Entering in FY 23-24: Regulatory review of corporate law developments

– Payal Agarwal, Deputy Manager (payal@vinodkothari.com)

As the new financial year 23-24 commences, we look back at where we stand at the end of FY 22-23, in terms of the regulatory developments. While there has been no substantial traffic in terms of regulatory developments to the Companies Act, the migration of various forms in MCA’s V3 portal proved to be (and still continues to be so in some cases) a turmoil, with a standstill in the fundraising process, and other practical difficulties, even resulting in levy of additional fines. 

There has been significant traction on the part of SEBI too. While Structured Digital Database (SDD) remained the buzzword for the listed entities with the stock exchanges requiring them to submit quarterly compliance certificates, the stress for proper controls on insider trading remained the focal point. Having stiffed the nerves of the Compliance Officers in the listed entities through the quarterly compliance certificates, the same has been finally absorbed in the annual secretarial compliance reports under the Listing Regulations.

Read more

Directors to declare on personal disqualifications too in DIR-8

– Prapti Kanakia, Manager | prapti@vinodkothari.com

Loader Loading…
EAD Logo Taking too long?

Reload Reload document
| Open Open in new tab

Download as PDF [166.84 KB]

2022 Wrapped Up: Regulatory review of corporate law developments

– Payal Agarwal, Assistant Manager (payal@vinodkothari.com)

2022 has been a relatively stable year when it comes to Companies Act, save changes in the forms and filing procedures with increasing online processes, there has been significant traction on the part of SEBI. While Structured Digital Database (SDD) remained the buzzword for the listed entities with the stock exchanges requiring them to submit quarterly compliance certificates, the stress for proper controls on insider trading remained the focal point. For social enterprises, a landmark development was the introduction of the concept of Social Stock Exchanges, which seems to be shortly getting into operational mode.

We have tried to briefly cover the major developments in corporate laws during the year 2022. You may also refer to our brief discussion of the same in this youtube video. For updates relevant to the financial sector including the overseas investment norms, refer 2022 in retrospect: Regulatory activity in the financial sector. You may also refer to our quick round-up of regulatory developments in IBC in the year 2022.

Read more

CSR Rules tweaked to rationalize committee constitution, implementing agencies etc

– Nitu Poddar, Partner | Lovish Jain, Executive | corplaw@vinodkothari.com

MCA vide its notification dated September 20, 2022 has made amendments in the Companies (Corporate Social Responsibility Policy) Rules, 2014 (“Rules”). The said amendment seeks to do away with the redundant requirements in Rule 3(2) of making CSR expenditure and other compliances even after the companies cease to be covered within the thresholds under section 135(1), provide for continuation of CSR committee in case of amount lying in the unspent CSR account, amend the scope of implementing agencies and in the ceiling of expenditure towards impact assessment as well as some changes in the annual report on CSR.

Read more

Definition of Small Company – Evolution over time

Loader Loading…
EAD Logo Taking too long?

Reload Reload document
| Open Open in new tab

Download as pdf [301.04 KB]

New avatar of DPT-3 requires aging details for exempted deposits

– Also burdened with irrelevant deposit related details

– Payal Agarwal, Senior Executive (payal@vinodkothari.com)

The format of the “return on deposits” and on “exempted deposits”, that is, form DPT-3  has been amended pursuant to  the notification of the Companies (Acceptance of Deposit) Amendment Rules, 2022 (“Amendment Rules”) on 29th August, 2022. While the same has been made applicable immediately, the revised format will be actually relevant for the filing of form DPT-3 for FY 2022-23, since the due date for filing DPT-3 for FY 2021-22 has already expired on 30th June, 2022. It is interesting to note that while most of the changes pertain to the “return of deposits”, the same does not have any practical significance in India. However, there is specifically one addition w.r.t. the money received by a company, but not considered as deposit, i.e., exempted deposits. 

Read more

Investments from neighbouring countries under stringent scan of GoI

– Prapti Kanakia | corplaw@vinodkothari.com

Recently, the Ministry of Corporate Affairs (MCA) has implemented a series of amendments which relates to investments in India by foreign nationals or entities incorporated in a country which shares a land border with India. These amendments are in tandem with the amendment made by the Department for Promotion of Industry and Internal Trade (DPIIT) in FDI Policy and by the Ministry of Finance, Department of Economic Affairs, in FEM (Non Debt Instruments) Rules, 2019 (NDI Rules).

DPIIT amended the FDI policy vide press note no. 3 dated 17 April, 2020 to curb the hostile takeovers of Indian Companies by nationals/entities of neighbouring countries.  Erstwhile, only a citizen of Bangladesh & Pakistan or an entity incorporated in Bangladesh & Pakistan were required to take government approval for investing in India. Pursuant to amendment, any entity incorporated in a country, citizen or beneficial owner of a country, which shares land border with India, needs to obtain government approval for investing in the equity instrument of the Indian Company. Thus, nationals/entities from Pakistan, Afghanistan, China, Bhutan, Nepal, Myanmar and Bangladesh can invest in India only under approval route.

Read more

Utilisation of accumulated surplus by section 8 companies

-Can surrogate means be used to relegate funds or benefits to shareholders

Pammy Jaiswal | Partner | Vinod Kothari and Company

Shraddha Shivani | Executive | Vinod Kothari and Company

corplaw@vinodkothari.com

Background

Section 8 of the Companies Act, 2013 (‘CA’) provides for the formation of companies with specific objects. Since the section revolves around incorporation of companies with charitable or some other specified welfare objectives, it gives an impression that these companies do not work to earn financial gains for their shareholders. This impression becomes evident since Section 8 companies are commonly referred to as ‘not-for-profit’ companies which further substantiates this understanding and adds to the confusion. They may make profits, as indeed, they very often do; however, the profit necessarily gets redeployed to carry the very same objects for which the company was formed, and cannot be relegated to the shareholders.

 In fact, earning profits is not just permitted but is also essential for their continued existence and organic growth of its affairs. Most such companies do not borrow; hence, they carry their activities either through corpus contributions or through retained profits. Thus, the restrictions under CA are not on earning profits but on the distribution of the same to its shareholders. 

The most common way for a company to distribute profits to its shareholders is by way of payment of dividend. This is explicitly barred in case of a Section 8 company. Having said that, these companies may also come across a situation where they do not foresee any immediate application of their accumulated profits and therefore, may look out for ways to utilise it for some other purpose. The management running these companies, potentially representing shareholders, may not be necessarily driven by avarice when they intend to use the funds other than for the purpose for which the company was formed.

Read more

Provision w.r.t. higher additional fees notified by MCA | Effective July 1, 2022

corplaw@vinodkothari.com

Our resources on corplaw: https://vinodkothari.com/category/corporate-laws/

Addressing subsequent applicability of Section 139(2) of the Companies Act

Whether existing auditor needs to vacate immediately?

Abhishek Saraf | Manager (corplaw@vinodkothari.com)

Background

On and from the enforcement of the provisions of the Companies Act, 2103 (the “Act”), statutory auditor of a company is required to be appointed for a fixed term of 5 consecutive years (except in the case of appointment of first auditor and appointment of auditor in Government Company). The said requirement is different from the provisions of corresponding section 224 and 224A of the erstwhile Companies Act, 1956 (“Act, 1956”) where a statutory auditor was appointed year on year basis.

In addition to the introduction of a minimum tenure of 5 years, the Act also brought the concept of mandatory rotation of the statutory auditors so appointed so to ensure the auditors do no develop too much familiarity with the auditee. In fact, the Report[1] of the CII Task Force on Corporate Governance also discussed on the proposal of the rotation of auditors as well as audit partners to discourage any sort of an affinity between the auditors and the company.

The provisions relating to mandatory rotation of the statutory auditors have been provided under section 139(2) of the Act.

Section 139(2) of the Act states that-

“(2) No listed company or a company belonging to such class or classes of companies as may be prescribed, shall appoint or re-appoint 

(a) an individual as auditor for more than one term of five consecutive years; and

(b) an audit firm as auditor for more than two terms of five consecutive years:

…..”

Section 139(2) of the Act provides for a mandatory rotation of statutory auditors for the following classes of companies:

(i) Listed companies

(ii) Unlisted public companies having paid up share capital of INR 10 crores or more;

(iii) Private companies having paid up share capital of INR 50 crores or more; and

(iv) Companies having paid up share capital of below threshold limit mentioned in (ii) and (iii) above, but having public borrowings from financial institutions, banks or public deposits of INR 50 crores or more.

Once the bar on re-appointment applies; there is a mandatory cooling-off period of 5 years where the outgoing auditor should not be in any way be related to the incoming auditor.

Further, the requirement of appointment of auditors for a minimum tenure as well as the rotational requirement has been exempted for certain classes of companies which have been mentioned below:

Exemption from minimum tenure of 5 years Exemption from rotational provisions
 

·         All companies in case of appointment of first auditor

 

·         Government companies

 

·         One person company

 

·         Small companies

Application of rotational requirements during the transitional period

From the date of enforcement of section 139 of the Act, i.e., 1st April, 2014, companies were given a time period of three years to comply with sub-section (2) of the Act. However, considering the practical difficulties, MCA vide its Companies (Removal of Difficulties) Third Order, 2016 amended the transitional provisions of Section 139(2) of the Act to allow companies to comply with the provisions relating to rotation of auditors not later than date of the 1st AGM of the company held after 3 years from the date of commencement of the Act.

With this amendment, it was clarified that the auditor who has utilized the tenure of 5 years or 10 years, as applicable may continue the office till the conclusion of AGM held for the FY ended 31st March 2017 and the company shall appoint new auditor in accordance with section 139 (1) in the same AGM.

 

Treatment in case of subsequent applicability of rotational provisions

It is to be noted that the third proviso to sub-section (2) of section 139 contained the provisions to address the first-time applicability on companies on and from the commencement of the said section. It was given to allow smooth transition from the old regime to the new regime. The proviso specifically provided 3 years’ time from commencement of the Act which has expired long back.

Another situation that requires to be addressed is the fate of the auditors of the companies which subsequently get covered under sub-section (2) of section 139.

In this regard, it is important to note the language of the said sub-section states the following:

No listed company or a company belonging to such class or classes of companies as may be prescribed, shall appoint or re-appoint XXX

Addressing the said issue, the view expressed in Ramaiya[2] is that the auditor will have to vacate his office at the next forthcoming AGM of the company, even if the existing term is not complete.

However, we will hold a different view on the same based on the following reasons:

  • It is to be noted that the appointment or re-appointment of statutory auditors is done for a fixed term which should not be of more than 5 consecutive years and the provisions does not mentions for appointment for any specified years and further has done away with ratifying the appointment every year[3].
  • Secondly, as the language suggests, the provisions of the Section 139(2) is applicable only at the time of  appointment or re-appointment.
  • If the existing term, which was in accordance with Section 139 (1) of the Act, is not complete, there is no case of appointment or reappointment. Hence, it is only when the existing term is complete that the question of rotation will arise.
  • Furthermore, mandatory rotation of statutory auditor as per Section 139(2) of the Act cannot be equated with ineligibility to be appointed as an auditor of a company under Section 141(3) of the Act, which sinks in immediately.

Concluding Remarks

In view of the rationale given above, it can be concluded that since the question of rotation will arise only at the time of appointment or re-appointment which again can only be seen only after the completion of the tenure of 5 years, therefore, the interpretation of requiring the continuing auditor to vacate its office at the ensuing AGM post first time applicability does not seem to be correct.

[1] To view the Report, click here

[2] Page 2473 of A Ramaiya Guide to the Companies Act (19th Edition)

[3] The requirement to ratify was done away with vide the Companies (Amendment) Act, 2017 w.e.f. 7th May, 2018.

Our other relevant articles –

  1. https://vinodkothari.com/2021/06/rbi-guidelines-at-odds-with-the-companies-act-on-appointment-of-auditor/
  2. https://vinodkothari.com/2021/04/faqs-appointment-of-statutory-auditors/
  3. https://vinodkothari.com/wp-content/uploads/2019/05/Concept-of-Retiring-Auditors-under-Act-2013-1.pdf
  4. https://vinodkothari.com/2018/05/alignment-of-audit-auditors-rules-with-amendment-act-2017/