Companies (Amendment) Act, 2017 – Important Amendments Which Have Relevance From Audit

Presently, companies are required to deposit an amount of not less than 15% of the deposits maturing during the financial year and financial year next following which is to be kept in a Scheduled Bank and called as Deposit Repayment Reserve Account. ( Section 73)

Companies Amendment Act 2017 (CAA 2017) now provides that an amount of not less than 20% of the deposits maturing during the following financial year is to be kept in a Scheduled Bank and called as Deposit Repayment Reserve Account.

Companies Law Committee ( CLC/ Committee) Observations in Para 5.1 of the report are self-explanatory which read as under :

The Committee felt that though the provision was a safeguard for depositors, it would increase the cost of borrowing for the company as well as lock-up a high percentage of the borrowed sums. Accordingly, the requirement for the amount to be deposited and kept in a scheduled bank in a financial year should be changed to not less than twenty percent of the amount of deposits maturing during that financial year, which would mitigate the difficulties of companies, while continuing with reasonable safeguards for the depositors who have to receive money on maturity of their deposits.

Currently Rule 13 of Companies (Acceptance of Deposits) Rules, 2014 provides that amount of deposit pursuant to these rules shall not fall below fifteen per cent. of the amount of deposits maturing, until the end of the current financial year and the next financial year. 

This provision in the case of larger deposit accepting companies required huge amount to be blocked in deposits since it required two financial years to be considered for maintenance of liquid assets . Thus amendment made now will help in reducing the financial burden of deposit accepting companies especially in the falling interest rate scenario. 

Presently, companies accepting deposits are required to get the deposits insured.

This requirement is done away with.

CLC Observations in Para 5.2 of the report are self-explanatory which read as under :

It was also noted by the Committee that as on date none of the insurance companies is offering such insurance products.

Considering the above situation, the provisions of Section 73(2) (d) along with relevant Rules are  omitted.

Presently, companies accepting deposits are required to certify that the company has not committed any default in the repayment of deposits accepted either before or after the commencement of this Act or payment of interest on such deposits.( Section 73)

CAA 2017 provides that companies accepting deposits are required to certify that the company has not committed any default in the repayment of deposits accepted either before or after the commencement of this Act or payment of interest on such deposits and where a default had occurred, the company has made good the default and a period of five years has elapsed since the date of making good the default. 

Thus post-amendment, Company can accept deposits after 5 years from the date of making good such default (In repayment of deposit and/or interest). 

CLC Observations in Para 5.3 of the report are self-explanatory which read as under :

The Committee noted that imposing a lifelong ban for a default anytime in the past would be harsh. Therefore, it was recommended that the prohibition on accepting further deposits should apply indefinitely only to a company that had not rectified/made good earlier defaults.

However, in case a company had made good an earlier default in the repayment of deposits and the payment of interest due thereon, then it should be allowed to accept further deposits after a period of five years from the date it repaid the earlier defaulting amounts with full disclosures.

Currently, deposits accepted and interest thereon, which remained unpaid at the commencement of Companies Act, 2013 was required to be paid within one year or before the expiry of the stipulated period, whichever was earlier.  ( Section 74)

CAA 2017 now provides that such amounts shall be repaid within three years or before the expiry of the stipulated period, whichever was earlier.

Under Companies Act 2013, deposits are allowed to be accepted by only eligible companies and this has put lot of restrictions on the companies which had accepted deposits under Companies Act 1956 . 

To overcome the difficulties faced by such companies, repayment is now permitted up to 3 years or maturity , whichever is earlier.     

Currently, Section 76A(1)(a) provides that in respect of contraventions of Section 73 or 76, the company shall, in addition to the payment of the amount of deposit or part thereof and the interest due, be punishable with fine which shall not be less than one crore rupees but which may extend to ten crore rupees;

CAA 2017 provides that a company will be punishable with a fine of one crore rupees or twice the amount of deposit accepted by the company, whichever is lower.

Normally, rules of Penalty require that Penalty be imposed with reference to the quantum of offence committed. Thus flat penalties provided under the current provisions were disproportionate to the offence committed and hence this amendment seeks to correlate penalty with the underlying deposit.

Currently, it is provided that an officer of the company who is in default shall be punishable with imprisonment or fine.

Now it is provided that an officer of the company who is in default shall be punishable with imprisonment and fine.

In the process, the offence has been made non-compoundable.

Provisions in brief prior to Amendment

Provisions after Amendment

Impact / Implications/ Remarks

Currently, the charge holder can register the charge only in case the company fails to do so within the period specified in section 77, which is 300 days.

CAA 2017 now provides that the person in whose favor the charge has been created can file the charge on the expiry of 30 days from the creation of charge where a company (borrower) fails to file such charge

This amendment is welcome from the point of view of the lender.

Primary obligation for registration was with the borrower u/s 77 which allowed creation of charge up to 300 days on payment of additional fees. After such period, application for condonation was required to be done by the company or any other person interested in such charge. It was felt that the wordings of the present section required a waiting period up to 300 days for creation of charge by the lender. But in the process the charge remained to be registered and as such loan under the charge remained unsecured. This anomaly is sought to be removed by this amendment.   

A company was required to report satisfaction of charge within a period of 30 days from the date of such satisfaction failing which an application for condonation of delay had to be made before the Regional Director.( Section 82)

The company can now report satisfaction of charge within a period of 300 days.

This amendment now brings reporting period of satisfaction in line with creation of charge and as such a welcome measure. 

Provisions in brief prior to Amendment

Provisions after Amendment

Impact / Implications/ Remarks

Section 92(1) Every company shall prepare a return (hereinafter referred to as the annual return) in the prescribed form containing the particulars as they stood on the close of the financial year regarding—

(c) it’s indebtedness;

(j)details, as may be prescribed, in respect of shares held by or on behalf of the Foreign Institutional Investors indicating their names, addresses, countries of incorporation, registration, and percentage of shareholding held by them;

Provided that in relation to One Person Company and small company, the annual return shall be signed by the company secretary, or where there is no company secretary, by the director of the company.

Section 92(1):

(a) clause (c) shall be omitted;

(b) in clause (j), the words “indicating their names, addresses, countries of incorporation, registration, and percentage of shareholding held by them” shall be omitted;

(c) after the proviso, the following proviso shall be inserted, namely:—

“Provided further that the Central Government may prescribe abridged form of annual return for One Person Company, small Company and such other class or classes of companies as may be prescribed”;

The details related to disclosing indebtedness and details with respect to name, address, country of incorporation etc. of FII in the annual return of the company are also omitted.

It is further provided that the Central Government may prescribe the abridged form of annual return for One Person Company (‘OPC’), Small Company and such other class or classes of companies as may be prescribed.

This amendment thus seeks to achieve an objective of avoiding duplication of information.

Further proviso when implemented will achieve simplicity in the case of companies proposed to be covered in the proviso.

Section 92(3)

An extract of the annual return in such form as may be prescribed shall form part of the Board‘s report.

Section 92(3)

 Every company shall place a copy of the annual return on the website of the company if any, and the web-link of such annual return shall be disclosed in the Board’s report.”

CAA 2017 has omitted the requirement of MGT-9 i.e. extract of annual return to form part of the Board’s Report. The copy of annual return shall now be uploaded on the website of the company if any, and its link shall be disclosed in the Board’s report.

This amendment was largely guided by the fact that report of the Board of Directors was becoming very much lengthier and expensive especially for the listed companies.

Time limit of 270 days within which annual return could be filed on payment of the additional fee has been done away with. It is further provided that a company can file the annual return with ROC at any time on payment of a prescribed additional fee.

All the measures proposed hereinabove are expected to simplify Annual Return filing process and avoid duplication of information.

;

Presently dividend can be paid u/s 123(1) from :

Current Year Profits or

Accumulated Profits or

from a and b above or

From money provided by Central or State Governments pursuant to a guarantee given

A proviso is added as under :

“Provided that in computing profits any amount representing unrealized gains, notional gains or revaluation of assets and any changes in carrying amount of an asset or of a liability on measurement of the asset or the liability at fair value shall be excluded;

Reserves are clarified as “free reserves”   so as to bring clarity as to the source of the dividend.

Consequent upon Ind AS Applicability to Phase I and Phase II companies, this amendment is clarificatory and a welcome measure.

This has become essential since one of the sources for payment of dividend is free reserves and definition of free reserves under Section 2 (43) excludes unrealised or notional gains and l credits to such reserves on account of measurement of assets and liabilities at fair value. Thus primary source of reserves being profits are also sought to be brought in line with definition of free reserves for the purpose of determination of distributable profits. 

Section 123 (3)The Board of Directors of a company may declare interim dividend during any financial year out of the surplus in the profit and loss account and out of profits of the financial year in which such interim dividend is sought to be declared:

Provided that in case the company has incurred a loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not be declared at a rate higher than the

Section 123 (3) The Board of Directors of a company may declare interim dividend during any financial year or at any time during the period from closure of financial year till holding of the annual general meeting out of the surplus in the profit and loss account or out of profits of the financial year for which such interim dividend is sought to be declared or out of profits generated in the financial year till the quarter preceding the date of declaration of the interim dividend:

Dividends are usually payable for a financial year after the final accounts are ready and the amount of distributable profits is available. The dividend for a financial year of the company (which is called ‘final dividend’) is payable only if it is declared by the company at its annual general meeting on the recommendation of the Board of directors. Sometimes dividends are also paid by the Board of directors between two annual general meetings without declaring them at an annual general meeting

average dividends declared by the company during the immediately preceding three financial years.

Provided that in case the company has incurred a loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not be declared at a rate higher than the average dividends declared by the company during immediately preceding three financial years.”

 (which is called ‘interim dividend’).

[Source: Monograph on Dividend by ICSI ]

Thus it is now clarified that Interim dividend will not only mean dividend paid during the financial year but also dividend declared from the closure of financial year till holding of an AGM.

Section 129(3)-

‘Where a company has one or more subsidiaries, it shall, in addition to financial statements provided under sub-section (2), prepare a consolidated financial statement of the company and of all the subsidiaries in the same form and manner as that of its own which shall also be laid before the annual general meeting of the company along with the laying of its financial statement under sub-section (2):

Revised Section 129(3)-

“Where a company has one or more subsidiaries or associate companies, it shall, in addition to financial statements provided under sub-section (2), prepare a consolidated financial statement of the company and of all the subsidiaries and associate companies in the same form and manner as that of its own and in accordance with applicable accounting standards, which shall also be laid before the annual general meeting of the company along with the laying of its financial statement under sub-section (2):

As regards consolidation of accounts, main concern related to the inclusion of associate companies in absence of the specific provisions. This concern now is addressed and consolidation will have to be done even if there is no subsidiary. 

The consolidated financial statement of the company, its subsidiaries and associates should be in accordance with the applicable accounting standards which is now specifically provided in the section itself.

Explanation.—For the purposes of this subsection, the word ?subsidiary? shall include associate company and joint venture.

This explanation stands deleted after the amendment

This amendment is consequential to the changes mentioned hereinabove.

Existing Sec 130 of the Act provides that reopening can be done on the basis of an order from court or tribunal. The said section provides that court or tribunal will give a notice to various regulatory authorities and will take into consideration representations made by such regulatory authorities. However, the said section did not provide for an opportunity of representing to any other concerned party.

CAA, 2017 has now amended the said section to give an opportunity to other persons concerned of making a representation before an order is passed by the tribunal or court.

Presently in the case of reopening, notice was required to be given to various regulatory authorities and court or tribunal is required to take into consideration representations of such regulatory authorities . Surprisingly it did not provide for representation to persons concerned such as auditors even though court/ tribunal had an inherent power to give notice to any other interested parties.      This amendment will remove this anomaly since it is now provided in the section itself. 

Existing section did not provide the time limit up to which reopening could be done

CAA, 2017 now provides that reopening cannot be done for a period earlier than 8 financial years immediately preceding the current financial year unless Central Government has given a direction under Section 128(5) for maintaining the accounts for a longer period.

Section 128(5) provides for the period for which books are required to be maintained which cannot go beyond 8 financial years immediately preceding current financial year except with the permission of the Central Government.

Thus the amendment seeks to align the period of maintenance of books of accounts with the reopening.

The financial statement, including consolidated financial statement, if any, shall be approved by the Board of Directors before they are signed on behalf of the Board at least by the chairperson of the company where he is authorised by the Board or by two directors out of which one shall be managing director and the Chief Executive Officer, if he is a director in the company, the Chief Financial Officer and the company secretary of the company, wherever they are appointed, or in the case of a One Person Company, only by one director, for submission to the auditor for his report thereon.( Section 134) 

The financial statement, including consolidated financial statement, if any, shall be approved by the Board of Directors before they are signed on behalf of the Board by the chairperson of the company where he is authorised by the Board or by two directors out of which one shall be managing director, if any, and the Chief Executive Officer, the Chief Financial Officer and the company secretary of the company, wherever they are appointed, or in the case of One Person Company, only by one director, for submission to the auditor for his report thereon .

The amendment provides that the Chief Executive Officer shall sign the financial statements irrespective of the fact whether he is a director or not because Chief Executive Officer is a Key Managerial Personnel, and is responsible for the overall management of the company. Further, since the appointment of a managing director is not mandatory for all companies, it is proposed to insert the words “if any”, after the words “managing director”.

Presently extract of Annual Return is required to be annexed to the Board’s Report. ( Section 134)

Now annual return is to be placed on the website and web address is required to be mentioned in the Board’s report.

The Requirement of having an extract of Annual return (Form MGT-9) has been done away with by placing the copy of annual return on the website of the company (if any) and the web address/ link is to be provided. As mentioned in the Annual Return part above, this seeks to avoid duplication and voluminous information which was associated with report of the Board of Directors. 

Right of member to copies of audited financial statement [ Section 136(1) ]

A copy of the financial statements, including consolidated financial statements, 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 every member of the company, to every trustee for the debenture-holder of any debentures issued by the company, and to all persons other than such member or trustee, being the person so entitled, not less than 21 days before the date of the meeting:

A provision is now made for a situation where the required copies are sent less than 21 days before the date of the meeting. Accordingly, If the copies of the documents are sent less than 21 days before the date of the meeting, they shall, notwithstanding that fact, be deemed to have been duly sent if it is so agreed by members—

(a) holding, if the company has a share capital, majority in number entitled to vote and who represent not less than 95% of such part of the paid-up share capital of the company as gives a right to vote at the meeting; or

(b) having, if the company has no share capital, not less than 95% of the total voting power exercisable at the meeting:

Amendment to sub-section (1) of section 136 provides that copies of audited financial statements and other documents may be sent at shorter notice if ninety-five percent of members entitled to vote at the meeting agree for the same.

Section 101 of the Act provides that the consent of members holding at least ninety-five percent of the voting power be obtained to call a general meeting at a notice shorter than twenty-one days.

For circulation of annual accounts to members, the MCA had clarified by way of a circular dated 21^st July 2015 that the shorter notice period would also apply to the circulation of annual accounts. It is now provided in the Amendment Bill itself.

Appointment and Ratification:

It was provided that every company shall, at the first annual general meeting, appoint an individual or a firm as an auditor who shall hold office from the conclusion of that meeting till the conclusion of its sixth annual general meeting and thereafter till the conclusion of every sixth meeting.

It was further required that the company shall place the matter relating to such appointment for ratification by members at

every annual general meeting.( Section 139)

The requirement to place the matter

relating to such appointment for

ratification by members at every annual general meeting has been removed.

In view of this amendment, controversy as to whether the form is required to be filed with ROC after every ratification stands resolved.

Besides, inconsistency between removal (which required Special Resolution and Central Government Approval) and non ratification (which required only Board Approval) stands resolved.

Resignation of auditor:

The penalty for non-filing of the return of resignation with the Registrar made the auditor punishable with fine, not less than fifty thousand rupees but which may extend to five lakh rupees.( Section 140)

The penalty for non-filing of the return of resignation with the Registrar shall now make the auditor punishable with fine not be less than fifty thousand rupees or the remuneration of the auditor,

whichever is less.

This form filing requirement was to be complied by the Auditor who was resigning. (Form ADT 3).

Eligibility :

Presently, it was provided in Section 141(3)(i) as under: The following persons shall not be eligible for appointment as an auditor of a company, namely:-

(i) any person whose subsidiary or associate company or any other form of entity, is engaged as on the date of appointment in consulting and specialised services as provided in section 144.

In section 141 of the principal Act, in sub-section (3), for clause (i), the following clause shall be substituted namely:-

(i) a person who, directly or indirectly, renders any service referred to in Section 144 to the company or its holding company or its subsidiary company.

Explanation.—For the purposes of this clause, the term “directly or indirectly” shall have the meaning assigned to it in the Explanation to section 144.‘

Existing provisions were not very happily worded and gave an impression that Auditor could not provide services referred to in Section 144 to any other company.

Amendment now made makes it clear that such services are not to be provided to auditee company or its holding or subsidiary company.

Access to the records :

Presently the proviso to Section 143(1) reads as under :

Provided that the auditor of a company which is a holding company shall also have the right of access to the records of all its subsidiaries in so far as it relates to the consolidation of its financial statements with that of its subsidiaries.

(i) in sub-section (1), in the proviso, for the words “its subsidiaries”, at both the places, the words “its subsidiaries and associate companies” shall be substituted;

The change now made will enable auditors of the holding  company to have right to access records of associate companies.

As associate includes, Joint Venture (JV), access will now be available to the records of JVs also.

Internal Financial Controls:

Presently as per the provisions of Section 143(3)(i) auditor is required to report :

whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls.

Amendment provides as under:

in sub-section (3), in clause (i) for the words “internal financial controls system”, the words “internal financial controls with reference to financial statements” shall be substituted;

This amendment is in pursuance of the suggestion of Companies Law Committee in Para 10.11which are worth noting:

Section 143 (3) (i) requires the auditor to state in his report whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls. This has to be read with Section 134 (5) (e) on the Directors’ Responsibility Statement which also defines internal financial controls, and Rule 8(5)(viii) of Companies (Accounts) Rules, 2014. Rule 10A of the Company (Audit and Auditors) Rules, 2014, makes the requirement under Section 143(3)(i) optional for FY 14-15 and is mandatory from FY 15-16 onwards. It has been expressed that auditing internal financial control systems by auditors would be an onerous responsibility. It was also expressed that their responsibility should be limited to the auditing of the systems with respect to financial statements only and that this cannot be compared with the responsibility of directors which is wider and can be discharged as they have other resources like internal auditors, etc. who can be used for this purpose. In this regard, the Committee recommended that the reporting obligations of auditors should be with reference to the financial statements.

Thus this amendment is now brought in line with the Guidance Note issued by ICAI. 

Applicability :

Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an Independent Director.

In section 135 of the principal Act,—

in sub-section (1) –

(a) for the words “any financial year”, the words “the immediately preceding financial year” shall be substituted;

(b) the following proviso shall be inserted, namely:—

“Provided that where a company is not required to appoint an independent director under sub-section (4) of section 149, it shall have in its Corporate Social Responsibility Committee two or more directors.”;

Eligibility criteria for the purpose of constituting the corporate social responsibility committee and incurring expenditure towards CSR is proposed to be calculated based on immediately preceding financial year. Currently this eligibility is decided based on preceding three financial years.

In case of a company which is not required to appoint an Independent Director and such company is required to appoint CSR Committee, such committee can be constituted with two or more directors. 

Remuneration of Managerial Personnel ( Section 197)

First Proviso to Subsection 1 allowed the company in general meeting ( with the approval of the Central Government) to authorise the payment of remuneration exceeding 11% of the net profits of the company, subject to provisions of Schedule V.

The requirement of taking approval from Central Government has been done away with.

CLC has observed in Para 13.5 of the report as under :

Currently, the law in countries like the US, the UK and Switzerland, does not require the company to approach government authorities for approving remuneration payable to their managerial personnel, even in a scenario where they have losses or inadequate profits and empowers the Board of the companies to decide the remuneration payable to Directors.

Further, the Committee also recommended that the requirement for government approval may be omitted altogether, and necessary safeguards in the form of additional disclosures, audit, higher penalties, etc. may be prescribed instead.

Keeping in line this philosophy, Approval of Central Government is dispensed with and Special Resolution is replaced in the place. 

Second Proviso allowed companies to pass ordinary resolution in general meeting and prescribe remuneration in excess of limits specified therein.

The second proviso has been amended by replacing ordinary resolution by special resolution

This amendment is consequential.

Additionally a third proviso has been inserted which provides  that, where the company has defaulted in payment of dues to any bank or public financial institution or non-convertible debenture holders or any other secured creditor, the prior approval of the bank or public financial institution concerned or the non-convertible debenture holders or other secured creditor, as the case may be, shall be obtained by the company before obtaining the approval in the general meeting.

Equity demands that parties affected by any decision should be consulted prior to taking of such decisions. Although most lenders have such clauses as a part of their agreement, legal compulsion was lacking which is now provided for in the section itself.

Sub Section 3 :

Provided that in case a company had no profits or its profits were inadequate, the company could not pay to its directors, including any managing or whole-time

director or manager, by way of remuneration any sum exclusive of any fees payable to directors under sub-section (5) except in accordance with the provisions of Schedule V and if it was not able to comply with such provisions, with the previous approval of the Central Government.

the words “and if it is not able to comply with such provisions, with the previous approval of the Central Government” shall be omitted.

This amendment is consequential.

Sub Section 9:

If any director draws or receives, directly or indirectly, by way of remuneration any such sums in excess of the limit prescribed by this section or without the prior sanction of the Central Government, where it is required, he shall refund such sums to the company and until such sum is refunded, hold it in trust for the company.

Sub Section 9 is amended as under:

If any director draws or receives, directly or indirectly, by way of

remuneration any such sums in excess of the limit prescribed by this section or without approval required under this section, he shall refund such sums to the

company, within two years or such lesser period as may be allowed by the company, and until such sum is refunded, hold it in trust for the company.”;

Period of Recovery in the event of excess remuneration now stands extended to 2 years subject to passing of Special Resolution. Existing section did not provide for any time limit within which such excess remuneration paid was to be recovered. 

Sub Section 10:

The company shall not waive the recovery of any sum refundable to it under sub-section (9) unless permitted by the Central Government

Sub Section 10

The company shall not waive the recovery of any sum refundable to it under sub-section (9) unless approved by the company by special resolution within two years from the date the sum becomes refundable

Presently, act did not provide time limit within which refund of excess remuneration was to be made. This amendment is consequential to the amendment made in the previous clause.

Proviso inserted :

Provided that where the company has defaulted in payment of dues to any bank or public financial institution or non-convertible debenture holders or any other secured creditor, the prior approval of the bank or public financial institution concerned or the non-convertible debenture holders or other secured creditor, as the case may be, shall be obtained by the company before obtaining approval of such waiver.

Equity demands that parties affected by any decision should be consulted prior to taking of such decisions. Although most lenders have such clauses as a part of their agreement, legal compulsion was lacking which is now provided for in the section itself.

Sub Section 11:

In cases where Schedule V is applicable on grounds of no profits or inadequate profits, any provision relating to the remuneration of any director which purports to increase or has the effect of increasing the amount thereof, whether the provision be contained in the company‘s memorandum or articles, or in an agreement entered into by it, or in any resolution passed by the company in general meeting or its Board, shall not have any effect unless such increase is in accordance with the conditions specified in that Schedule and if such conditions are not being complied, the approval of the Central Government had been obtained.

Sub Section 11:

the words “and if such conditions are not being complied, the approval of the Central Government had been obtained” shall be omitted;

Thus in such cases, special resolution of the company in general meeting will suffice. The theme of the law makers now seems to be shifting to the self regulation rather than government approvals.

Sub Section 16:

The auditor of the company shall, in his report under section 143, make a statement as to whether the remuneration paid by the company to its directors is in accordance with the provisions of this section, whether remuneration paid to any director is in excess of the limit laid down under this

section and give such other details as may be prescribed.

Presently clause xi of CARO 2015 has mandated for this reporting which is now brought under the provisions of the act.   This will possibly lead to duplication of reporting unless MCA clarifies the position .

Sub Section 17:

On and from the commencement of the Companies (Amendment) Act, 2017, any application made to the Central Government under the provisions of this section [as it stood before such commencement], which is pending with that Government shall abate, and the company shall, within one year of such commencement, obtain the approval in accordance with the provisions of this section, as so amended.”

This provision is enabling provision which deals with approvals pending as on the date of the commencement of new section. This also shows lesser  indulgence of the government in the approval process. 

Section 198 : Calculation of profits.

Section 198 : Calculation of profits.

(3) In making the computation aforesaid, credit shall not be given for the following sums, namely:—

(a) profits, by way of premium on shares or debentures of the company, which are issued or sold by the company;

(3) In making the computation aforesaid, credit shall not be given for the following sums, namely:—

(a) profits, by way of premium on shares or debentures of the company, which are issued or sold by the company unless the company is an investment company as referred to in clause (a) of the Explanation to section 186

CLC in Para 13.9 observed as under:

Section 198(4) requires that while calculating profits for managerial remuneration, the profits on sale of investments be deducted. The Committee agreed to the argument that Investment Companies, whose principal business was sale and purchase of investments, would not be using the correct profit figures, and may need to comply with the requirements of Schedule V to pay remuneration to its managerial personnel. It was recommended, that specific provisions for such companies be incorporated in the Act. 

3) In making the computation aforesaid, credit shall not be given for the following sums, namely:—

“(f) any amount representing unrealised gains, notional gains or revaluation of assets.”;

This clause is newly added consequent upon Ind AS applicability to the companies.

In Para 13.7 of its report, CLC observed as under:

The Committee examined Section 198 as to whether it has outlived its utility in current times where the Accounting Standards prescribe a robust framework for the determination of yearly profit or loss for the company, and the possibility of using the net profit before tax as presented in the financial statements, for basing the determination of managerial remuneration. Alternative formulations were considered, but found to be more complex, and further the present formulation is well accepted. Therefore, no change, other than on account of requirement of Ind AS, was recommended.

This amendment is consistent with the amendment related to distributable profits for the purposes of dividends discussed above under Dividends.  

(4) In making the computation aforesaid, the following sums shall be deducted, namely:

(l) the excess of expenditure over income, which had arisen in computing the net profits in accordance with this section in any year which begins at or after the commencement of this Act, in so far as such excess has not been deducted in any subsequent year preceding the year in respect of which the net profits have to be ascertained;

( Portion marked in bold is omitted after amendment)

(4) In making the computation aforesaid, the following sums shall be deducted, namely:

(l) the excess of expenditure over income, which had arisen in computing the net profits in accordance with this section in any year which begins at or after the commencement of this Act, in so far as such excess has not been deducted in any subsequent year preceding the year in respect of which the net profits have to be ascertained;

CLC in Para 13.8 has observed as under :

Section 198(4)(l) mandates the deduction of ‘brought forward losses’ of the company while calculating the net profit, for the purpose of computing managerial remuneration in the subsequent years. However, the clause did not provide for the deduction of brought forward losses of the years prior to the commencement of the Act, which may be an inadvertent omission.  Thus amendment now made has amended Section 198(4)(l), to include brought forward losses of the years subsequent to the enactment of the Companies (Amendment) Act, 1960 and inadvertent omission existing is corrected .