Companies Act -Key Observations and Action BY GOLDMAN GROUP

Companies Act 2013Key Observations and Our Approach

CA Shelly GuptaGoldman Group190, m block, new Rajinder nagarMob.: 9968498865E-mail : [email protected]

Contents► The companies act, 2013 - Overview

► The companies act, 2013 - Notified Sections –Key Impact

► The companies act, 2013 – Key impact area

► Accounting

► Audit

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► Audit

► Governance

► Mergers & Acquisitions

► Key Action areas

► Financial Accounting Advisory Services (FAAS)

► Knowledge and Thought Leadership

► 29 Chapters, 470 Clauses,7 Schedules

► Various new concepts /definitions introduced –

• one man company• Independent directors,• CEO, CFO,• Class action lawsuits,• Small companies,• Dormant companies,• Woman director

► 98 sections notified

► Sixth set of draft rules aremade available for publiccomments

Highlights of the Companies Act 2013

► Significant changes in financial reporting requirements –Moved closer to International best practices

► Significant change in auditors reporting requirements and alsomaking auditor rotations mandatory

► Significant responsibilities on Independent directors andrestrictions on certain transactions with directors.

► Corporate social responsibility rules are defined which in away mandates the prescribed class of companies to spend2% of net profits on social cause

► Significant penalties and imprisonment is prescribed atseveral places

► Rules on Mergers and Acquisitions are simplified as well asredefined

Companies Act 2013 - Overview

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► 29 Chapters, 470 Clauses,7 Schedules

► Various new concepts /definitions introduced –

• one man company• Independent directors,• CEO, CFO,• Class action lawsuits,• Small companies,• Dormant companies,• Woman director

► 98 sections notified

► Sixth set of draft rules aremade available for publiccomments

Highlights of the Companies Act 2013

► Significant changes in financial reporting requirements –Moved closer to International best practices

► Significant change in auditors reporting requirements and alsomaking auditor rotations mandatory

► Significant responsibilities on Independent directors andrestrictions on certain transactions with directors.

► Corporate social responsibility rules are defined which in away mandates the prescribed class of companies to spend2% of net profits on social cause

► Significant penalties and imprisonment is prescribed atseveral places

► Rules on Mergers and Acquisitions are simplified as well asredefined

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Notified Sections – Key Impact

The Companies Act, 2013 – Notified sections– Key ChangesSection Topic Description

2-18/19 CEO/CFO Statutory recognition to Chief Executive Officer (CEO) and Chief Financial Officer (CFO).Shall be considered as Key Managerial Personnel (KMP) and Related party too.

2-27 Control Definition broadened. Substance based approach.► Right to appoint majority directors OR► Control the management or policy decisionsAligned to SEBI takeover regulation 2011

2-87 SubsidiaryCompany orSubsidiary

“’Subsidiary company’ or ‘subsidiary,’ in relation to any other company (that is to say theholding 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 ortogether with one or more of its subsidiary companies.”

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SubsidiaryCompany orSubsidiary

“’Subsidiary company’ or ‘subsidiary,’ in relation to any other company (that is to say theholding 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 ortogether with one or more of its subsidiary companies.”

2-76 Relatedparty

More transparent -► Approval for RPT is required from board unless its ordinary course of business and at

arm’s length► Special resolution in cases where transaction exceed certain sum

2-77 Relative Certain deletions and new additions in the list of relatives

180 Power ofboard

‘Restriction on power of board’ in relation to transfer / sale of undertaking, borrowingpowers, etc.

The Companies Act, 2013 – Notified sections– Key Changes

Section Topic Description185 Loan to directors No loans/guarantees, unless ordinary course of business and at RBI rates.

Covered person are directors and the person in whom directors areinterested.

192 Non-cash transactionswith directors

Non-cash transactions with Directors requiring prior approval ofshareholders in general meeting.

194 Prohibition on forwarddealings in securities ofcompany by director orkey managerial personnel

Directors are prohibited from dealing with forwards of securities. This is amatter of compliance.

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Prohibition on forwarddealings in securities ofcompany by director orkey managerial personnel

Directors are prohibited from dealing with forwards of securities. This is amatter of compliance.

195 Prohibition on insidertrading in securities

Insider trading applies to all companies now including listed companies.

447 Punishment for fraud Definition of fraud has been incorporated. This has impact on the auditorfrom a liability perspective and also from a reporting perspective in theCARO report.

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The Companies Act,2013 Key Impact and Interpretation matters

The Companies Act, 2013 – Key impact area

Chapters Areas Potential Impact*

FinancialAccounting

Fixed Assets – Depreciation and component HighConsolidated financial statement HighChange in the definition of control HighAuthentication of BOD report and FS HighUtilisation of Security premium HighRight to Copies of Audited FS MediumDeclaration and payment of dividend Medium

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FinancialAccounting

Declaration and payment of dividend MediumRegistered Valuer MediumNational Financial Reporting Authority (NFRA) MediumUniform financial year - April to March LowPreparation of Financial statement LowReopening of accounts LowAcceptance of public deposit LowIssues of bonus shares Low

*Impacts shall depend upon the complexity of operations in an entity


Chapters Areas PotentialImpact*

Audit andAuditors

Appointment of Auditor HighRotation of auditor HighProhibited services HighReporting responsibilities HighReporting on Internal Financial Control System (IFSC) HighFraud reporting responsibilities HighPenalties on auditor HighCost audit Medium

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Cost audit MediumInternal audit Medium

CorporateGovernance

Corporate social responsibility HighDirectors HighIndependent directors HighLoan to Directors and Subsidiaries HighLoans and investments by company HighRestrictions on non-cash transactions involving directors MediumAudit Committee MediumOther Committee Medium



Chapters Areas Potential Impact*

CorporateGovernance

Class action HighRelated party definition HighRelated party transactions HighVigil Mechanism HighManagement remuneration MediumDisclosure of interest by directors MediumInbound and outbound cross-border transactions Medium

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Mergers &Acquisitions

Inbound and outbound cross-border transactions MediumScheme should be in compliance with notifiedaccounting standards Medium

Auditors report MediumSimplified procedures in case of holding andwholly owned subsidiaries, and small companies Medium


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Accounting

Fixed Assets:► Fixed Assets:► Component approach mandatory► Depreciation schedule II prescribed lives to be

used which are significantly different thanexisting rates under Schedule XIV.

► Useful lives prescribed for tangible assets only.For intangibles notified accounting standard togovern the same.

► No separate rate for double and triple shifts,increase by 50% and 100% respectively.

► No specific requirement to charge 100%depreciation on assets whose actual cost doesnot exceed Rs.5 thousand

Security premiumCan be utilized only against:► Issue of fully paid preference shares as bonus

shares► Writing off equity share issue expenses► Buy-back of its own shares or other securities

Potential Impact *:

► Change in useful life of asset needs tobe assessed carefully as it may impactincome statement significantly.

► Assessment of impact due to componentapproach shall be required.

► Restriction on utilization of securitypremium may impact future transactions.

Accounting Audit Governance M&A

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Fixed Assets:► Fixed Assets:► Component approach mandatory► Depreciation schedule II prescribed lives to be

used which are significantly different thanexisting rates under Schedule XIV.

► Useful lives prescribed for tangible assets only.For intangibles notified accounting standard togovern the same.

► No separate rate for double and triple shifts,increase by 50% and 100% respectively.

► No specific requirement to charge 100%depreciation on assets whose actual cost doesnot exceed Rs.5 thousand

Security premiumCan be utilized only against:► Issue of fully paid preference shares as bonus

shares► Writing off equity share issue expenses► Buy-back of its own shares or other securities

Potential Impact *:

► Change in useful life of asset needs tobe assessed carefully as it may impactincome statement significantly.

► Assessment of impact due to componentapproach shall be required.

► Restriction on utilization of securitypremium may impact future transactions.

*Impacts shall depend upon the complexity ofoperations in an entity

Consolidation:

► Consolidated Financial Statements (CFS) to beprepared in Indian GAAP including at intermediateparent level

► Definition of subsidiary and control has beenbroadened (Notified)

► Term associate has been introduced which refersto “significant influence” over other entity

Authentication of FS & BOD report:

► Directors responsibility Statement to additionallyinclude:-► Internal Financial Control Systems (IFCS),► Compliance with all laws,► Corporate Social Responsibility (CSR) policy,► Related Party Transactions (RPT),► Risk management policies,► Material changes affecting financial performance and

many more

Potential Impact*:

► Indian GAAP consolidated financialstatement to be prepared at group andintermediate parent level. Since Indianlisted companies are already requiredto prepare CFS at group level as perlisting requirement this may not haveimpact however for intermediate parentlevel an entity still needs to prepareCFS.

► Strategic investments to be evaluatedfrom control definition perspective.

► The term associate needs to beanalyzed carefully on existing and newinvestments.

► Directors report shall be exhaustive,significant amount of additional detailsshall required to be included.


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Consolidation:

► Consolidated Financial Statements (CFS) to beprepared in Indian GAAP including at intermediateparent level

► Definition of subsidiary and control has beenbroadened (Notified)

► Term associate has been introduced which refersto “significant influence” over other entity

Authentication of FS & BOD report:

► Directors responsibility Statement to additionallyinclude:-► Internal Financial Control Systems (IFCS),► Compliance with all laws,► Corporate Social Responsibility (CSR) policy,► Related Party Transactions (RPT),► Risk management policies,► Material changes affecting financial performance and

many more

Potential Impact*:

► Indian GAAP consolidated financialstatement to be prepared at group andintermediate parent level. Since Indianlisted companies are already requiredto prepare CFS at group level as perlisting requirement this may not haveimpact however for intermediate parentlevel an entity still needs to prepareCFS.

► Strategic investments to be evaluatedfrom control definition perspective.

► The term associate needs to beanalyzed carefully on existing and newinvestments.

► Directors report shall be exhaustive,significant amount of additional detailsshall required to be included.


Other issues:

► Uniform accounting year from April toMarch.

► Reopening/revision of FinancialStatements (FS) is allowed voluntary aswell as in case tribunal orders.

► Right to copies of audited Financialstatements is provided to members.

► Dividend – transfer to reserves is optional► Registered Valuer for asset (i.e. property,

stock etc) valuation is required

Potential Impact *:

► Reopening/revision shall be usefulincase of restructuring scheme infuture.

► Company has to provide copies ofaudited financial statements includingaudited FS of its subsidiaries on itswebsite.

► Provisions relating to dividenddeclaration has been relaxed.

► Registered Valuer shall be required forvaluation for assets such as stocks,property, shares, debentures goodwilletc.


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Other issues:

► Uniform accounting year from April toMarch.

► Reopening/revision of FinancialStatements (FS) is allowed voluntary aswell as in case tribunal orders.

► Right to copies of audited Financialstatements is provided to members.

► Dividend – transfer to reserves is optional► Registered Valuer for asset (i.e. property,

stock etc) valuation is required

Potential Impact *:

► Reopening/revision shall be usefulincase of restructuring scheme infuture.

► Company has to provide copies ofaudited financial statements includingaudited FS of its subsidiaries on itswebsite.

► Provisions relating to dividenddeclaration has been relaxed.

► Registered Valuer shall be required forvaluation for assets such as stocks,property, shares, debentures goodwilletc.


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Audit

Appointment and Rotation:

► Appointment for a five-year term► Appointment to be ratified in every AGM► Mandatory rotation of auditors after 5 years for

individual CA and 10 years in case of CA firm.► Rotation requirement will apply retrospectively► Internal, cost and secretarial audit are

mandatory

Additional reporting responsibilities

► Material Fraud – Directly reported to CentralGovernment. (CG)

► Internal Financial Control System –Reporting ondesign and operating effectiveness

► Observations that have adverse effect onfunctioning of the company

Potential Impact *:

► Audit scope and effort is likely to increasefor the Company as well as Auditor.

► Company and auditor has to ensurecompliance with additional restrictions onauditors to avoid potential issues.

► Additional compliance for cost andsecretarial audit.

► Auditors report shall include observationson additional items which shall requiresetting up or appropriate systems andcontrols in places. This may result inadditional efforts.

► Management may have to institute a fraudrisk management framework, includingfraud risk identification, assessment,evaluation and mitigation controls- willhelp auditors review and reportingregarding fraud


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Appointment and Rotation:

► Appointment for a five-year term► Appointment to be ratified in every AGM► Mandatory rotation of auditors after 5 years for

individual CA and 10 years in case of CA firm.► Rotation requirement will apply retrospectively► Internal, cost and secretarial audit are

mandatory

Additional reporting responsibilities

► Material Fraud – Directly reported to CentralGovernment. (CG)

► Internal Financial Control System –Reporting ondesign and operating effectiveness

► Observations that have adverse effect onfunctioning of the company

Potential Impact *:

► Audit scope and effort is likely to increasefor the Company as well as Auditor.

► Company and auditor has to ensurecompliance with additional restrictions onauditors to avoid potential issues.

► Additional compliance for cost andsecretarial audit.

► Auditors report shall include observationson additional items which shall requiresetting up or appropriate systems andcontrols in places. This may result inadditional efforts.

► Management may have to institute a fraudrisk management framework, includingfraud risk identification, assessment,evaluation and mitigation controls- willhelp auditors review and reportingregarding fraud


Prohibited Services

► Additional services needs to be approved bythe board/ audit committee.

► Auditor is not allowed to render certainservices either directly or indirectly to thecompany, its holding or subsidiary companyincluding:► Accounting and book keeping services► Internal audit► Design and implementation of any

financial information system► Actuarial services► Investment advisory services► Investment banking services► Rendering of outsourced financial services► Management services► Any other kind of services as may be

prescribed

Potential Impact*:

► Audit committee approval processneeds to be put in place for any nonaudit services by the auditor.

► To ensure prescribed services are notrendered by auditor to ensure potentialissue related to conflict.


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Prohibited Services

► Additional services needs to be approved bythe board/ audit committee.

► Auditor is not allowed to render certainservices either directly or indirectly to thecompany, its holding or subsidiary companyincluding:► Accounting and book keeping services► Internal audit► Design and implementation of any

financial information system► Actuarial services► Investment advisory services► Investment banking services► Rendering of outsourced financial services► Management services► Any other kind of services as may be

prescribed


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Governance

Company Parameters >1 DirectorResident inIndia>182

days

>1Woman

Director*

> 1/3rd

ID*Committees

Audit* Nomination &Remuneration*

Shareholder

Listed √ √ √ √ √ √

Unlisted(All) √

- Share Capital > INR1b/100Cr

√ √ √ √

Mandatory Director Appointment


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- Share Capital > INR1b/100Cr

√ √ √ √

- Turnover >INR 3Billion/300Cr

√ √

- Loans/ Debentures/Deposits > INR 2Billion/200Cr

√ √ √

>1,000 shareholder,debenture holders or anyother security holders

√

*public company only

Directors

► Wide powers with some restrictions► Maximum 15 directors – may increase with

shareholders approval through a specialresolution

► At least one resident director (182 days)► At least one woman director for specified

companies► Directorship in maximum 20 companies,

maximum 10 can be public.► Duties of directors have been defined

particularly► Small shareholder director – optional with

the small shareholder► Related Party Transactions may result into

disqualification from appointment

Potential Impact *:

► Certain transactions can be done withapproval in meetings such asborrowing money, related partytransactions, issuance of security etc.

► Eligibility of directors has to beassessed based on new requirements(i.e. composition of public/privatecompanies in a directors portfolio)

► Company may have to keep track ofcompliance on regular basis in order toavoid any defaults.

► Appointment of woman director


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Directors

► Wide powers with some restrictions► Maximum 15 directors – may increase with

shareholders approval through a specialresolution

► At least one resident director (182 days)► At least one woman director for specified

companies► Directorship in maximum 20 companies,

maximum 10 can be public.► Duties of directors have been defined

particularly► Small shareholder director – optional with

the small shareholder► Related Party Transactions may result into

disqualification from appointment

Potential Impact *:

► Certain transactions can be done withapproval in meetings such asborrowing money, related partytransactions, issuance of security etc.

► Eligibility of directors has to beassessed based on new requirements(i.e. composition of public/privatecompanies in a directors portfolio)

► Company may have to keep track ofcompliance on regular basis in order toavoid any defaults.

► Appointment of woman director



Directors – Penal provisions- offences non-compoundable in nature

Consequences

Purchase or loan for its ownshares (Sec 67-5)

Loans and investment (Sec 186-13)

Imprisonment upto 3 years and finefrom Rs. 1 lakh and upto Rs. 25 lakh

Upto 2 years and fine upto Rs. 1 lakh

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Consequences

Fraud (Sec 447)

Class action suit (Sec 245)

Upto 6 months to 10 years and fineupto 3 times of amount involved

Upto 3 years and fine upto Rs. 1 lakh


Directors – Penal provisions- offence compoundable in nature with powerof Special court

Consequences

Provisions relating to auditors (Sec139 – 147)

Financial statement and Board’sreport (Sec 134-8)

upto 1 year or fine Rs. 10,000 upto Rs. 1lakh or with both

Imprisonment upto 3 years or fine Rs.50,000 to Rs. 5 lakhs or with both (for

every director)

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Consequences

Loans, guarantee or security (Sec185-2)

upto 6 months or fine Rs. 5 lakh upto Rs.25 lakh or with both

Related party transaction in caseof listed company (Sec 188-5)


Director interest & Participation inBoard meeting by interested

director (Sec 184-4)



Directors – Penal provisions- offence compoundable in nature with powerof Special court

Consequences

Consequences

Transfer and transferee companyin case of merger or amalgamation

(Sec 232-8)Imprisonment upto 1 year or fine Rs. 1 lakh

upto Rs. 3 lakh or with both

Forward dealing in securities of thecompany (Sec 194-2)

upto 2 years or fine Rs. 1 lakh upto Rs. 5lakh or with both

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Consequences

Related party transaction in caseof other company (Sec 188-5) – by

Regional directorFine not less than Rs. 25,000 upto Rs. 5

lakh

Forward dealing in securities of thecompany (Sec 194-2)

upto 2 years or fine Rs. 1 lakh upto Rs. 5lakh or with both

Independent Directors

► For prescribed class of companies at least1/3rd of the total number of directors will beindependent directors.

► Tenure 5 +5 years, 3 years cooling off► Prospective applicability► Not entitled to stock options► Class action suit► Held liable only for acts occurred with his

knowledge, or consent.► Independent director to give declaration of

independence every year.► Nominee director cannot be an ID

Potential Impact *:

► Independent director clause isapplicable to listed and prescribedclasses of companies (which includescompanies with paid up capital of 100Cr. Or turnover of 300 Cr Oroutstanding loans and borrowings ofmore than 200 Cr.

If a company fulfills the criteria it shallrequired:► To ensure compliance with new law

with respect to appointments and otherissues.

► A policy may need to be drafted todefine code of conduct for ID’s basedon the guidance available in ScheduleIV.


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Independent Directors

► For prescribed class of companies at least1/3rd of the total number of directors will beindependent directors.

► Tenure 5 +5 years, 3 years cooling off► Prospective applicability► Not entitled to stock options► Class action suit► Held liable only for acts occurred with his

knowledge, or consent.► Independent director to give declaration of

independence every year.► Nominee director cannot be an ID

Potential Impact *:

► Independent director clause isapplicable to listed and prescribedclasses of companies (which includescompanies with paid up capital of 100Cr. Or turnover of 300 Cr Oroutstanding loans and borrowings ofmore than 200 Cr.

If a company fulfills the criteria it shallrequired:► To ensure compliance with new law

with respect to appointments and otherissues.

► A policy may need to be drafted todefine code of conduct for ID’s basedon the guidance available in ScheduleIV.


Individually

► Act in good faith in 'bestinterest' of stakeholders

► Avoid conflict of interest► Avoid undue

gain/advantage personally► Exercise diligence and

reasonable care on duty

As part of Audit and other Committees

► Monitoring independence/effectiveness of auditors

► Approving related partytransactions

► Monitoring inter-corporateloans and investments

► Undertaking/asset valuation► Evaluation of internal

financial controls► To undergo annual

performance evaluation bynomination andremuneration committee.

► Operational effectiveness ofpolicies

As part of the Board

► Boards will now beanswerable to wider range ofstakeholders beyond onlyshareholders

► Development andimplementation of riskmanagement policy

► Governance andperformance are the drivingforces


Independent directors - Duties and responsibilities

► Act in good faith in 'bestinterest' of stakeholders

► Avoid conflict of interest► Avoid undue

gain/advantage personally► Exercise diligence and

reasonable care on duty

► Monitoring independence/effectiveness of auditors

► Approving related partytransactions

► Monitoring inter-corporateloans and investments

► Undertaking/asset valuation► Evaluation of internal

financial controls► To undergo annual

performance evaluation bynomination andremuneration committee.

► Operational effectiveness ofpolicies

► Boards will now beanswerable to wider range ofstakeholders beyond onlyshareholders

► Development andimplementation of riskmanagement policy

► Governance andperformance are the drivingforces

Goldman Group

► Schedule IV (Code for Independent Directors)defines the qualitative characteristics of ID.

► The ID’s shall hold at least one meeting in ayear, without the attendance of non-independentdirectors (Non-ID’s) and members ofmanagement to review :► performance of Non-IDs and BoD as a whole► performance of the Chairman taking into

consideration views of NEDs/ EDs► quantity/quality/flow of information from the

management to the Board to effectivelyperform the duty.

► Evaluation Mechanism for the Directors’performance .

Potential Impact*:► Disclosure with respect to employee

compensation may become publicinformation

► Performance evaluation for directorsperformance


► Devote sufficient time and attention forinformed and balanced decision making andexercise due care

► Bring independent and objective view

► Refrain from any action that would lead to lossof his independence

► Assist the company in implementing the bestcorporate governance practices and act inbest interest of the company

Independent directors - Duties and responsibilities

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► Schedule IV (Code for Independent Directors)defines the qualitative characteristics of ID.

► The ID’s shall hold at least one meeting in ayear, without the attendance of non-independentdirectors (Non-ID’s) and members ofmanagement to review :► performance of Non-IDs and BoD as a whole► performance of the Chairman taking into

consideration views of NEDs/ EDs► quantity/quality/flow of information from the

management to the Board to effectivelyperform the duty.

► Evaluation Mechanism for the Directors’performance .


Directors’ sitting fees increased from INR 20,000 to a maximum of Rs.100,000

► Devote sufficient time and attention forinformed and balanced decision making andexercise due care

► Bring independent and objective view

► Refrain from any action that would lead to lossof his independence

► Assist the company in implementing the bestcorporate governance practices and act inbest interest of the company

Corporate Social Responsibility

► Mandatory contribution► 2% of avg. net profit for 3 years. 2012-2014 is

defined as first block of 3 years.► Company can exclude profit from outside India

branches► CSR committee – 3 directors (1 ID)► Directors responsibility statement should discuss

CSR related details► Activities listed in Schedule VII► Tax deductibility?

Potential Impact *:

► Additional expenditure on CSR mayneed to be incurred.

► To frame a policy to comply with thenew requirements and to assesswhether the existing activities will fallunder the Schedule VII activities list ornot.

► Detailed disclosures / discussions to beincluded in CSR.


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► Mandatory contribution► 2% of avg. net profit for 3 years. 2012-2014 is

defined as first block of 3 years.► Company can exclude profit from outside India

branches► CSR committee – 3 directors (1 ID)► Directors responsibility statement should discuss

CSR related details► Activities listed in Schedule VII► Tax deductibility?

Potential Impact *:

► Additional expenditure on CSR mayneed to be incurred.

► To frame a policy to comply with thenew requirements and to assesswhether the existing activities will fallunder the Schedule VII activities list ornot.

► Detailed disclosures / discussions to beincluded in CSR.


Vigil mechanism► Mandatory for:

► Every listed company► Companies which accept public deposits AND► Companies which have borrowed money from

banks and public financial institutions in excessof 50 crores

► Audit Committee to operate the mechanism► Company to provide for adequate safeguards

against victimisation of persons who use suchmechanism

► Company to create provision for direct access to thechairperson of the Audit Committee in appropriate orexceptional cases

► Disclosure of details of establishment of suchmechanism by the company on its website, if any,and in the Board’s report

► Audit committee or the director to take suitableaction against repeated frivolous complaints

Potential Impact:► Company will have to develop and

implement vigil mechanism, including► Policy & procedures► Fraud response plan

► Audit committee / Director may have tonominate a sub-committee (e.g. EthicsCommittee) to manage the mechanism

► Company will have to conduct trainingand awareness sessions foremployees

► Have adequate documentation withregard to the mechanism and casesreported concerns


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Vigil mechanism► Mandatory for:

► Every listed company► Companies which accept public deposits AND► Companies which have borrowed money from

banks and public financial institutions in excessof 50 crores

► Audit Committee to operate the mechanism► Company to provide for adequate safeguards

against victimisation of persons who use suchmechanism

► Company to create provision for direct access to thechairperson of the Audit Committee in appropriate orexceptional cases

► Disclosure of details of establishment of suchmechanism by the company on its website, if any,and in the Board’s report

► Audit committee or the director to take suitableaction against repeated frivolous complaints

Potential Impact:► Company will have to develop and

implement vigil mechanism, including► Policy & procedures► Fraud response plan

► Audit committee / Director may have tonominate a sub-committee (e.g. EthicsCommittee) to manage the mechanism

► Company will have to conduct trainingand awareness sessions foremployees

► Have adequate documentation withregard to the mechanism and casesreported concerns

Duties of independent directors:► Ascertain & ensure that the company has an

adequate and functional vigil mechanism► Ensure that interests of a person using this

mechanism are not prejudicially affected

Loan to Directors/Subsidiaries

► Restriction on advancing of loan / guarantee/ providing security to any director or anyperson in whom director is interested.

► No exemption available for holding to itssubsidiary

► Restrictions does not apply for WTD/MD ifits part of service conditions or provided inthe ordinary course of business at RBI bankrates

NOTIFIED- 12th September 2013

Potential Impact *:

► Strictly prohibited and notified henceexisting transactions should beevaluated and appropriate action to betaken to avoid any default with respectto compliance.



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Loan to Directors/Subsidiaries

► Restriction on advancing of loan / guarantee/ providing security to any director or anyperson in whom director is interested.

► No exemption available for holding to itssubsidiary

► Restrictions does not apply for WTD/MD ifits part of service conditions or provided inthe ordinary course of business at RBI bankrates

NOTIFIED- 12th September 2013

Loans/ Investment by Co.

► Cannot make more than 2 layers ofinvestment companies except acquiringexisting company based out of India

► Cannot provide loans/ guarantees/security toother corporate or acquiring securities ofother corporate exceeding higher of :► 60% of paid up capital, free reserves and

securities premium or► 100% of free reserves and securities

premium► Prevailing market interest rate

Restrictions on Directors (Notified)

► Restriction on non cash transactions► Prohibition on forward contracts► Insider trading

Potential Impact*:

► Existing transactions should beevaluated and appropriate action to betaken to avoid any default.

► Appropriate policies need to be framedto comply with all the requirements ofAct with respect to loans andinvestments.

► Policy for non cash transactions,forward contracts and insider trading.Appropriate mechanism to be set totrack defaults if any made.


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Loans/ Investment by Co.

► Cannot make more than 2 layers ofinvestment companies except acquiringexisting company based out of India

► Cannot provide loans/ guarantees/security toother corporate or acquiring securities ofother corporate exceeding higher of :► 60% of paid up capital, free reserves and

securities premium or► 100% of free reserves and securities

premium► Prevailing market interest rate

Restrictions on Directors (Notified)

► Restriction on non cash transactions► Prohibition on forward contracts► Insider trading

Potential Impact*:

► Existing transactions should beevaluated and appropriate action to betaken to avoid any default.

► Appropriate policies need to be framedto comply with all the requirements ofAct with respect to loans andinvestments.

► Policy for non cash transactions,forward contracts and insider trading.Appropriate mechanism to be set totrack defaults if any made.


Other Committee

► Audit Committee► Nomination and Remuneration

Committee (NRC)► CSR committee► Stakeholder Relationship Committee

(SRC)► Vigil mechanism for directors and

employees

Other Matters

► Disclosure of interest by directors► Managerial remuneration► CFO/CEO statutory recognition and will

be treated as KMP and related parties► Class action► Serious Fraud Investigation Office

(SFIO)

Potential Impact*:

► With respect to vigil mechanism and CSRcommittee requirements, additionalcompliance shall need to assessed.

► Directors are required to disclose theirinterest and transactions with relatedparties.

► Transactions with CEO/CFO shall betreated as RPT hence appropriate careshould be taken to comply with therequirements of the Act.

► Requisite number of members/depositorsmay file and application to NationalCompany Law Tribunal (NCLT).


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Other Committee

► Audit Committee► Nomination and Remuneration

Committee (NRC)► CSR committee► Stakeholder Relationship Committee

(SRC)► Vigil mechanism for directors and

employees

Other Matters

► Disclosure of interest by directors► Managerial remuneration► CFO/CEO statutory recognition and will

be treated as KMP and related parties► Class action► Serious Fraud Investigation Office

(SFIO)

Potential Impact*:

► With respect to vigil mechanism and CSRcommittee requirements, additionalcompliance shall need to assessed.

► Directors are required to disclose theirinterest and transactions with relatedparties.

► Transactions with CEO/CFO shall betreated as RPT hence appropriate careshould be taken to comply with therequirements of the Act.

► Requisite number of members/depositorsmay file and application to NationalCompany Law Tribunal (NCLT).


Related Party Transactions

► Change in the definition of relative► Director his relatives, firm in which director

or his relative is partner, any other partner inthe firm, Private company of which thedirector is a member or director.

► KMP to be treated as related parties► Almost every transaction is covered► Board Resolution required for all

transactions► For specific companies previous special

resolution is required► Member who is a related party cannot vote

at GM► Transaction at arms length not covered► All transactions to be reported to

shareholders in Board report

Potential Impact*:

► No need to take approval from CentralGovernment for related partytransactions. Passing a specialresolution at the general meeting isenough if certain criteria are met.

► Interested members shall not beentitled to vote in such meetings

► Transactions at arm’s length shall needto be discussed in board report withjustification for the same.


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Related Party Transactions

► Change in the definition of relative► Director his relatives, firm in which director

or his relative is partner, any other partner inthe firm, Private company of which thedirector is a member or director.

► KMP to be treated as related parties► Almost every transaction is covered► Board Resolution required for all

transactions► For specific companies previous special

resolution is required► Member who is a related party cannot vote

at GM► Transaction at arms length not covered► All transactions to be reported to

shareholders in Board report

Potential Impact*:

► No need to take approval from CentralGovernment for related partytransactions. Passing a specialresolution at the general meeting isenough if certain criteria are met.

► Interested members shall not beentitled to vote in such meetings

► Transactions at arm’s length shall needto be discussed in board report withjustification for the same.


Relatives

► A person should be deemed to be relative of other if he or she is related infollowing manner► Spouse► Father, including step father► Mother, including step mother► Grand father (Paternal and maternal)► Grand mother (Paternal and maternal)► Son, including step son► Daughter in law► Grand son & daughter ( only Paternal)► Daughter► Son in law► Brother, including step brother► Sister, including step sister


Page 33

► A person should be deemed to be relative of other if he or she is related infollowing manner► Spouse► Father, including step father► Mother, including step mother► Grand father (Paternal and maternal)► Grand mother (Paternal and maternal)► Son, including step son► Daughter in law► Grand son & daughter ( only Paternal)► Daughter► Son in law► Brother, including step brother► Sister, including step sister

Who are related parties ?Nature of relationships Act AS 18

KMP and relatives Yes Yes

Holding, subsidiary, associate, Joint venture Yes# Yes

Individuals holding >20% and their relatives in a Co Yes *** Yes

Directors and their relatives Yes No *

Entities with common KMP Yes** Yes

Director or relative is a partner in a Firm Yes No


Page 34

Director or relative is a partner in a Firm Yes No

BC – Accustomed to act in accordance with Director/KMP Yes No##

Any person under who directions directors/KMP act Yes Yes##

Director / KMP (or relative) of Holding, subsidiary or associate Yes No

Members of Core Management Team (other than BoD) Yes No

*Only if they are able to affect policies of both enterprises** Only if KMP is a director*** Sufficient for director, KMP to be a member or director or hold 2% in public co. But a shareholder individual who is not aKMP or Director is not RPT for the Act but for AS 18# Joint venture not covered in Act for RPT## Only if control or significant influence is proved

Page 35

Mergers & Acquisitions


► Inbound and Outbound cross bordertransactions are allowed

► Scheme should be in compliance withAccounting Standards

► Auditors report► Simplified procedures in case of holding and

wholly owned subsidiary, and smallcompanies

► Minority squeeze outs and dissents► Prohibition on non cancellation of treasury

shares► Capital reduction► Corporate debt restructuring

Potential Impact*:

► Cross border transaction shall be easyto execute.

► Mandatory compliance with accountingstandards.

► Easy compliance for holding andsubsidiary transactions


Page 36








Potential Impact*:





Potential Impact*:

► Prohibition on creation of treasuryshares in mergers / amalgamations –Holding of treasury shares through atrust, recognition of dividend income onsuch shares, etc., will not be permitted.

► No clarity with respect to compliancewith AS for schemes filed and pendingfor approval at the date of enactment ofthe 2013 Act.

► The 2013 Act may not have any impacton accounting prescribed in the earlierapproved schemes which are not asper AS

Accounting for Mergers and Amalgamations

Overview of key changes► Compliance with notified accounting standard will be

mandatory for all companies – transitionrequirements still unclear.

► Demerger accounting prescribed – As per section2(19AA) of the Income-tax Act► Demerged company

► Derecognize book value of assets/ liabilities► Difference as goodwill/ capital reserve

► Resulting company► Recognize assets/ liabilities at book value► Shares issued at face value► Difference as goodwill/ capital reserve.


Page 37

Potential Impact*:

► Prohibition on creation of treasuryshares in mergers / amalgamations –Holding of treasury shares through atrust, recognition of dividend income onsuch shares, etc., will not be permitted.

► No clarity with respect to compliancewith AS for schemes filed and pendingfor approval at the date of enactment ofthe 2013 Act.

► The 2013 Act may not have any impacton accounting prescribed in the earlierapproved schemes which are not asper AS


Accounting for Mergers and Amalgamations

Overview of key changes► Compliance with notified accounting standard will be

mandatory for all companies – transitionrequirements still unclear.

► Demerger accounting prescribed – As per section2(19AA) of the Income-tax Act► Demerged company

► Derecognize book value of assets/ liabilities► Difference as goodwill/ capital reserve

► Resulting company► Recognize assets/ liabilities at book value► Shares issued at face value► Difference as goodwill/ capital reserve.









Potential Impact*:




Page 38








Potential Impact*:





Recap

Recap

Co’s Act2013

BetterGovernance

Deal withredundancy

Enhancedaccountability

Co’s Act2013

Social cause&

empowerment

Simplifiedprocedures &

regulatoryintervention

Global trendsin financialreporting

Key Action Area

Companies Act Diagnostic Study – Key Action Area

ProposedActivities

1. Diagnostic of differences between Companies Act 1956 and CompaniesAct 2013 specific to your transactions

2. Documenting the impact of relevant sections on various work streams suchas accounting , governance and audit etc.

3. Input and recommendations on issues or complications arising from theimpacts identified

4. Summarize findings for each area in the diagnostic report with high,medium and low indicators specific to you

5. Document the suggested remedial actions with time frame for each such

1. Companies Act Diagnostic report with differences categorized in high,medium and low category specific to you

2. Priority wise action plan for each activity (i.e. depreciation impactcomputation to be done in next SIX months)

3. Suggested implementation plan categorised indicating if it can be doneinternally or may require external help

4. Annexures for certain computations such as depreciation impactcomputation, CSR applicability template, admissible activities for CSRsuggested code of conducts for ID’s (based on managementrecommendations) and list of entities in the group where CFS is mandatoryetc.

1. Diagnostic of differences between Companies Act 1956 and CompaniesAct 2013 specific to your transactions

2. Documenting the impact of relevant sections on various work streams suchas accounting , governance and audit etc.

3. Input and recommendations on issues or complications arising from theimpacts identified

4. Summarize findings for each area in the diagnostic report with high,medium and low indicators specific to you

5. Document the suggested remedial actions with time frame for each such

Deliverable/Output

Fixed Assets – Depreciation and Component

Proposed Activities

1. To assist in updating the fixedasset register with revised livesas defined in Schedule II

2. To assist in computing the impactof revised lives on transition dateand suggest example journalentries to income statement orretained earnings

3. To document the assets in orderto determine the applicability ofcomponents (based on industrynorms and with the help ofcompany’s internal experts)

Deliverable/Output

1. Updated Fixed Assets register2. Suggested actions to avoid

volatility with respect todepreciation charge on incomestatement (i.e. use of appropriatedepreciation method)

3. Impact of component approach*4. Impact of change in life and due

to component approach onfinancial statement on transitiondate and in near future.

*to be done by valuation experts

1. To assist in updating the fixedasset register with revised livesas defined in Schedule II

2. To assist in computing the impactof revised lives on transition dateand suggest example journalentries to income statement orretained earnings

3. To document the assets in orderto determine the applicability ofcomponents (based on industrynorms and with the help ofcompany’s internal experts)

1. Updated Fixed Assets register2. Suggested actions to avoid

volatility with respect todepreciation charge on incomestatement (i.e. use of appropriatedepreciation method)

3. Impact of component approach*4. Impact of change in life and due

to component approach onfinancial statement on transitiondate and in near future.

*to be done by valuation experts

Consolidation of Financial Statements

Proposed Activities

1. To identify the list of entities whichneeds to be consolidated

2. To determine the intermediatelevels/holding companies at whichCFS to be prepared

3. To prepare the consolidated financialstatements at each level

4. To evaluate and address the mattersarising out of consolidation i.e.uniform financial year, uniformaccounting policies etc

5. Develop or update the consolidationmanual/tool for timely preparation offinancial statements

Deliverable/Output

1. Identified list of entities to beconsolidated based on newdefinition

2. Number of CFS to be preparedwith respective holding company

3. Identification of consolidationissues and recommendations toimprove the same

4. Consolidated financialstatements at various levels

5. AUTOMATED IN-HOUSECONSOLIDATION TOOL

1. To identify the list of entities whichneeds to be consolidated

2. To determine the intermediatelevels/holding companies at whichCFS to be prepared

3. To prepare the consolidated financialstatements at each level

4. To evaluate and address the mattersarising out of consolidation i.e.uniform financial year, uniformaccounting policies etc

5. Develop or update the consolidationmanual/tool for timely preparation offinancial statements

1. Identified list of entities to beconsolidated based on newdefinition

2. Number of CFS to be preparedwith respective holding company

3. Identification of consolidationissues and recommendations toimprove the same

4. Consolidated financialstatements at various levels

5. AUTOMATED IN-HOUSECONSOLIDATION TOOL

Related party transactions

Proposed Activities

1. To identify and list down the relatedparties to the Company as per newdefinition/provision in the Act

2. To establish appropriate policies inplace to ensure transactions are madeat arms length and are routinebusiness transactions otherwiseappropriate approvals/resolutions arepassed to made such transactions

3. To set up policies and procedure inplace for audit committee and boardapproval

4. To set up mechanism for shareholdersapproval as may be required

Deliverable/Output

1. Documentation and identificationof related parties to the company

2. Documentation and identificationof related party transactions andfor which approval required ornot.

3. Relevant policies and procedureswith respect to related partytransactions

4. Sample disclosure of suchtransactions in the board reportsas may be relevant

1. To identify and list down the relatedparties to the Company as per newdefinition/provision in the Act

2. To establish appropriate policies inplace to ensure transactions are madeat arms length and are routinebusiness transactions otherwiseappropriate approvals/resolutions arepassed to made such transactions

3. To set up policies and procedure inplace for audit committee and boardapproval

4. To set up mechanism for shareholdersapproval as may be required

1. Documentation and identificationof related parties to the company

2. Documentation and identificationof related party transactions andfor which approval required ornot.

3. Relevant policies and procedureswith respect to related partytransactions

4. Sample disclosure of suchtransactions in the board reportsas may be relevant

Internal Financial Control Systems (IFCS)

Proposed Activities

Drafting and implementation of internalfinancial control systems policy toensure appropriate and effectivemechanism for the following activities: Compliance with internal policy and

procedures Safeguarding of assets Prevention and detection of fraud

and error Completeness and accuracy of

financial statements Timeliness of preparation of

financial statements

Deliverable/Output

1. Design of internal financial controlsystems commensurate with thesize and operations of entity

2. Implementation roadmap forinternal financial control systemsto ensure effective output

3. Testing of operating effectivenessof internal financial controlsystems

Drafting and implementation of internalfinancial control systems policy toensure appropriate and effectivemechanism for the following activities: Compliance with internal policy and

procedures Safeguarding of assets Prevention and detection of fraud

and error Completeness and accuracy of

financial statements Timeliness of preparation of

financial statements

1. Design of internal financial controlsystems commensurate with thesize and operations of entity

2. Implementation roadmap forinternal financial control systemsto ensure effective output

3. Testing of operating effectivenessof internal financial controlsystems

Compliance with laws and regulations

Proposed Activities

1. To put together a list of applicablecentral and state laws

2. To define the requirements with respectto particular law (i.e. prescribed forms,timelines, authority etc)

3. To assign responsibility for complianceto the designated officials

4. To establish a certification process forsuch compliance by respective officialsin a time bound manner

5. To set up the escalation process in theevent on any non compliance

6. To list down the consequential penaltiesin case of non-compliance

Deliverable/Output

1. To set up a process to ensurecompliance with all the laws andregulations in the country

2. To set up a periodic reportingmechanism to ensureappropriate reporting are doneto BoD. Report shall highlightthe list of non-compliance andtheir impact in terms of high,medium and low

3. Online access of reports at pre-authorized levels and timelyreminder for escalation toappropriate authorities

1. To put together a list of applicablecentral and state laws

2. To define the requirements with respectto particular law (i.e. prescribed forms,timelines, authority etc)

3. To assign responsibility for complianceto the designated officials

4. To establish a certification process forsuch compliance by respective officialsin a time bound manner

5. To set up the escalation process in theevent on any non compliance

6. To list down the consequential penaltiesin case of non-compliance

1. To set up a process to ensurecompliance with all the laws andregulations in the country

2. To set up a periodic reportingmechanism to ensureappropriate reporting are doneto BoD. Report shall highlightthe list of non-compliance andtheir impact in terms of high,medium and low

3. Online access of reports at pre-authorized levels and timelyreminder for escalation toappropriate authorities

Risk Management Framework

Proposed Activities

1. To identify and analyze entities toexposure to various risks, whichmay include financial and Non-financial risks

2. Examine the risk managementtechniques and select mostappropriate to the company

3. Assist in implementing thetechnique as may be suitable

4. Define a process to monitor results

Deliverable/Output

1. Policy on development ofrobust risk managementframework relevant to thecompany

2. Drafting of risk managementframework most relevant toexisting conditions of the entity

1. To identify and analyze entities toexposure to various risks, whichmay include financial and Non-financial risks

2. Examine the risk managementtechniques and select mostappropriate to the company

3. Assist in implementing thetechnique as may be suitable

4. Define a process to monitor results

1. Policy on development ofrobust risk managementframework relevant to thecompany

2. Drafting of risk managementframework most relevant toexisting conditions of the entity

Vigil Mechanism

Proposed Activities

► Ascertain & ensure that thecompany has an adequate andfunctional vigil mechanism

► Draft of policy to establish a vigilmechanism: for ‘genuine concerns’ allow direct access to the audit

committee chairman as required► Disclosure of Mechanism► Monitoring by the audit committee

and the board

Deliverable/Output

1. Report on vigil mechanism,including: Policy & procedures Fraud response plan

2.Recommendations toestablish or improve existinginfrastructure to effect the vigilmechanism

► Ascertain & ensure that thecompany has an adequate andfunctional vigil mechanism

► Draft of policy to establish a vigilmechanism: for ‘genuine concerns’ allow direct access to the audit

committee chairman as required► Disclosure of Mechanism► Monitoring by the audit committee

and the board

1. Report on vigil mechanism,including: Policy & procedures Fraud response plan

2.Recommendations toestablish or improve existinginfrastructure to effect the vigilmechanism

Corporate Governance

Proposed Activities

1. Listing of requirements with respectto number of directors, womendirectors, independent directors etc.based on the complexity and size ofoperations

2. Drafting policy to list down issue to betaken care while appointment orresignation of directors etc.

3. Drafting of policy to effect evaluationof Board performance

4. Drafting of policies and procedures toset up mechanism for variouscommittees such as audit, NRC,shareholders, CSR etc.

Deliverable/Output

1. Comprehensive documentto list down all therequirements of the Act inthis regards.

2. To draft organization chartto assign responsibility ofactivities to respectivepersonnel

1. Listing of requirements with respectto number of directors, womendirectors, independent directors etc.based on the complexity and size ofoperations

2. Drafting policy to list down issue to betaken care while appointment orresignation of directors etc.

3. Drafting of policy to effect evaluationof Board performance

4. Drafting of policies and procedures toset up mechanism for variouscommittees such as audit, NRC,shareholders, CSR etc.

1. Comprehensive documentto list down all therequirements of the Act inthis regards.

2. To draft organization chartto assign responsibility ofactivities to respectivepersonnel

Directors – Code of Conduct

Proposed Activities

1. To draft document on to ensureappropriate code of conducts are inplace and existing ones are updatedas well

2. Eligibility for appointment3. Company policy and procedures4. Changes to the article of association

of the company5. Declaration of independence by the

independent director

Deliverable/Output

1. To set up several code ofconduct and updating ofexisting policy framework

1. To draft document on to ensureappropriate code of conducts are inplace and existing ones are updatedas well

2. Eligibility for appointment3. Company policy and procedures4. Changes to the article of association

of the company5. Declaration of independence by the

independent director

1. To set up several code ofconduct and updating ofexisting policy framework


Proposed Activities

1. Corporate Social ResponsibilityCommittee to be formed. Committeeresponsible for Formulation of CSR policy Regular monitoring of CSR

initiatives. Board to be responsible for;

• Approving and disclosing CSRpolicy

• Ensuring implementation of CSRactivities

Deliverable/Output

1. Policy on system andprocess around CorporateSocial responsibility

2. List of activities maysuitable to entity’srequirements with respect tocompliance with CSRschedule

1. Corporate Social ResponsibilityCommittee to be formed. Committeeresponsible for Formulation of CSR policy Regular monitoring of CSR

initiatives. Board to be responsible for;

• Approving and disclosing CSRpolicy

• Ensuring implementation of CSRactivities

1. Policy on system andprocess around CorporateSocial responsibility

2. List of activities maysuitable to entity’srequirements with respect tocompliance with CSRschedule

Audit Related Matters

Proposed Activities

1. Audit of consolidated financialstatements for unlisted companies(including intermediate holdingcompanies)

2. Additional auditors reportingresponsibility: Design adequacy and operating

effectiveness of internal financialcontrols system Financial transactions or matters

which have any adverse effect onthe functioning of the Company Material frauds to be reported to

central government

Deliverable/Output

1. Policy on processes toensure completion of auditactivity in a timely manner

2. Designing of FinancialStatement ClosureProcess to help identifyinggaps

1. Audit of consolidated financialstatements for unlisted companies(including intermediate holdingcompanies)

2. Additional auditors reportingresponsibility: Design adequacy and operating

effectiveness of internal financialcontrols system Financial transactions or matters

which have any adverse effect onthe functioning of the Company Material frauds to be reported to

central government

1. Policy on processes toensure completion of auditactivity in a timely manner

2. Designing of FinancialStatement ClosureProcess to help identifyinggaps

Thank YouThank You

Goldman Fincorp Private Limited190, Lower Ground Floor, M Block, DDA Site I,New Rajendra Nagar, New Delhi 110060.Office: +91 28741408 | Fax: +91 28741408 |[email protected] Phone: +91 9871012936. Website: www.goldmangroup.in

Goldman Fincorp Private Limited190, Lower Ground Floor, M Block, DDA Site I,New Rajendra Nagar, New Delhi 110060.Office: +91 28741408 | Fax: +91 28741408 |[email protected] Phone: +91 9871012936. Website: www.goldmangroup.in

Companies Act -Key Observations and Action BY GOLDMAN GROUP

Economy & Finance

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