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The Companies Act, 2013: An overview

Ministry of Corporate Affairs is notifying the Act and the Rules with lightning speed. After notification of majority of sections and rules, these have caught the professional and corporate sector in a whirlwind. We have tried to give below a background of important provisions of Companies Act, 2013 pertaining to meetings of Boards and Auditors. Background: Long awaited Companies Act, 2013 ("The 2013 Act") has come into existence on the assent by the President of India on 29th August, 2013 and published in the Official Gazette on 30th August, 2013. The 2013 Act comprises of 29 chapters, 470 sections with 7 schedules as against 658 sections, 14 schedules in the Companies Act, 1956 ("The 1956 Act"). Out of the above, the Ministry of Corporate Affairs (“MCA”) has notified around 280 sections of the Act.

Composition of the Board:

Appointment of Directors The 1956 Act provided that the limit for maximum number of directors be based on its articles or twelve (12) whichever is lower. The 2013 Act provides that the company shall have a maximum of fifteen (15) directors on the Board of Directors (‘Board’) and appointing more than fifteen directors would require approval of shareholders through a special resolution. The 1956 Act did not prescribe any academic or professional qualifications for directors. The 2013 Act provides that majority of members of Audit Committee including its Chairperson shall be persons with ability to read and understand the financial statements. The 2013 Act provides for appointment of at least one woman director on the Board for such class or classes of companies i.e., Company having paid–up share capital of one hundred crore rupees or more or a turnover of three hundred crore rupees or more as on the last date of latest audited financial statements. A transitional period of one year has been prescribed to companies for the compliance with this provision. The 2013 Act provides that a company should have at least one director who has stayed in India for a total period of not less than hundred and eighty two days in the previous calendar year. The 2013 Act introduces a new category of a company, One Person Company (“OPC”), which should have at least one director. For the first time, duties of the directors are defined under the 2013 Act. Following are some of the duties:
  • To act in accordance with co.’s AOA
  • Act in good faith
  • Exercise his duties with due care and diligence.
  A director shall not:
  • Involve in any conflicting interest with the co.
  • Achieve or attempt to achieve any undue advantage.
  • Assign his office.
  Independent Directors (‘ID’) Under 1956 Act, there was no requirement to have IDs. However, under the Listing Agreement, the Board of listed entities having non-executive chairman and executive chairman should comprise of at least one-third and one-half of the Board as ID respectively. The 2013 Act proposes that the public companies having paid up share capital of ten crore rupees or more [or] having turnover rupees 100 crores or more (or) which have, in aggregate, outstanding loans or borrowings or debentures or deposits, exceeding fifty crore rupees as per the latest audited financial statements shall have atleast two of the total number of its directors as IDs. Any intermittent vacancy of an independent director shall be filled-up by the Board at the earliest but not later than immediate next Board meeting or three months from the date of such vacancy, whichever is later. Separate meeting The independent directors of the company shall hold at least one meeting in a year, without the attendance of non-independent directors and members of management.

Functioning of the Board

Notice of Board meeting The 1956 Act provided that notice of every Board meeting should be given in writing. However, it did not specify the period of notice. The 2013 Act provides that a minimum of seven days notice to the Board is required to call a Board meeting. The company may give a shorter notice to transact urgent businesses, provided at least one ID is present at the meeting. In case of absence of ID from such a meeting, decisions taken at the meeting to be circulated to all the directors and to be made final only on ratification by at least one ID. Frequency of Board meetings The 1956 Act required atleast one Board meeting to be conducted in every three calendar months and four such meetings in a financial year. Further, Listing Agreement requires at least four meetings in a year with a maximum time gap of four months between two meetings. The 2013 Act, consistent with the Listing Agreement requirement, provides that the company should have at least four meetings in a year with a maximum time gap of one hundred and twenty days between two meetings. The 2013 Act also requires that the first Board meeting of the company be held within thirty days of incorporation of the company. Conduct of the Board meeting Participation in the Board meeting through prescribed video conferencing or other audio visual means is recognised, provided such participation is recorded and recognised.

Constitution of Committees

Audit committee The Board of Directors of every public company having paid up capital of ten crore rupees or more [or] turnover of hundred crore rupees or more [or] which have, in aggregate, outstanding loans or borrowings or debentures or deposits exceeding fifty crore rupees shall constitute an Audit Committee. The Audit Committee shall consist of a minimum of three directors with independent directors forming a majority: Provided that majority of members of Audit Committee including its Chairperson shall be persons with ability to read and understand, the financial statement. Establishment of vigil mechanism The vigil mechanism shall provide for adequate safeguards against victimisation of employees and directors who avail of the vigil mechanism and also provide for direct access to the Chairperson of the Audit Committee. An audit committee shall oversee the vigil mechanism through the committee. Nomination and Remuneration Committee Every Public company having paid up capital of ten crore rupees or more [or] turnover of hundred crore rupees or more [or] which have, in aggregate, outstanding loans or borrowings or debentures or deposits exceeding fiftycrore rupees shall constitute a Nomination and Remuneration Committee. The Committee shall consist of three or more non-executive directors out of which not less than one-half shall be independent directors. Main Activity is to lay the criteria for recommending to the Board for the appointment of directors in senior management and their removal. Also formulate the criteria for determining the remuneration of directors, key managerial personnel and other employees and recommending to the board.

Appointment & rotation of Auditors

Appointment Every company shall appoint at its first AGM an individual or a firm as an auditor who shall hold office from the conclusion of that AGM till the conclusion of its 6th AGM, and thereafter till the conclusion of every 6th meeting. The duty to inform the auditor about his appointment and to file a notice with the Registrar within 15 days of the meeting in which the auditor is appointed is that of the Company. Rotation of Auditors An individual auditor having completed his more than 1 term (5 years) shall not be eligible for re-appointment. An audit firm having completed its term as auditor for more than 2 terms (10 years) shall not be eligible for reappointment as auditor in the same company for the next 5 years. A transition period of 3 years from the commencement of this Act has been provided for companies in existence to comply with the provision of rotation of auditor. In case the company has an audit committee, then all appointments of auditors including filling of casual vacancies shall be made after taking into account the recommendation of such committee. Appointment of Internal Auditor Every public company having paid up share capital of Rupees fifty crores or more during the preceding F.Y [or] turnover of two hundred crore rupees or more in the preceding F.Y [or] outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees or more at any point of time during the preceding financial year [or] outstanding deposits of twenty five crore rupees or more at any point of time during the preceding financial yearis required to appoint an internal auditor, who shall either be a chartered accountant or a cost accountant, or such other professional as may be decided by the Board to conduct internal audit of the functions and activities of the company. Appointment of CFO Section 2 (19) of the Companies Act 2013, defines a Chief Financial Officer as follows: “Chief Financial Officer” means a person appointed as the Chief Financial Officer of a Company. CFO in 2013 Act For the purposes of sub-section (1) of section 203 every listed company and every other public company having a paid-up share capital of ten crore rupees or more shall have whole-time key managerial personnel. Every KMP should be appointed by passing a Board resolution. The terms and conditions including the remuneration should be mentioned in the Board resolution for such appointment. A whole-time KMP of a Company shall not hold office in more than one company except in its subsidiary company at the same time. Appointment of Key Managerial Personnel[KMP] [New section has been introduced and KMP is covered in officer in default definition] Every listed company and every other public company having a paid-up share capital of ten crore rupees [or] more shall have the following whole-time key managerial personnel:
  • Managing Director or Chief Executive Officer or Manager and in their absence, a Whole-time Director;
  • Company Secretary; and
  • Chief Financial Officer
  Business Letters of the Company Every company shall get its Name, Address of registered office, Corporate Identification Number (CIN) as allotted by MCA, Phone/(Fax no., email id and website address if any) printed on all the business letters, bill heads, letter papers, all notices, etc. in terms of Section 12(3)(c) of the Companies Act, 2013. The word Notices includes notices given under the Companies Act, 2013 but also notices inviting tenders, employment notice, notice for loss of shares or debenture certificates, notice for change of name by the Company or closure of register of members etc.  
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Disclaimer: The entire contents of this document have been developed on the basis of relevant information and are purely the views of the authors. Though the authors have made utmost efforts to provide authentic information however, the authors and the company expressly disclaim all and any liability to any person who has read this document, or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance upon the contents of this document.

 
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