FICCI - PowerPoint Presentation

Slide1

FICCICompanies Act, 2013Accounts, Auditors, Dividends and Related Party Transactions

12 September 2013Slide2

Contents2

Background

Accounts of Companies

Auditors

Dividend

Related

Party

Transactions

GlossarySlide3

Accounts of CompaniesSlide4

Financial Year

Particulars

Companies Act 1956

Companies Act 2013

Financial Year

[Clause 2(41)]

FY means in relation to any body corporate, the period in respect of which any profit and loss account of the body corporate laid before it in AGM is made up, whether that period is a year or not

FY of a company / body corporate means the period ending on 31st March every year.

In case a company has been incorporated on or after the 1st day of January of a year, the period ending on the 31st day of March of the following year, will be its first financial year

Extension of FY – no longer permissible Exception – A company or body corporate, which is a holding company or a subsidiary of a company incorporated outside India and is required to follow a different FY for consolidation of its accounts outside India, with NCLT approvalTransition period: - 2 years

4

Takeaways:

Aligned with “previous year” under Income Tax Act 1961

Whether

an application will be entertained by NCLT for following a different period as FY by company in India which is an associate company or joint venture company of a foreign

entitySlide5

Financial Statements

5

Particulars

Companies Act 1956

Companies Act 2013

Financial

statements

[Clause 2(40)]

Not defined

“financial statement” in relation to a company to include: a balance sheet as at the end of the FY;a profit and loss account / an income and expenditure account for the FY;cash flow statement for the FY;a statement of changes in equity, if applicable; and

any explanatory note annexed to, or forming part of, any document referred to above.Exceptions: for OPC, small company and dormant company cash flow statement excluded

Takeaways:

Legal recognition under Company law for financial statements – aligned with Indian GAAP

Financial statement to give true and fair view of state of affairs of the company and comply with prescribed accounting standards .

Responsibility of CFO to maintain financial statements

Auditor to give report on the financial statements Slide6

Consolidated Financial Statements

6

Particulars

Companies Act 1956

Companies Act 2013

Consolidated Financial

statements

[Clause 134(1)]

No such concept.

A company required to give specified information about the financials of a subsidiary - Section 212 report - as part of Director’s report Under the Listing Agreement of SEBI, Consolidated Financial Statement (CFS) is mandatory for listed company If a company has a subsidiary / associate / joint venture, CFS to be prepared and laid before an

AGM in addition to standalone financial statements

Takeaways:

CFS mandatory for all companies Slide7

Audited Accounts7

Particulars

Companies Act 1956

Companies Act 2013

Audited Accounts

[Clause 136]

Balance sheet of a holding company to include the following

Balance sheet, P&L, Directors report, Auditors report,

Statement of holding company’s interest etc.

Where the financial year of subsidiary defers from holding company, statement for comparison, details of material changes in respect of fixed assets etc.Audited Accounts of all subsidiaries are required to be prepared and provided to shareholders on requestAudited accounts of the listed companies along with the subsidiaries to be placed on the website

Takeaways:

Accounts of subsidiary to be made available to shareholders on request – step towards striking balance between transparency and ‘need to know’Slide8

Voluntary revision of financial statements

8

Particulars

Companies Act 1956

Companies Act 2013

Voluntary

Revision of financial

Statement or BOD’s report

[Clause 131]No specific provisionsBOD may prepare revised financial statement or a revised board report in respect of any of the 3 preceding FYs after obtaining approval of NCLT, if it believes that the financial statement or the BOD report do not comply with the relevant provisions

Takeaways:

Voluntary restatement of financial statement possible – subject to safeguardsSlide9

Mandatory revision of financial statements

9

Particulars

Companies Act 1956

Companies Act 2013

Mandatory

re-opening or re-casting of book of accounts by

Statutory Authorities

[Clause 130]

No provision for the re-opening of accounts.A company can re-open its books of accounts or re-cast its financial statements on the below grounds:that the relevant earlier accounts were prepared in a fraudulent manner; oraffairs of the company were mismanaged during the relevant period casting a doubt on the reliability of the financial statements

on an application made by CG, IT authorities, SEBI or any other statutory regulatory body or authority or any person concerned and on an order being made by a Court or NCLT

Takeaways:

Restatement of financial statement in event of fraud legally possible – subject to safeguards – Satyam case Slide10

Maintenance of books10

Particulars

Companies Act 1956

Companies Act 2013

Period

for maintenance of Books of Accounts

[Clause 128(5)]

Companies are required to preserve the Books of Account for a period of 8 years

CG may direct keeping books of accounts of a company to be maintained for a period more than 8 years where any investigation has been ordered.

Takeaways:

Regulatory clarity – books etc. to be preserved for more than 8 years in case of pending investigations Slide11

Accounts signing11

Particulars

Companies Act 1956

Companies Act 2013

Signing of financial statements

[Clause 134(1)]

Balance sheet and statement of profit and loss to be signed by manager or secretary and by 2 Directors including MD where there is one.

Financial Statements to be signed at least by

Chairperson of the company, if authorized by BOD; or

2 directors including MD, where there is one and CEO if he is a Director, CFO and CS, wherever they are appointed

In case of OPC balance sheet and statement of profit and loss to be signed by 1 director only

Takeaways:

CFO where required to be appointed to sign the financial statements Slide12

Circulation of financial statements to members etc.12

What

needs to be provided

[Clause 136]

Unlisted Company

A copy of the financial statements, CFS if any, auditor’s report and every other document required by law to be annexed or attached to the financial statements, which are to be laid before a company in its general meeting, shall be sent to atleast 21 days before the meeting to:

Every member of the company;

Every trustee for the debenture-holder of any debentures issued by the company; and

All other persons entitled to receive

Listed CompanyIn addition to provisions applicable to an unlisted company, a listed company is required to:Make these documents available for inspection at its registered office during working hours To send a statement containing salient features of such documents in the prescribed form or copies of the documents, as the company may deem fit to shareholders unless they ask for full financial statements. place its financial statement, CFS if any, and all other documents required to be attached thereto, on its website. to provide a copy of separate audited financial statements in respect of each of its subsidiary, to any shareholder of the company who asks for it.PenaltyAny contravention will make the Company liable to penalty of ` 25,000 and every officer who is in default with a penalty of ` 5,000Slide13

Filing of financial statements with

ROC

13

When to file

[Clause

137]

Company to file its financials etc. within 30 days of its adoption at AGM

If the financials etc. are not adopted at the AGM or at adjourned meeting even such un-adopted financials need to be filed with ROC within 30 days from the date of AGM

ROC shall take such un-adopted financials on record as provisional till the financials are adopted in adjourned AGM for that purpose and filed within 30 days from the date of adjourned AGM

Even if AGM of the Company has not been held, the financials etc. has to be filed within 30 days of the last date before which the AGM should have been heldPenaltyIf Company do not file the documents within time or extended time limit, the company is liable to pay a fine of ` 1,000 per day during which default continues subject to maximum ` 10 ,00,000; and MD and CFO, and in their absence, any other director in charge by the BOD with this responsibility, and in the absence of such director, all directors are punishable withimprisonment upto 6 months or with fine of ` 1,00,000 to ` 5,00,000 or with both of the aboveSlide14

AuditorsSlide15

Tenure

15

Particulars

Companies Act 1956

Companies Act 2013

Tenure of Auditor -Unlisted Companies

[Clause 139(1)]

To hold office from one AGM to the conclusion of the next AGM

At first AGM

to hold office till conclusion of 6

th AGM, subject to ratification by members at every AGMSubsequent AGMto hold office till conclusion of 6th meeting, subject to ratification by members at every AGM

Tenure of Auditor - Listed and

specified class of c

ompanies

[Clause 139(2)]

To hold office from one AGM to the conclusion of the next AGM

Individual - 1 term of 5 consecutive years

Audit Firm - 2 terms of 5 consecutive years

Cooling off period of 5 years provided before next appointment

Transition

period –3 years

Takeaway

Mandatory rotation of auditors for listed and prescribed classes of companies introduced

As per draft rules - prescribed class of companies

means

all companies other than OPC and small companies . This will mean a large number of auditors will have to be replaced by new auditors once the rotation provisions are enacted. Slide16

Provisions for appointment / rotation

16

Common

conditions for appointment of auditor in listed and classes of companies to be

prescribed :

Incoming audit firm should not have any common partners who were the partners of the outgoing audit firm i.e. the audit firm whose tenure expired in the immediately preceding FY by virtue of mandatory rotation requirement

Rules to be prescribed to state the manner in which the companies shall rotate their auditors

Audit committee of listed and other

prescribed classes

of companies to recommend appointment of an auditorSlide17

Reporting in case of fraud

17

Particulars

Companies Act 1956

Companies Act 2013

Reporting

of fraud by auditor to CG

[Clause 143(12)]

No provisions

Auditor is required to report directly to CG where he has reason to believe that an offence involving fraud is committed against the company by the officers or employees of the company

Takeaways:Audit processes to be revamped to be able to detect fraudResponsibilities of auditors increased Slide18

Requirements applicable to all companies

18

First

auditor

First

auditor

to

be appointed by the BOD within 30 days of incorporation of a

company

If the first auditor is not appointed by the BOD as above, the members to appoint the first auditor within 90 days at the EGMTenure of the first auditor shall be upto the conclusion of first AGMAdditional conditionsThe company may resolve:If audit firm is appointed, the audit partner and his team shall rotate at such intervals as may be resolved by membersthat audit shall be conducted by more than 1 auditor (i.e. joint auditor

)1956 Act requires all the partners of the audit firm to be a qualified CA and practicing in India. 2013 Act provides that:Majority of partners practicing in India should be qualified CA;If LLP is appointed as auditor, only partners who are CA shall be authorized to signProcedure and manner of selection of auditor to be prescribed by the RulesAdditional grounds for disqualifications for appointment as auditor providedAn auditor or audit firm who or which has been performing any non-audit services on or before the commencement of 2013 Act shall comply with the above before the closure of the 1st FY after the date of such commencementSlide19

Proscribed services

19

Particulars

Companies Act 1956

Companies Act 2013

Don’ts of Auditors

[Clause 144]

No provisions

Auditor cannot provide following services "directly or indirectly" to the company or its holding company or subsidiary company, namely:—

accounting and book keeping services;

internal audit;design and implementation of any financial information system;actuarial servicesinvestment advisory services;investment banking services;

rendering of outsourced financial services;

management services; and

services prescribed under the Rules

Transition

period: To c

omply with the restriction before the closure of the 1st FY after the date of commencement

of 2013 Act

Takeaway

Avenues of providing specified

services

curtailedSlide20

Proscribed services

20

Key Points

For proscribed services

: "Directly

or indirectly" shall include rendering of services by the

auditor

–

Where auditor is an individual - Either himself or through his relative or any other person connected or associated with such individual or through any other entity, whatsoever, in which such individual has significant influence or control, or whose name or trade mark or brand is used by such individualWhere auditor is a firm – Either itself or through any of its partners or through its parent, subsidiary or associate entity or through any other entity, whatsoever, in which the firm or any partner of the firm has significant influence or control, or whose name or trade mark or brand is used by the firm or any of its partners. Takeaway Above restrictions to be applicable even to network of firm / companies having common brand even when partners / owners are differentSlide21

Internal Auditor

21

Particulars

Companies Act 1956

Companies Act 2013

Appointment of Internal Auditors [Clause

138]

No provisions

Such class or classes of Companies as may prescribed need to compulsory appoint Internal Auditor to conduct the internal audit of functions and activities of the company.

Qualification of Internal Auditor

[Clause 138]No provisions

Internal Auditor shall either be a chartered accountant or a cost accountant, or such other professional as may be decided by the BOD

Takeaway

CARO contained

provisions requiring auditor’s comments on existence and efficacy of internal

audit system

in case of listed

companies and

/ or companies having

networth >

`

50

lakhs

or average

annual turnover >

`

5 crores for

a period of

3 consecutive FY immediately

preced­ing the

FY concerned. 2013 Act contains specific provision of appointment of internal auditor

As per draft rules –

prescribed class of companies –

listed companies

; and

public

companies-

with paid-up capital of R

s. 10

crores

or more,

with

outstanding loans or borrowings from banks or public financial institutions exceeding

Rs

. 25

crores

or which have accepted deposits of

Rs

. 25

crores

or more at any point of time during the last FYSlide22

Dividend and DepreciationSlide23

Declaration and Payment of Dividend

23

Particulars

Companies Act 1956

Companies Act 2013

Declaration of dividend and

Transfer

to reserves

Dividend can be declared for any FY out of the profits of the company for that FY or previous FY(s) after providing for depreciation. Lower of loss in the previous FY or amount of depreciation to be also adjusted

Mandatory transfer to the reserves of portion of profits of the company for that FY, not less than 10% of its profitsDividend can be declared for any FY out of the profits of the company for that FY or previous FY(s) after providing for depreciation

A company

may

voluntarily transfer a portion of its profits to reserves as considered appropriate. Mandatory transfer to reserves

is not required.

Declaration of dividend in case of inadequate

or absence of profits

In case of inadequacy or absence of profits in

any FY

, the company can declare dividend out of the reserves only after complying with the Companies

(Declaration of Dividend out of Reserves) Rules, 1975, wherein the maximum rate of dividend is prescribed as 10%

In case of inadequacy or absence of profits in any FY, the company can declare dividend out of the accumulated profits earned by it in previous years and transferred to reserves in accordance with the rules to be prescribed.

Dividend can be paid only out of free reserves. Securities premium is not free reserve.Slide24

Declaration and Payment of Dividend

24

Particulars

Companies Act 1956

Companies Act 2013

Depreciation

Minimum 95% of original costs to be written off over useful life of asset

Minimum rate as per Schedule XIV

To

be provided as per Schedule II to the Act.

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. Depreciable amount of an asset is the cost of an asset or other amount substituted for cost less its residual value. The useful life of an asset is the period over which the asset is expected to be available for use by an entity or the number of production or similar units expected to be obtained from the asset by the entity.Rate of depreciation revisedestimated useful life of the assets – if notified for accounting purpose by a regulatory authority constituted under law to be followed

Componentisation

of assets mandated.Slide25

Depreciation – Schedule IIThe useful life of an asset shall not be longer than the useful life and the residual value shall not be higher than that prescribed in Part C of Schedule II to the 2013 Act

In case of prescribed class of

companies whose financial statements comply

with

AS, where the useful

life

or residual value

of an asset

is different from the one mentioned in Part C, it shall disclose the justification

for the sameThe above provisions to apply to intangible assetsWhere cost of part of the asset is significant to its total cost and useful life of that part is different from the useful life of the remaining asset, useful life of that significant part to be determined separatelyAsset used for double shift – depreciation to increase by 50% for the period used Asset used for triple shift – depreciation to increase by 100% for the period used From the date the Schedule II comes into effect, the carrying amount of the asset as on that date—shall be depreciated over the remaining useful life of the asset as per the Schedule IIafter retaining the residual value, shall be recognized in the opening balance of retained earnings where the remaining useful life of an asset is nil25Slide26

Declaration and Payment of Dividend

26

Particulars

Companies Act 1956

Companies Act 2013

Unpaid / unclaimed dividend transferred to IEPF

Only dividend which remains unpaid for 7 years is required to be transferred to IEPF.

Where the unpaid / unclaimed dividend has been transferred to Investor Education and Protection Fund (IEPF), the corresponding shares on which such dividend was unpaid / unclaimed shall also be transferred to IEPF.

IEPF – additional transfers

Application money received for allotment of securities and due for refund – not paid for 7 years

Sale proceeds of fractional shares on merger, bonus for more than 7 years

Redemption amount of preference shares remain unpaid for more than 7 years

Amounts as prescribed in Rules etc.

Takeaway

The shares in respect of which unpaid / unclaimed dividend is transferred to IEPF also stands transferred to IEPF. Under the draft Rules,

voting rights in respect of such shares shall be frozen. Slide27

Declaration and Payment of Dividend

27

Particulars

Companies Act 1956

Companies Act 2013

Restrictions on declaration of dividend/ interim dividend

No restrictions are provided for declaring dividend

Interim dividend may be declared out of the surplus in the Profit & Loss Account as well as profits of the FY in which dividend is sought to be declared.

In case company has incurred loss up to the preceding quarter of the current FY then interim dividend shall not be declared at a rate higher than the average dividends declared by the company during the immediately preceding 3 FYs

Failure to comply with provisions relating to acceptance and repayment of deposits will bar the company to declare any dividend during the period of non-complianceSlide28

Failure to distribute dividend

28

Particulars

Penalty

Directors

Imprisonment of 2 years; and

fine >/= INR.

1,000

per day of default

CompanyTo pay simple interest @ 18% p.a. during the period of default

Not an offence (defense

available)

Dividend not paid by reason of the operation of any law;

Directions of

shareholder not complied with and the same

has been communicated to him;

Dispute regarding the right to receive the dividend;

Adjustment

of dividend

by the company against any

sum due to it from the shareholder; or

Failure to pay the dividend or to post the

warrant within the period was not due to any default on the part of

the company.Slide29

Related Party TransactionsSlide30

Related Party Transactions

30

Particulars

Companies Act 1956

Companies Act 2013

Scope of Section

[Clause 188(1)]

sale, purchase or supply of any goods or materials;

sale, purchase or supply of any services;

underwriting the subscription of any shares, debentures of a companysale, purchase or supply of any goods or material;

buying, selling or disposing of property of any kind;leasing of property of any kind; availing or rendering of any services; appointment of any agents for purchase or sale of goods, materials, services or property;related party’s appointment to any office or place of profit in the company, its subsidiary company associate company; orunderwriting the subscription of any shares in or derivatives thereof;

Takeaway

List of related

party

transactions widened

Immovable property also brought under the ambit of

related party

transactionsSlide31

Related Party Transactions

31

Particulars

Companies Act 1956

Companies Act 2013

Approval

required

[Clause 188(1)]

Prior consent of the BoD

by resolution passed at Board meetingPrior approval of Regional Director, in case the paid-up capital of company is exceeding ` 1 crore

Where a transaction with a related party is (i) not in the ordinary course of business or (ii) is in the ordinary course of business but not on an arm’s length basis:Prior consent of the BOD by a resolution at a board meeting and compliance with the conditions to be prescribed is necessary (limits as per draft rules elaborated in next slide)Prior approval of the shareholders where paid-up capital of company or transaction amount exceeds prescribed limit (limits as per draft rules elaborated in next slide)Related party who is a member of such a company cannot vote on such a special resolutionRequirement of obtaining CG approval for related party transactions done away with'Arm’s length transaction' means a transaction

between 2 related parties that is conducted as if they were unrelated, so that there is no conflict of interest

Takeaway

Removal of taking CG approval for related party will remove the uncertainty in timeline and execution of the related party transactions

Related party transactions at arms

' length price will call for aligning the benchmarking under transfer pricing norms as per Income tax Act for both domestic and international transactionsSlide32

Related Party TransactionsAs per the

draft rules, a company shall enter into any contract or arrangement with a related party

with prior

consent of the BOD by a resolution at a board meeting and

subject to compliance

with the

following conditions :

The

notice of the Board meeting at which the resolution is proposed to be moved shall disclose-

name of the related party and nature of relationship; nature, duration of the contract and particulars of the contract or arrangement;material terms of the contract or arrangement including the value, if any; any advance paid or received for the contract or arrangement, if any; and any other information relevant or important for the BOD to take a decision on the proposed transaction. Where any director is interested in any contract or arrangement with a related party, such director shall not be present at the meeting during discussions on the subject matter of the resolution relating to such contract or arrangement32Slide33

Related Party TransactionsAs per the draft rules, prior approval of the shareholders

will be required for a company to enter

into a contract or arrangement with any related party

where:

Paid-up

share capital

is

Rs

. 1

crore or more; The transaction(s) to be entered into :individually or taken together with previous transactions during a FY, exceeds 5% of annual turnover or 20% of net worth of the company as per the last audited financial statements of the company, whichever is higher, for the following contracts or arrangements:sale, purchase or supply of any goods or material;buying, selling or disposing of property of any kind;leasing of property of any kind; availing or rendering of any services; appointment of any agents for purchase or sale of goods, materials, services or property; orrelates to appointment to any office or place of profit in the company, its subsidiary company or associate company at a monthly remuneration exceeding Rs. 1 lakh; or is for a remuneration for underwriting the subscription of any securities or derivatives thereof of the company exceeding Rs. 10 lakhs 33Slide34

Related Party Transactions

34

Particulars

Companies Act 1956

Companies Act 2013

Specified persons

with whom contracts are covered

[Clause 2(76)]

Director of the Company

Relative of such directorA firm in which such director or relative is a partnerAny other partner of such firm in which director or relative is a partnerPrivate Company in which such director is a director or member

“Related Party” :director or his relative;KMP or his relative;firm, in which a director, manager or his relative is a partner;private company in which a director or manager is a member or director ;

public company in which a director or manager is a director or holds along with his relatives, more than 2% of its paid-up share capital;

any body corporate whose BoD, managing director, or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager;

any person under whose advice, directions or instructions a director or manager is accustomed to act;

any company which is—

a holding, subsidiary or an associate company of such company; or

a subsidiary of a holding company to which it is also a subsidiary

such other persons as may be prescribed

Takeaway

The scope of related party is substantially expanded to ensure interest of shareholders. As

per draft rules

–

“other prescribed

persons

“

means a director

or

KMP of

the holding, subsidiary or associate company of such company or his

relative or any

person appointed in senior management in the company or its holding, subsidiary or

associate

company. Slide35

Related Party Transactions

35

Particulars

Companies Act 1956

Companies Act 2013

Non-cash transaction with directors

[Clause 192]

No

such restriction

Non-cash transaction with a director of the company or its holding, subsidiary or associate company or a person connected for acquisition or sale of assets allowed only with prior approval of the members in a general meeting and supported by values determined by Registered valuers

Exemptions[Proviso to Clause 188(1)]Purchase/Sale of goods and materials for cash at prevailing market price.

Purchase/Sale of goods and materials

or services the cost of which does not exceed

`

5,000/- in any year during the period of contract

Any transaction of banking / insurance company in the ordinary course of such company

Any transaction entered by company in its ordinary course of business which are on arm’s length basis

Takeaway

Justification to be provided in BOD report for related party transaction – more onus on

BODSlide36

Glossary

AGM: Annual General Meeting

BOD: Board of Directors

CA: Chartered Accountant

CARO: Companies (Auditor's Report) Order 2003

CEO: Chief Executive Officer

CFO: Chief Finance Officer

CFS:

Consolidated Financial StatementCG: Central GovernmentFY: Financial YearKMP: Key Managerial PersonnelMD: Managing DirectorNCLT: National Company Law TribunalOPC: One Person Company

ROC: Registrar of CompaniesSEBI: Securities and Exchange Board of India36Slide37

THANK YOU

37Slide38