in the next year as prior period items
Reopening/recasting of accounts
- S 130 / S131 – new – contd…
• Questions that arise:
– How many years can be reopened not clear in S 130?
– For application by authorities nothing provided
opportunity of being heard to Company! S 130?
– Finality is provided in S 130 not in S 131!?
– S 131 revisions every year possible!?
– Revision of CFS possible?
for
National Financial Reporting Authority
(NFRA) - S 132 – (S 210A)
• NACAS becomes NFRA
• Reach extends to audit standards and overview of audit
profession also
• NFRA has powers to investigate professional or other
misconduct
– Suo moto or on reference by CG
– ICAI can’t initiate/ continue any proceedings where
NFRAS initiates action
– Misconduct of CFO/Co. officials also covered
• NFRA has powers of civil court
NFRA
- S 132 – (S 210A) – contd…
• Penalty action if member(CA) proved guilty
– Penalty not < Rs 1Lakh upto 5 times fees received for
individual
– Penalty not < Rs 10 lakhs upto 10 times fees received for
firms
• Fees for how many years?
– Debarring member or firm min. 6 months max. 10 years
• Appeal to Appellate authority possible
Corporate Social Responsibility (CSR)
- S 135 CSR rw CSR rules dtd 27 feb 14
• Spend
– At least 2% of average net profit of 3 immediately
preceding FY (per S 198)
– Excluding
• Profit from overseas branches
• Dividend received from other companies in India
complying with S 135 (avoids double counting)
Corporate Social Responsibility (CSR)
- S 135
• Limit of 5% on own personnel and implementation agencies –
R 4(6)
• Rule 4(1) excludes activities undertaken in pursuance of
company’s normal course of business.
– So for inst. a hospital cannot extend healthcare services.
• Schedule III requires
– Disclosure of CSR expenses
• Disclose reasons if amount not spent.
Corporate Social Responsibility (CSR) Issues
- S 135
1. Does extension to foreign company in rule violate act?
2. Foreign companies may require FCRA approval
3. What does ‘building CSR capability of own personnel mean?
How is 5% cap to be calculated? R 4(3)
4. What does ‘profit for financial years for which financial
statements prepared under Companies act, 1956 not
required to be recalculated’ mean?
5. Is a provision required in accounts on accrual basis? In my
opinion no as not spending is also possible
S 136, 137 ( S 219, 220)
• Copies of FS /filing:
– CFS also to be sent to members etc
– Listed co can send statement containing salient features
to members etc provided it makes them available for
inspection at regd office (in view of cl 32 they can’t send
abridged CFS)
– Listed cos to place CFS and standalone FS on website
– Electronic dispatch of FS under certain circumstances
– All companies with subsidiary need to place separate
audited a/cs of subsidiary/ies on website
• Thus unlisted cos having subsidiary need a website?
and
• Need not place the holding co a/cs or cfs on website!
S 138 rw Ch IX rule 13
• Internal auditor
– Required for
• Listed cos
• All companies with TO Rs 200cr or more or o/s loans and
borrowings from Banks/FI Rs 100cr or more
• Unlisted public cos with Share capital Rs 50cr or more or
Public deposits Rs 25 cr or more
– Shall appoint a
• CA /cost accountant; can be firm of internal auditors;
– 6 months time for compliance
– AC or Board in consultation with IA to formulate scope,
functioning, periodicity and methodology of IA
SOME OTHER KEY PROVISIONS RELEVANT
FOR AUDIT
Net worth
- S 2(57)
• Reserves created out of
• Write back of depreciation and amalgamation Excluded
– As auditors we need to note this carefully.
Related party
- S 2(76) rw CH 1-R4
•
•
•
•
Director of co/holding co
KMP of co/holding co
Relative of above
And ….
Related party new co law
New Companies Act
S 276 read with MCA Rule 3 of chapter I Rules
“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 is a
member or director;
(v) a public company in which a director or manager is a director
or 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;
Related party new co law contd.
(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; (Rule 3 of Chapter I)
A director or KMP of the Holding Co or his Relative with ref to a
co.
Related party Cos act Vs AS
S 276 read with MCA Rule 3 of
chapter I Rules
AS
Holding Company
Holding Company 2(76) VIII A
Subsidiary
Subsidiary 2(76) VIII A
Fellow Subs
Fellow Subs - 2(76) VIII B a subs
of holding company to which it
is also a subsidiary.
Associate includes JV Company Associate 2(76) VIII A
KMP & Relatives
KMP & Relative 2(76) II
Entrenchment
- S 5(3) -New
• The articles can now contain provisions for entrenchment –
– ie. specified provisions of the articles may be altered only if
conditions or procedures that are more restrictive than
those applicable in the case of a special resolution, are
met or complied with
• We should as auditors to ensure that If there is such a provision
in articles, resolutions passed are as prescribed
• Similarly if Board meeting called at short notice and no
independent director present, whether independent director
has ratified decisions later (S 173(3)
Special resolution required
- S 180/181/182 (S 293/293A)
• The clause regarding investment in trust securities now
applies to compensation received by company as a result of
merger or amalgamation
• Donations now for bona fide charitable and other funds
above 5% of average net profits for 3 immediately preceding
years will require prior permission of company in general
meeting. (Rs 50000 lower limit removed)
• Political parties donation hiked to 7.5% from 5%
– For both above profit means profit (after tax?) and link to
managerial remuneration profits goes
• If existing borrowing limit u/s 293(1)(d) is sufficient, no need for
a special resolution again. If limit exceeded under New act
for new borrowings , charge registration, Special resolution to
be taken before 11 Sep 14. (Circular 4/14)
Loans to directors etc.
- S 185- (S295)
• Loans /guarantees /providing security to director or any
other person in whom director interested prohibited (director
of lending co or holding co or partner/relative of such
director; any firm where such director or relative is
partner; private co of which such director is director or
member; any BC where over 25% voting power
exercised by such director/directors together; or where
Board is accustomed to act according to instruction of
board or directors of lending co)
– Except for
• loan to MD/WTD as part of service condition extended
to all employees or per scheme approved by members
by special resolution
• Loans in the ordinary course at rates of interest not less
than bank rate
Loans/investments
- S 186 - (S 372A)
• Only two layers of investment companies
– Unless acquiring another company out of India
– Subsidiary having investment subsidiary to meet
requirements of any law
• Giving of loans/guarantee/security extended to any
person/body corporate (not only corporates)
• Prior approval by special resolution needed if limits exceeded
for loans/Guarantee/security/Investment (i.e 60% of PUC/Free
reserves/Securities premium or 100% of free reserves incl.
securities premium)
• Rule 11 Ch XII
– Loans/guarantee/providing security to WOS/JV exempt
– Guarantees to Subsidiaries exempt if a)to banks /FI; b)
used for subsidiary’s principal activities
– Investments in WOS exempt.
Loans/investments
- S 186 - (S 372A) contd..
• No loans /investments if in default of repayment of deposits
• Rate of interest not less than prevailing yield on 1 year/3
years/ 5 years /10 years Government security, closest to tenor
of loan (previously bank rate)
– What about Forex loans?
• Disclose in FS details of loans / investments / guarantee/
security, purpose
– No exemptions for private cos, etc
– One year time given to get approvals
– Omnibus resolutions possible
Related party transactions
- S 188 - (S 297)
• Related party definition widened
• Prior Special resolution required for RPTs (previously CG
approval if PUC over Rs 1cr) if not at arm’s length
– No vote by related party gives enormous powers to non
related parties for material transactions!
– How to take care in fellow subsidiaries/JV cos?- deadlock
situations?
• New items now brought under RPTs if not on an arm’s length
basis:
– Leasing of property; selling/buying property; appointment
of agents for purchase/sale of materials/service/property;
appointment to office or place of profit
in
Company/Holding co.; underwriting securities/ derivatives
• Arm’s length V IT department Transfer pricing?
• How to determine arm’s length? And document?
Related party transactions covered
- S 188
Transactions covered under new Act
Transactions covered under Old Act
188(1)
a)sale purchase or supply goods or
materials
297 1 a sale purchase or supply
goods or materials
b) Selling or otherwise disposing off or
buying, property of any kind
c) Leasing of property of any kind
Not Covered
d) Availing or rendering of any services
297 1 a – for supply of any services
Not covered
e) appointment of any Agent for purchase Sole selling agents 294 or sale of goods materials services or
property
f) such related parties appointment to any 314 office or place of profit in the company or
subsidiary or associate co.
g) underwriting of subscription any
securities or derivatives thereof of the co.
297 1 b for underwriting the sub of
any shares in or deb of the co.
RPT requiring prior approval of membersmajority of minority- if not at arm’s length
•
•
•
Chapter XII Rule 15 (3) –Prior approval of members – by special Resolution
– Provided further that no member of the company shall vote on such
special resolution, to approve any contract or arrangement which may
be entered into by the company, if such member is a related party
– The Co having paid up share capital of over Rs 10 cr or
– .
– sale purchase supply of goods or materials exceeding 25% of
annual TO
– selling or disposing of or buying property exceeding 10% of
networth
– leasing of property exceeding 10% of networth or 10% of TO
– availing or rendering of service exceeding 10% of the net worth.
iii) appointment to any office or place of profit in the co or subsidiary or
associate at a monthly remuneration exceeding Rs 2.5 lacs
iv) remuneration for underwriting the subscription of derivatives exceeding
1% of Net worth.
• Does it mean if paid up capital is over Rs 10 Cr, none of the other
conditions help?
Non cash transactions – directors
- S 192• Director of company/holding/subsidiary/associate co. or
person connected with him (not defined) requires prior
approval of Company in GM (also GM of holding co if
director of holding co) for:
– Acquiring assets from Company or
– For Company to acquire from the above
• for consideration other than cash
Minimum managerial remuneration
- S197/ SchV
Limits on yearly
remuneration not exceeding
(can be double if approved by
Special resolution)
Negative or less than Rs. 5 crores Rs. 30 lakhs
Slabs for Effective Capital
Rs. 5 crores and above but less
than Rs. 100 crores
Rs. 42 lakhs
Rs.100 crores and above but
less than Rs. 250 crores
Rs. 60 lakhs
Rs. 250 crores and above
Rs. 60 lakhs plus 0.01% of the
effective capital in excess of Rs.
250 crores
Freezing of assets
- S 221 -New
• The Tribunal, on reference made to it by the Central
Government or in connection with any inquiry or investigation
into the affairs of a company or on any complaint made by
such number of members as specified or a creditor having Rs
1 lakh amount outstanding against the company or any other
person
• having a reasonable ground to believe that the removal,
transfer or disposal of funds, assets, properties of the company
is likely to take place in a manner that is prejudicial to the
interests of the company or its shareholders or creditors or in
public interest,
• it may by order direct that such transfer, removal or disposal
shall not take place during such period not exceeding three
years as may be specified in the order or may take place
subject to such conditions prescribed
OTHER PROVISIONS-ACCOUNTS/AUDITING
Financial Year
- S 2 (41)
• Uniformly Mar 31
• A holding/ subsidiary of foreign co. can follow different FY
with permission of Tribunal
– Two years time for conversion to Mar 31
• Result:
– More work for companies and auditors due to peaking up
Free Reserves
- S 2 (43)
(i) any amount representing unrealised gains, notional gains or
revaluation of assets, whether shown as a reserve or
otherwise, or
(ii) any change in carrying amount of an asset or of a liability
recognised in equity, including surplus in profit and loss
account on measurement of the asset or the liability at fair
value,
– shall not be treated as free reserves;
• The underlined parts are going to pose lot of
challenges!
Free reserves
- to take care
• S 123 – no dividend to be declared from reserves other than
free reserves.
– New declaration of dividends out of reserves rules (chapter
VIII) clearly states amount drawn from accumulated profits
shall first be utilised to set off losses incurred in the financial
year in which dividend is declared.
– Hence the previous option of declaration out of ‘surplus’ in
P&L is no longer there.
Free reserves
- to take care
• S 180 on restrictions on powers of Board
– Borrowing moneys exceeding paid up share capital and
free reserves –here free reserves would mean only those
available for distribution as dividend and after reducing
unrealised gains and surplus on measurements of assets
and liabilities at fair value.
– Special resolution to be taken before 11 Sep 14 if
borrowing is more than limit (Circular 4/14)
• S 179 rw Rule 8(6) Chapter 12 –Board resolution required in
meeting and to be filed with ROC
– Buy sell investment held by company (non trade)
constituting 5% or more of Paid up capital and free
reserves of investee company.
Share application money–to take care
• Companies acceptance of deposits
Rules 2014 makes it compulsory to
issue shares within 60 days of receipt
of share application money or refund
it within 15 days.
• Else this will be treated as deposit with serious consequences.
–Esp. for private limited companies.
Small Company
- S 2 (85) new
• Paid up share capital- Rs 50 lacs to Rs 5cr as prescribed
• Turnover per last P&L –Rs 2cr to Rs 20cr as prescribed (Rs 50cr
under AS)
– Exempt:
• Holding or subsidiary
• S 8 co
• Cos under special act
• Issues:
– Definition different from AS for SMC
– So cash flow statement becomes applicable for
companies with turnover per cos act limit which is smaller;
– What about companies with Turnover less than co. law
limit but borrowings exceeding Rs 10cr?
Section 71 rw rule 18 Chapter IV
• Company is now required to create DRR equivalent to 50% of
amount raised through the debenture issue before
redemption commences (sub rule 7 (b))
• This is more than current requirement in some cases
– In my opinion new rule applies to debentures issued after
Apr 1, 14 only
Dividends
- S 123 (S 205)
• Transfer of current profits to reserves rule go- transfer will be at
discretion of company
• No power to declare dividend without providing for
depreciation with CG approval
• Interim dividend:
– Out of surplus in P&L and out of profits of the FY
– If loss during CY upto previous quarter , rate not to be
higher than average dividends during immediately
preceding 3 FY
• Declaration of dividend out of reserves to be as per rules
• No dividend if S 73/74 (deposits
acceptance and
repayment) not complied with
Books of accounts
- S 128 (S 209)
Type/details:
Branch:
• Recognises electronic mode
• No details of account books like money
received, expended , assets and
liabilities and cost of material and labor
(S 209(1)(d)) in new act
• Branch returns periodically (previously
not more than 3 months)
Inspection:
Preservation of books:
• Inspection of subsidiary books by a person
authorised by a resolution of Board
• In case of investigation under ch xiv, CG may
direct longer period than 8 years
Books of accounts
- S 128 (S 209) contd…
• When books not maintained:
– No longer to have defense that a competent and reliable
person was charged with the duty
– Willful offense not required for imprisonment
• Responsible person:
– Director (where no MD) and every officer removed
– Now it is MD, WTD and CFO or any other person charged
by Board with the duty
Authentication of FS
- S 134 (S 215-217)
• Chairperson where authorised by Board or Two directors
including MD/CEO director
• CFO (need not be director)
– New /onerous requirement for all companies;
– Previously only in listed companies he was required to sign
a certificate that FS are free from material misstatement.
• Secretary
• Does this mean if Chairperson is authorised by Board he only
need sign FS?
Directors Report
- S 134 (S 215-217)
• Board report to also include:
 Extract of annual return
 Number of meetings of Board
 Director’s responsibility statement
 Statement on declaration by independent directors
 Policy on director’s appointment and remuneration
Directors Report
- S 134 (S 215-217) contd…
• Explanation by board on qualifications etc in secretarial audit
report
• Contracts/arrangements with related parties
• Risk management policy including elements of risk which
may threaten existence of company
– Previously this was restricted to listed cos
• CSR initiatives
• For listed and other prescribed cos
– Annual evaluation of performance of board, committees
and directors
• Others as may be prescribed
– Board report to include summary of CFS results also?
Directors Report
- S 134 (S 215-217) contd…
• Internal financial controls
• Policies and procedures adopted by the Company for
ensuring orderly and efficient conduct of its business including
• adherence to company’s policies,
• safeguarding of its assets ,
• the prevention/detection of frauds and errors ,
• the accuracy and completeness of accounting records,
and
• the timely preparation of financial statements
• Rule 8(5)(viii) Ch ix talks of Internal financial controls wrt
financial statements in Director’s report –hence only ICFR and
not all Internal controls
Directors Report
- Other sections
• Board report to include:
– Every contract/arrangement with related party along with
justification (including non cash transactions)
• Form AOC -2 Ch IX Accounts
– This is going to be a long list!
Directors’ responsibility Statement
- S 134
• Applicable AS followed
• Selection and application of accounting policies, making
reasonable and prudent judgments and estimates to give
true and fair view of FS
• Proper /sufficient care for maintenance of adequate
accounting records for safeguarding assets and for
preventing/detecting fraud/ irregularities
• Prepared accounts on going concern basis
Directors’ responsibility Statement
- S 134 contd…
• Proper systems to ensure compliance with provisions of all
applicable laws and such systems were adequate and
running effectively
• Constitution of CSR committee where applicable ; disclose
CSRP and reasons for not spending 2% of avg profits on CSR
(S 135)
• In listed company,
– Laid down internal financial controls to be followed by the
company (for orderly and efficient conduct of business)
– These internal financial controls are adequate and
operating effectively
Auditor removal
- S 140 (S 225)
• Special resolution and previous approval of CG required
• By Tribunal suo moto or application made, if it is satisfied that
auditor has directly or indirectly acted in a fraudulent manner
or abetted or colluded in any fraud by or in relation to
company or its directors or officers
• By Tribunal if application is made by CG
• If Tribunal passes order, auditor debarred for 5 years and also
liable for action u/s 447
• Liability of firm and every partner who acted in fraudulent
manner or abetted or colluded in the fraud
Auditor resignation
- S 140 (S 225)
• Auditor to file a statement indicating reasons for resignation
within 30 days
• Resigning auditor to file form ADT-3 with ROC
• Fine not filing- Rs 50k to Rs 5 lakhs!
• Even resignation is not easy!
S 447 (new)
• S 447 defines fraud and hence is very important from auditor’s
view point.
• “fraud” in relation to affairs of a company or any body
corporate, includes any act, omission, concealment of any
fact or abuse of position committed by any person or any
other person with the connivance in any manner, with intent
to deceive, to gain undue advantage from, or to injure the
interests of, the company or its shareholders or its creditors or
any other person, whether or not there is any wrongful gain or
wrongful loss;
• “wrongful gain” means the gain by unlawful means of
property to which the person gaining is not legally entitled;
• “wrongful loss” means the loss by unlawful means of property
to which the person losing is legally entitled.
For any queries please write at
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