The Companies Act, 2013 has been passed by the Parliament. It has received the assent of the President on 29th August, 2013. After the Act is notified it will replace the existing Companies Act, 1956. By a notification dated 12-09-2013, 98 out of 470 sections of the Act have been brought into force from 12.9.2013. The provisions relating to Management and Administration of companies and other relevant provisions are contained in the following sections of the New Act. Draft Rules relating these provisions have been issued by the Government for
Public Comments.
(i) Chapter VII – Section 88 to 122 – Management and Administration.
(ii) Chapter VIII – Section 123 to 127 – Declaration of Dividend
(iii) Chapter VI – Section 77 to 87 – Registration of charges.
Most of these provisions are similar to the provisions in the existing Act. Some of the important provisions which require attention during the course of management, administration and Declaration of Dividends by Companies are discussed in this Article.
1 Register of Members:
1.1 The provisions relating to maintenance of Register of Members. Debenture holders and any other securities in the company in section 88 of the New Act are similar to the provisions in sections 150 to 152 and 152A of the existing Act. Draft Rules 7.1 to 7.6 provide for the procedure and also prescribes Form in which the Register is to be maintained.
1.2 Sections 89 and 90 of the New Act which correspond to existing section 187C and 187D provide for declaration to be made by a person who does not hold beneficial interest in the shares registered in the company in his name. Similarly, the beneficial owner has also to make this declaration. This declaration is to be made in the prescribed form and submitted to the company within the prescribed time limit. Particulars of changes in beneficial interest are also to be filed with the company within 30 days of change. The company has to register particulars of such beneficial interest and file a return in the prescribed form with the ROC within 30 days of receipt of such declaration. Draft Rule 7.7 prescribes Forms for this purpose and also provides for procedure for this purpose.
1.3 The Central Government is given power to investigate about the beneficial ownership of shares in the company by appointing one or more competent persons under new section 90.
1.4 The above Register of members, debentureholders etc. can be closed for an aggregate period of 45 days in each year, but not exceeding 35 days at a time, u/s. 91 which corresponds to existing section 154. If the above Register is closed for more than the above period, the company and every defaulting officer will be liable to pay penalty of Rs. 5,000/- per day of default subject to maximum of Rs.1 lakh. It may be noted that Section 91 has come into force from 12-09-2013. Draft Rule 7.8 provides for procedure for this purpose.
1.5 If the company fails to maintain the register u/s. 88, the company and every defaulting officer shall be punishable with minimum fine of Rs. 50,000/- which may extend to Rs. 3 lakh. In the case of continuing default fine upto Rs. 10,00/- per day can also be charged.
1.6 If a person required to make declaration of beneficial interest u/s. 89, without reasonable cause, fails to make the declaration, he will be punished with fine upto Rs. 50,000/- . In case of continuing default fine upto Rs. 1,000/- per day can also be charged. Similarly, if the company makes default in filing return giving particulars of these declarations with ROC as required u/s. 89(6), it shall be liable to pay minimum fine of Rs. 500/- which may extend to Rs. 1,000/-. In the case of continuing default, further fine upto Rs. 1,000/- per day for the period of delay can be levied.
2. Annual return:
2.1 New Section 92 which corresponds to existing sections 159, 161 and 162 provides for filing the Annual Return with ROC within 60 days of holding Annual General Meeting. If such AGM is not held the Annual Return should be filed with ROC within 60 days of the last date when AGM was due to be held. In such a case the company will have to file a statement specifying reasons for not holding the AGM in time.
2.2 Broadly stated the Annual Return is to be prepared in the prescribed form containing the following particulars as on the last day of the financial year.
(i) Its Registered Office, principal place of business, particulars of its holding, subsidiary and associate companies.
(ii) Its shares, debentures and other securities and shareholding pattern.
(iii) Its indebtedness.
(iv) Its members and debenture-holders along with changes therein since the close of previous financial year
(v) Its promoters, directors, key managerial personnel (KMP) along with the charges therein since the close of the previous financial year.
(vi) Meetings of Members or a class thereof, Board and its various committees with attendance details.
(vii) Remuneration of Directors and KMP.
(viii) Penalty and punishment imposed on the company, its directors or officers with details of compounding of offenses and appeals made against such penalty or punishment.
(ix) Matters relating to certification of compliances, disclosures as may be prescribed.
(x) Details in respect of Shares held by FIIs giving their names, addresses etc. and percentage of shareholding as may be prescribed.
(xi) Such other matters as may be prescribed.
The annual return is to be signed by a Director and company secretary/company secretary in practice. In the case of one person company and small company, it is to be signed by the company secretary or, if there no secretary, by the director.
In the case of a listed company or such specified companies, as may be prescribed, the Annual Return is required to be certified by a company secretary in practice in the prescribed form.
2.3 An extract of the Annual Return in the prescribed form should form part of the Board Report.
Draft Rules 7.9, 7.10, and 7.12 provide for Forms of Annual Return etc and procedure to be followed for filing the Annual Return with ROC.
2.4 If the company does not file the Annual Return within 60 days as stated above or within the extended time as provided in section 403 with additional fees, the company shall be punishable with the minimum fine of Rs. 50,000/- which may extend to Rs. 5 lakh. Similarly, every defaulting officer will be punishable with imprisonment upto 6 months or with a minimum fine of Rs. 50,000/- which may extend to Rs. 5 lakh or with both. Similar fine can be levied on the company secretary in practice if his certificate is not in conformity with the requirements of the section.
2.5 Section 93 is a new section which provides that every listed company should file a return in the prescribed form with ROC with respect to changes in the number of shares held by promotors and top 10 shareholders within 15 days of such charge. Draft Rule 7.11 prescribes Form No.7.10 for this purpose.
2.6 New sections 94 and 95 which correspond to existing sections 163 and 164 provide for place at which Registers, Returns and other documents required to be maintained by the company shall be kept. These registers, documents etc.will be open for inspection by shareholders, debenture holders etc. Draft Rules 7.13 and 7.14 provide for detailed procedure for this purpose. It is provided that the copies of Annual Returns should be preserved for 8 years and Register of Debenture Holders, Foreign register of Members etc. should be preserved for 15 years.
3. Procedure for General Meetings:
3.1 New sections 96 to 122 deal with procedure to be followed for holding Annual General Meeting, Extra ordinary general meeting and other related matters. These sections are similar to the existing sections 166 to 197. The provisions made in the new sections being similar to existing provisions, some of the important provisions are stated in the following paragraphs.
3.2 Annual General Meeting (Section 96)
(i) One person company is not required to hold AGM.
(ii) All other companies have to hold AGM once every year within the same time limit as provided in existing sections 166 and 210. The only difference is that the first AGM which at present can be held within 18 months of date of incorporation will now required to be held within 9 months of the closing of the first financial year.
(iii) Under existing section 166 AGM can not be held on a ‘Public Holiday’. Now u/s. 96 AGM can be held on a “Public Holiday”. However, it cannot be held on a “National Holiday” as may be declared by the Central Government.
Further, under the new provision it is specifically provided that AGM can be held during business hours i.e. between 9.00 AM and 6.00 PM. The Central Government can grant exemption from this requirement, subject to such conditions which it may impose.
(iv) If there is a default in holding ay AGM, the Tribunal can, on an application by any member, direct the company to hold such a meeting subject to such conditions as the Tribunal may specify under new section 97.
(v) Similarly, the Tribunal, on its own or on an application by a Director or member, direct the company to hold any general meeting (other than AGM) subject to such conditions which it may specify under new section 98.
(vi) If there is default in holding any general meeting, in accordance with the above direction of the Tribunal the company and every defaulting officer of the company will be punishable with fine upto Rs1 lac. In case of continuing default a further fine upto Rs.5000/- per day during which default continues can be levied under new section 99.
3.3 Extraordinary General Meetings:
The procedure for calling an Extraordinary General Meeting in new section 100 is the same as in the existing section 169. This procedure is laid down in Draft Rule 7.15. This section has come into force from 12-09-2013.
3.4 Notices for General Meetings:
(i) New section 101 provides for notice to be given in writing or through electronic mode 21 clear days before the meeting in the same manner as provided in existing sections 171 and 172. However, a general meeting can be called by giving shorter notice if consent is given by at least 95% of members entitled to vote at such meeting.
(ii) Explanatory statement is to be annexed with every notice concerning each item of special business to be transacted at the General Meeting. New section 102 which corresponds to existing section 173 provides for this requirement. It explains the material facts in respect of which the explanation as under is to be provided:
(a) Nature of concern or interest, financial or otherwise in respect of each items of every director, manager, KMP, and their relatives.
(b) Any other information and facts that may enable members to understand the meaning, scope and implications of the items of business and to take decision thereon.
(iii) It is further provided in section 102 that if any item of specified business relates or affects any other company, the notice must disclose the extent of interest of every promoter, director, Manager or KMP of the company, if it is more than 2% of the paid up share capital of that company. This section has come into force on 12-09-2013.
(iv) Where, as a result of the non-disclosure or insufficient disclosure in the statement to be furnished as above by the promoter, director, manager or KMP, any benefit accrues to any of these persons, he shall hold the same in trust for the company and compensate the company to the extent of the benefit received by him.
(v) In the event of any contravention of this section, the defaulting promoter, director, manager, KMP or relatives of any of them shall be punishable with fine upto Rs.50000/-or 5 times the amount of the benefit received by such person, whichever is more.
(vi) The procedure for giving Notice of the General Meeting is given in Draft Rule 7.16.
3.5 Quorum for the General Meeting:
Under the existing section 174 quorum required for the General Meeting of members of public companies is 5 members personally present at the meeting, unless the articles stipulate a larger number. New section 103 provides for a quorum based on number of members of the company as under, unless the articles provide for larger numbers.
(i) 5 Members personally present if the number of members on the date of meeting is less than 1,000.
(ii) 15 Members, if the number of members is between 1,000 and 5,000.
(iii) 30 Members, if the number of Members are more than 5,000.
For private companies, the quorum of 2 members continue, as at present. Section 103 has come into force on 12-09-2013.
3.6 Procedure for conducting General Meeting:
(i) New sections 104 to 116, deal with the procedure for election of chairman, proxies, voting at general meeting etc. These provisions are similar to existing provision in sections 175 to 185 and 187 to 192A. Only section 108 is new. It provides that the Central Government may prescribe class of companies in which members will be allowed to exercise their voting rights by electronic means. It may be noted that Sections 104 to 107, 111 to 114 and 116 have come into force from 12-09-2013.
(ii) At present, section 190 does not provide for any requirement that members who give special notice should hold some minimum voting power in the company. New section 115, now provides that such special notice for consideration of a resolution as required under the Act or Articles can be given by such number of members holding not less than one percentage of total voting power or holding shares on which such aggregate sum not exceeding Rs. 5 lakh, as may be prescribed, has been paid up. (Refer Draft Rule 7.21).
(iii) It may be noted that new section 110 provides for passing resolutions by “Postal Ballot”. This provision is similar to existing section 192A. The company can use this procedure in respect of such items of business as the Central Government may by notification provide. (Refer Draft Rule 7.20 (16).
(iv) Form of Proxy to be given u/s. 105 (Form No.7.11) is prescribed under Draft Rule 7.17. Procedure for voting through electronic means is given in Draft Rule 7.18. Similarly procedure for Poll process is provided in Draft Rule 7.18 and procedure for Postal Ballot is provided in Draft Rule 7.20.
3.7 Resolutions and Agreements to be filed with ROC:
New section 117, which corresponds to existing section 192, provides for filing of Resolutions and Agreements specified in section 117(3) with ROC within 30 days. In the event of contravention of the provision of this section the company shall be punishable with minimum fine of Rs. 5 lakh which may extend to Rs. 25 lakh. Similarly, every defaulting officer shall be punishable with minimum fine of Rs. 1 lakh which may extend to Rs. 5 lakh. Form No. 7.14 is prescribed by Draft Rule 7.22.
3.8 Minutes of Meetings:
(i) New section 118 corresponds to existing sections 193 to 195 and 197. It provides for maintenance of minutes of proceedings of General Meetings, Board meetings and other meetings. It is specifically provided in this new section that while recording these minutes, the company shall observe the “Secretarial Standards” in this respect, issued ICSI as approved by the Central Government.
(ii) In the event of non-compliance with the requirement of this section, the company will be liable to penalty of Rs. 25,000/- and every defaulting officer shall be liable to pay penalty of Rs. 5,000/-. If any person is found guilty of tempering with the minutes, he shall be punishable with imprisonment upto 2 years and with minimum fine of Rs. 25,000/- which may extend to Rs. 1 lakh.
(iii) New section 119 which corresponds existing to section 196 provides for inspection of the minute books of general meetings of the company. If such inspection is refused, monetary penalty similar to the one stated in (ii) above can be levied on the company and the defaulting officer.
(iv) Detailed procedure for this purpose is provided in Draft Rules 7.23 and 7.24.
3.9 Some New Provisions:
Sections 120 to 122 are new. They provide as under.
(i) Maintenance and Inspection of Document in Electronic Form Section 120 provides that any document, record, register, minutes etc. which are required to be kept by a company and allowed to be inspected or copied by any person can be kept, inspected or copies given in electronic form in the prescribed manner. This is prescribed in Draft Rule 7.25.
(ii) Report on AGM
Under Section 121 a listed company is required to prepare in the prescribed manner a report on each AGM stating that such meeting was convened, held and conducted as required under the companies Act. This report is to be filed with ROC within 30 days of conclusion of AGM. Draft Rule 7.26 gives the contents of this Report. In the event of contravention of this provision, the company will be punishable with minimum fine of Rs. 1 lakh which may extend to Rs. 5 lakh. Similarly, every defaulting officer will be punishable with minimum fine of Rs. 25,000/- which may extend to Rs. 1 lakh.
(iii) One person company
Section 122 provides that sections 98 and 100 to 111 shall not apply to one person company (OPC) . If a company is required to transact any business by ordinary or special resolution u/s. 114, it shall be sufficient in the case of OPC if the said resolution is recorded in the minute book which shall be signed by the Director.
4. Registration of Charges:
4.1 New Sections 77 to 87 deal with the procedure relating to Registration of charges. These provisions are similar to provisions of sections 125 to 127, 130, 134, 135, 137, 138 and 141 to 143 of the existing Act. For this purpose, section 2(16) defines the word ‘charge’ to mean “An interest or lien created on the property or assets of a company or any of its undertakings or both as Security and includes a Mortgage. Section 2(16) has come into force from 12- 09-2013. Broadly stated, the new provisions are as under.
(i) U/s. 77 every charge on the property or as-sets (whether tangible or intangible) created by a company (whether public or private) shall be registered with ROC within 30 days of creation of such charge. For this purpose, the prescribed form will have to be filed with the fees. In the event of any delay, ROC can permit the registration of such charge within 300 days on payment of additional fees.
(ii) The existing section 125(4) requires a company to register only 9 type of charges. Under the new provision every charge created by it on property, assets or undertaking is to be registered u/s. 77.
(ii) ROC has to give a Certificate of such registration in the prescribed form.
(iv) If the company fails to register a charge, the person in whose favour charge is created can apply to ROC in the prescribed manner, as provided in section 78.
(v) ROC has to keep a Register of charges in the prescribed form. This Register will be open to inspection to any person on payment of fees.
(vi) Any modification of charge is also required to be registered with ROC.
(vii) On satisfaction of any charge, it is also to be registered with ROC within 30 days. In the event of delay, ROC can permit such registration within 300 days on payment of additional fees.
(viii) The company has also to maintain a Register of charges in the prescribed manner. This register shall be open to inspection by any member or creditor or by any other person subject to such reasonable restrictions as the company may by its AOA, impose.
(ix) If the company does not register such creation, modification or satisfaction of charge the company or any other person can apply to the Central Government u/s. 87. The Government can order such registration of charge or its modification, satisfaction etc. on such terms and conditions as it may consider appropriate.
(x) Draft Rules 6.1 to 6.10 prescribes Forms to be filed with ROC and other procedure to be followed and documents to be maintained for this purpose.
4.2 A new provision is made in section 83. It authorizes the ROC to make entries in the Register of charges if any evidence is produced before him about creation of a charge or modification/satisfaction of charge on any property/assets by a company. ROC has to intimate the concerned parties about making such entry within 30 days.
4.3 If there is any contravention of the provisions, section 86 provides for the following penalties.
(i) The company shall be punishable with a minimum fine of Rs. 1 lakh which may extend to Rs. 10 lakh.
(ii) Every defaulting officer shall be punishable with imprisonment upto 6 months or with minimum fine of Rs. 25,000/- which may extend to Rs. 1 lakh or with both.
The above penalty can be levied even if the company has complied with the above provisions but filed the particulars of charges, modification or satisfaction etc. of the charges within the extended time as stated above. This section has come into force on 12-09-2013.
5. Declaration and Payment of Dividend:
Declaration of Dividend:
5.1 New Sections 123 to 127 provide for declaration and payment of Dividends by a Company. These Sections are similar to existing sections 205 to 207. Broadly stated these provisions are as under:-
(i) The dividend can be declared and paid only out of the following profits;
(a) Profits of the financial year, after providing depreciation as stated in Section 123(2) read with Schedule II.
(b) Accumulated profits of the earlier years, after providing for depreciation u/s 123(2) read with Schedule II.
(c) Out of money provided by Central or State Government for payment of dividend in pursuance of a guarantee given by the Government.
(ii) Existing section 205(2A) provides that a dividend can be declared for any financial year only after transferring such percentage of profit not exceeding 10%, as may be prescribed. In the new section 123, it is provided that such dividend may be declared or paid after transferring such percentage of its profits for the financial year to reserves as the Company may consider appropriate. Thus a Company can declare or pay dividend in any year even without making such transfer to reserves.
(iii) In the event of inadequacy or absence of profits in any financial year, the company can declare dividend out of its “Free Reserves” in accordance with the prescribed Rules.(Refer Draft Rule 8.1)
(iv) Board of Directors can declare “Interim Dividend” out of surplus available in the Profit & Loss Account and out of profits of the Financial Year upto the date of declaration of such dividend. If the Company has made a loss upto the end of the quarter, preceding the date of declaration of interim dividend, the Board cannot declare interim dividend at a rate higher than the average dividend declared by the Company during the preceding 3 Financial Years.
(v) The amount of dividend, including interim dividend, has to be deposited in a Separate Scheduled Bank Account within 5 days from the date of declaration.
(vi) It will be possible for the Company to utilise the profits and reserves for issue of Bonus
Shares or for payment of Unpaid amount on partly paid shares.
(vii) It may be noted that a Company cannot declare or pay dividend if it has made de-fault in repayment of Deposits or Interest as provided in sections 73 and 74 till such time when the default continues.
(viii) Draft Rules 8.1 and 8.2 provides for certain conditions to be complied with before declaring dividend.
5.2 Unclaimed Dividend Account:
(i) If any dividend is not claimed or paid within 30 days from the date of declaration, it has to be transferred, within 7 days, to a “Unpaid Dividend Account” to be opened in a Scheduled Bank.
(ii) If any amount of unpaid dividend is not claimed or paid within 90 days, the company has to put the list of such unpaid dividend on the website of the company or other approved website in the prescribed manner. Draft Rule 8.3 provides for procedure for this purpose.
(iii) In the event of delay in transferring the amount to such special account, the company will have to pay 12% P.A. interest on the unclaimed dividend amount.
(iv) If the unclaimed dividend is not claimed by any shareholder for 7 years, the company will have to transfer the said amount to “Investor Education and Protection Fund” as provided in section 125. Procedure for this is provided in Draft Rule 8.4.
(v) Section 124(6) makes a departure from the existing provisions of section 205C and provides that even the shares on which dividend is not claimed for 7 years will have to be transferred to the above Fund. For this purpose, a statement in the prescribed form is to be filed with the Administrator of the Fund. The shareholder whose shares are so transferred to the above Fund will have to make a claim for return of such shares with the Administrator of the Fund in the prescribed manner. Draft Rule 8.5 gives detailed procedure for this purpose.
5.3 Investor Education and Protection Fund:
New Section 125, corresponding to existing section 205C provides for establishment of Investor Education and Protection Fund. Central Government is authorised to establish this Fund and prescribe Rules for its administration as provided in section 125. Besides the unclaimed Dividend outstanding for 7 years and shares relating to such dividend, the company has also to transfer the following amounts which have remained unclaimed for 7 years.
(a) Application Money received by the Company for allotment of shares or securities and due for refund.
(b) Matured Deposits due with Interest.
(c) Matured Debentures due with interest.
(d) Sale proceeds of Fractional Shares arising out of issue of Bonus Shares, Merger and Amalgamation.
(e) Redemption amount of Preference Shares remaining unpaid or unclaimed.
Detailed provisions are made in section 125 for administration of “Investment Education and Protection Fund”, investment of funds, return of the funds to claimants and utilisation of surplus funds. Central Government has to prescribe Rules for this purpose. It is also provided that the existing balance in Investor Education and Protection fund created u/s. 205C of the existing Act shall also be transferred to the new fund to be established under new section 125. Further, amounts transferred to the existing fund u/s. 205C (2) (a) to (d) of the existing Act can be refunded to the concerned person according to the Rules to be prescribed under new section 125. Detailed provision is given in Draft Rules 8.6 and 8.7.
5.4 Penalties for Defaults:
(i) If a Company contravenes provisions relating to unclaimed Dividends as stated in section 124, it will be punishable with a minimum fine of Rs. 5 lakh which may extend to Rs. 25 lakh. Similarly every defaulting officer will be punishable with a minimum fine of Rs. 1 lakh which may extend to Rs. 5 lakh.
(ii) If a Company has declared dividend but the same has not been paid or the warrant for the dividend has not been posted within 30 days from the date of declaration, the following penalties can be levied.
(a) Every director who is knowingly a party to the default will be punishable with imprisonment upto 2 years and with minimum fine of Rs. 1, 000/- per day during which such default continues.
(b) The Company will have to pay interest @ 18% p.a. on the dividend amount for the period of delay.
Proviso to section 127 states that under cer-tain circumstances the above penalty under (ii)will not be leviable.
(iii) It may be noted that the above minimum fine is leviable at fixed amount without reference to the amount of dividend in respect of which the default has occurred. To the extent the above penalty provisions are harsh.
(iv) Section 127 has come into force from 12-09-2013.
6. To Sum Up
6.1. The above provisions for Management and Administration of companies in the New Act are more or less on the same lines as the existing provisions of the Companies Act, 1956. These provisions are mostly procedural. The company management will have to comply with the new procedure in the day to day working. Some of the procedures have been streamlined in order to improve Corporate Governance and also to safeguard the interest of the stakeholders.
6.2 The provisions relating to declaration and payment of dividend have also been streamlined under the new Act. In order to protect the interest Fixed Depositors it is now provided that no dividend on equity shares can be declared during the period when default relating to repayment of Fixed Deposit or Interest due continues. However, the minimum fine to be levied for default relating to payment of dividend is fixed without reference to the amount of dividend involved. To this extent the provision is also harsh.
6.3 Taking an overall view of the provisions relating to management and administration of companies under the new Act, including provisions relating to declaration and payment of dividends, acceptance of public deposits and registration of charges it can be stated that these will streamline and simplify the day to day procedural requirements. The officers in charge of the management and administration of companies will have to be vigilant in complying with the new provisions to avoid any defaults. If the new provisions are complied with in the spirit in which they are enacted, the quality of Corporate Governance will improve to a great extent in the coming years.
