PART III OF SECOND RESEARCH SERIES ON COMPANIES ACT, 2013

Acceptance & repayment of deposits [Ref: Section 73, 74 76 and Companies (Acceptance of Deposits), Rules 2014

As per Companies (Acceptance of Deposits), Rules 2014, deposits inter alia includes (i) loan and (ii) application money or advance received for subscription for securities which have not been allotted within 60 days from the date of receipt of the application money and such application money or advance is not refunded to the subscribers within 15 days from the date of completion of 60 days.

Inter corporate deposits continue to remain excluded from the purview of deposits like the 1956 Act.

Acceptance of deposits from members Companies Act, 2013 prescribes stringent norms for acceptance of deposits from members.

Some of the important conditions are as under:

• No company can accept or renew any deposit from its members, if the amount of such deposits together with the amount of other deposits outstanding as on the date of acceptance or renewal of such deposits exceeds 25% of the aggregate of the paid-up share capital and free reserves of the company;
• An “eligible company” cannot accept or renew any deposit from its members, if the amount of such deposit together with the amount of deposits outstanding as on the date of acceptance or renewal of such deposits from members exceeds 10% (ten per cent) of the aggregate of the paid-up share capital and free reserves of the company;
• An “eligible company” means a public company, having a net worth of not less than Rs. 100 crores or a turnover of not less than Rs. 500 crores and which has obtained the prior consent of the company in general meeting by means of a special resolution and also filed the said resolution with the Registrar of Companies before making any invitation to the public for acceptance of deposits.
• issuance of a circular in the prescribed form to its members including therein a statement showing the financial position of the company, the credit rating obtained, etc & filing the same with the RoC within 30 days from the date of issue;
• Every eligible company intending to invite deposits has to issue a circular in the form of an advertisement in an English newspaper and in one vernacular newspaper having wide circulation in the State in which the registered office of the company is situated.
• A circular or circular in the form of advertisement issued shall be valid until the expiry of 6 months from the date of closure of the financial year in which it is issued or until the date on which the financial statement is laid before the company in annual general meeting or, where the annual general meeting for any year has not been held, the latest day on which that meeting should have been held in accordance with the provisions of the Act, whichever is earlier.
• depositing a minimum sum of 15% of the amount of its deposits maturing during a financial year and the financial year next following, and kept in a scheduled bank in a separate bank account to be called as deposit repayment reserve account and the said account cannot be used by the company for any purpose other than repayment of deposits;
• Enter into a contract for providing deposit insurance at least 30 days before the issue of circular or advertisement or at least 30 days before the date of renewal, as the case may be. The amount specified in the deposit insurance contract will be deemed to be the amount in respect of both principal amount and interest due thereon. The deposit insurance contract has to specifically provide that in case the company defaults in repayment of principal amount and interest thereon, the depositor shall be entitled to the repayment of principal amount of deposits and the interest thereon by the insurer up to the aggregate monetary ceiling as specified in the contract.
• The amount of insurance premium paid on the insurance of such deposits has to be borne by the company itself and shall not be recovered from the depositors by deducting the same from the principal amount or interest payable thereon.
• The company cannot not reserve to itself, either directly or indirectly, a right to alter, to the prejudice or disadvantage of the depositor, any of the terms and conditions of the deposit, deposit trust deed and deposit insurance contract after circular is issued and deposits are accepted.
• Certifying that the company has not committed any default in the repayment of deposits (or payment of interest) accepted either before or after the commencement of the Companies Act, 2013.
• Providing security, if any for the due repayment of the amount of deposit or the interest thereon including the creation of such charge on the property or assets of the company. For the purposes of providing security, the company inviting secured deposits shall provide for security by way of a charge on its assets as referred to in Schedule III of the Companies Act, 2013 excluding intangible assets of the company for the due repayment of the amount of deposit and interest thereon for an amount which shall not be less than the amount remaining unsecured by the deposit insurance.
• The security for deposits is required to be created in favour of a trustee for the depositors on specific movable or immovable property of the company.
• No person including a company that is in the business of providing trusteeship services shall be appointed as a trustee for the depositors, if the proposed trustee – (a) is a director, KMP or any other officer or an employee of the company or of its holding, subsidiary or associate company or a depositor in the company; b) is indebted to the company, or its subsidiary or its holding or associate company or a subsidiary of such holding company; c) has any material pecuniary relationship with the company; d) has entered into any guarantee arrangement in respect of principal debts secured by the deposits or interest thereon; e) is related to any person specified in point (a) above.
• the company has to ensure that the total value of the security either by way of deposit insurance or by way of charge or by both on company’s assets shall not be less than the amount of deposits accepted and the interest payable thereon

Repayment of existing deposits

As per section 74 of the Companies Act, 2013, in respect of any deposit accepted by a company under Companies Act, 1956 (“Earlier Deposits”), the amount of such deposit or part thereof or any interest due thereon which remains unpaid on such commencement or becomes due at any time thereafter, the company is required to: a) File with the RoC within 3 (three) months with effect from April 1, 2014 or from the date on which such payments are due, a statement of all the Earlier Deposits accepted by the company and sums remaining unpaid on such amount with the interest payable thereon along with the arrangements made for such repayment; and b) Repay the Earlier Deposits within 1 (one) year from April 1, 2014 or from the date on which such payments are due, whichever is earlier.

However, as per Companies (Acceptance of Deposits), Rules 2014, in case of Earlier Deposits, if the Company has been repaying such deposits and interest thereon in accordance with provisions of the Companies Act, 1956, the aforesaid point (1.4.1 (b)) of repayment shall be deemed to have been complied with if the company complies with requirements under Companies Act, 2013 and the aforesaid rules and continues to repay such deposits and interest due thereon on due dates for the remaining period of such deposit in accordance with the terms and conditions and period of such Earlier Deposits and in compliance with the requirements under the Act and under Companies Act, 2013 and the aforesaid rules.

Acceptance of deposits from public

Only an “eligible company” as defined above can accept deposits from public with prior consent of the company in general meeting by means of a special resolution.

Companies which accept deposits from the public also have to comply with the provisions and conditions which are applicable to acceptance of deposits from members as prescribed under section 73 and the Companies (Acceptance of Deposits), Rules 2014,

the amount of such deposit together with the amount of such other deposits, (other than the deposits accepted from members), outstanding on the date of acceptance or renewal must not exceed 25% (twenty-five per cent) of aggregate of the paid-up share capital and free reserves of the company.

Company is required to obtain rating (including its networth, liquidity and ability to pay its deposits on due date) from a recognised credit rating agency for informing the public the rating given to the company at the time of invitation of deposits from the public which ensures adequate safety and the rating shall be obtained for every year during the tenure of deposits.

Register of members [Ref: Section 88 and Companies (Management and Administration) Rules, 2014]

As per section 88, Companies are now required to maintain register of debenture holders and register of security holders along with register of members.

As per the said rules, the register of members which is required to be maintained under the prescribed format must (in addition to the particulars prescribed under Companies Act, 1956) inter alia mention e-mail address; PAN or CIN, as the case may be, UIN of the member, if any and instructions, if any, given by the member with regard to sending of notices etc.

In the case of existing companies, registered under the Companies Act, 1956, particulars shall be compiled within 6 (six) months from the date of commencement of the said rules (likely to be April 1, 2014)

Consequent upon any forfeiture, buy-back, reduction, sub- division, consolidation or cancellation of shares, issue of sweat equity shares, transmission of shares, shares issued under any scheme of arrangements, mergers, reconstitution or employees stock option scheme or by issue of duplicate or new share certificates or new debenture or other security certificates, entries have to be made within 7 (seven) days after approval by the Board or committee, in the register of members or in the respective registers, as the case may be.

In case of companies whose securities are listed on a stock exchange in or outside India, the particulars of any pledge, charge, lien or hypothecation created by the promoters in respect of any securities of the company held by the promoter including the names of pledgee/pawnee and any revocation therein have to be entered in the register within 15 (fifteen) days from such an event.

Register of debenture holders and other security holders [Ref: Companies (Management and Administration) Rules, 2014]

Every company which issues or allots debentures or any other security is required to maintain a separate register of debenture holders or security holders, as the case may be, for each type of debentures or other securities in the prescribed format.

If any order is passed by any judicial or revenue authority or by SEBI or NCLT attaching the shares, debentures or other securities and giving directions for remittance of dividend or interest, the necessary reference of such order shall be indicated in the respective register.

Annual Return [Ref: Section 92 and Companies (Management and Administration) Rules, 2014]

Detailed particulars have to be submitted under annual return inter alia regarding indebtedness, changes members, debenture holders and KMP since the close of the previous financial year, Board and members’ meetings along with attendance details, remuneration of directors and KMP, matters relating to certification of compliances, details relating to shares held by FII etc.

An annual return has to be signed by a director and the company secretary, or where there is no company secretary, by a company secretary in practice. The annual return, filed by a listed company or a company having paid- up share capital of Rs. 10,00,00,000 (Rupees ten crore or more or turnover of Rs. 50,00,00,000 (Rupess fifty crore) or more, have to be certified by a practicing Company Secretary.

An extract of the annual return in the prescribed form have to be a part of the Board’s report.

Change in promoter’s and top 10 shareholders shareholding [Ref: Section 93 and Companies (Management and Administration) Rules, 2014]

Every listed company is required to file a return in the prescribed form with the RoC with respect to changes relating to either increase or decrease of 2% (two percent), or more in the shareholding position of each of promoters and each of top ten shareholders of the company in each case, either value or volume of the shares, within 15 (fifteen) days of such change.

Annual General Meeting [Ref: Section 96 and Companies (Management and Administration) Rules, 2014]

The first AGM can be held within a period of 9 months from the date of closing of the 1st financial year.

Notice of general meeting [Ref: Section 101 and Companies (Management and Administration) Rules, 2014]

Unlike Companies Act, 1956 wherein a private company had the flexibility to call a general meeting by giving less than 21 days by providing the said provision under its articles, under the new Act even private companies are required to give the said notice within 21 days.

For convening meeting at a shorter notice whether for an Annual General meeting (“AGM”) or an extra ordinary general meeting (“EGM”), consent of at least 95% of members entitled to vote is required. Under the 1956 Act, there was a difference in % of members whose consent was required for AGM and EGM where in for EGM consent of 95% of members was required and for AGM, consent of all members was required.

Under the 2013 Act, detail provisions have been made for sending notice by electronic mode which includes the following:

the company is required provide an advance opportunity atleast once in a financial year, to the member to register his e-mail address and changes therein and such request may be made by only those members who have not got their email id recorded or to update a fresh email id and not from the members whose e-mail ids are already registered;

The subject line in e-mail must state the name of the company, notice of the type of meeting, place and the date on which the meeting is scheduled;

When notice or notifications of availability of notice are sent by e-mail, the company is required to ensure that it uses a system which produces confirmation of the total number of recipients e-mailed and a record of each recipient to whom the notice has been sent and copy of such record and any notices of any failed transmissions and subsequent resending is required to be retained by or on behalf of the company as ‘‘proof of sending’’.

the company may send e-mail through in-house facility or its registrar and transfer agent or authorise any third party agency providing bulk e-mail facility;

the notice made available on the electronic link or Uniform Resource Locator has to be readable, and the recipient should be able to obtain and retain copies and the company is required to give the complete URL or address of the website and full details of how to access the document or information;

and the notice of the general meeting of the company shall be simultaneously placed on the website of the company if any and on the website as may be notified by the Central Government.

Statement to be annexed to the notice [Ref: Section 102]

Unlike the 1956 Act, where under an explanatory statement, the items which were considered to be “material facts” were not specified, the 2013 Act requires that a statement setting out the following material facts concerning each item of special business to be transacted at a general meeting, must be annexed to the notice calling such meeting, namely:— a) the nature of concern or interest, financial or otherwise, if any, in respect of each items of— (i) every director and the manager, if any; (ii) every other key managerial personnel; and (iii) relatives of the persons mentioned in sub-clauses (i) and (ii); and 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.

where any item of special business to be transacted at a meeting of the company relates to or affects any other company, the extent of shareholding interest in that other company of every promoter, director, manager, if any, and of every other KMP of the first mentioned company is also be set out in the statement, if the extent of such shareholding is not less than 2% (two per cent) of the paid-up share capital of that company.

Where as a result of the non-disclosure or insufficient disclosure any benefit which accrues to such promoter, director, manager or other key managerial personnel or their relatives, either directly or indirectly, the promoter, director, manager or other KMP, as the case may be, is required to hold such benefit in trust for the company, and shall, without prejudice to any other action being taken against him under the Act or under any other law for the time being in force, be liable to compensate the company to the extent of the benefit received by him.

Voting through electronic means [Ref: Section 108 and Companies (Management and Administration) Rules, 2014]

Every listed company or a company having more than 1,000 (One thousand) shareholders, is required to provide to its members facility to exercise their right to vote at general meetings by electronic means.

the expression ‘‘voting by electronic means’’ is defined to mean a ‘secured system’ based process of display of electronic ballots, recording of votes of the members and the number of votes polled in favour or against, such that the entire voting exercised by way of electronic means gets registered and counted in an electronic registry in a centralized server with adequate ‘cyber security’;

the expression ‘‘secured system’’ has been defined to mean computer hardware, software, and procedure that – (a) are reasonably secure from unauthorized access and misuse; (b) provide a reasonable level of reliability and correct operation; (c) are reasonably suited to performing the intended functions; and (d) adhere to generally accepted security procedures.

the expression “Cyber security” has been defined to mean protecting information, equipment, devices, computer, computer resource, communication device and information stored therein from unauthorised access, use, disclosures, disruption, modification or destruction.

Detailed procedure has been set out in the rules regarding voting by electronic means which include the following:

• the notice is required to be placed on the website of the company, if any and of the agency forthwith after it is sent to the members;
• the notice is required to clearly indicate the process and manner for voting by electronic means and the time schedule including the time period during which the votes may becast and shall also provide the login ID and create a facility for generating password and for keeping security and casting of vote in a secure manner;
• the company is required to cause an advertisement to be published, atleast 5 (five) days before the date of beginning of the voting period, in a vernacular newspaper and in in an English newspaper (both having a wide circulation in that district), and specifying therein, inter alia, the date and time of commencement end of voting through electronic means, contact details of the person responsible to address the grievances connected with the electronic voting etc;
• the e-voting has to remain open for not less than 1 (one) day and not more than 3 (three) days;
• once the vote on a resolution is cast by the shareholder, he cannot be allowed to change it subsequently;
• the Board of directors must appoint one scrutinizer, who may be a practicing CA or a CS or a cost accountant or an advocate (any of whom is not in employment of the company) and is a person of repute who, in the opinion of the Board can scrutinize the e-voting process in a fair and transparent manner;
• within a period of 3 (three) working days from the date of conclusion of e-voting period, the scrutinizer is required to unblock the votes in the presence of at least 2 (two) witnesses who are not in the employment of the company and make a scrutinizer’s report of the votes cast in favour or against, if any, forthwith to the Chairman;
• the scrutinizer is required to maintain a register either manually or electronically to record the assent or dissent, received, mentioning the particulars of name, address, folio number or client ID of the shareholders, number of shares held by them, nominal value of such shares and whether the shares have differential voting rights;
• the register and all other papers relating to electronic voting has to remain in the safe custody of the scrutinizer until the chairman considers, approves and signs the minutes and thereafter, the scrutinizer has to return the register and other related papers to the company;
• the results declared along with the scrutinizer’s report has to be placed on the website of the company and on the website of the agency within 2 (two) days of passing of the resolution at the relevant general meeting of members;

Voting by Poll [Ref: Section 109 and Companies (Management and Administration) Rules, 2014]

Detail process has been laid out in the rules regarding the manner in which the Chairman of meeting shall get the poll process scrutinised and provide report thereof.

Postal ballot [Ref: Section 110 and Companies (Management and Administration) Rules, 2014]

Under Companies Act, 2013, Central Government may, by notification, declare to be transacted only by means of postal ballot, instead of transacting such business at a general meeting. Detailed procedure has been laid under the rules relating to procedure to be followed.

Companies (Management and Administration) Rules, 2014 provide for a list of items of business which shall be transacted only by means of voting through a postal ballot. The said list inter alia includes (i) alteration of the objects clause of the memorandum, (ii) change in place of registered office outside the local limits of any city, town or village, (iii) change in objects for which a company has raised money from public through prospectus and still has any unutilized amount out of the money so raised, (iv) issue of shares with differential rights as to voting or dividend or otherwise, (v) variation in the rights attached to a class of shares or debentures or other securities, (vi) buy-back of shares by a company, (vii) sale of the whole or substantially the whole of an undertaking of a company, (viii) giving loans or extending guarantee or providing security in excess of the limit specified under section 186 of the Act.

In case of every resolution passed by postal ballot, a brief report on the postal ballot conducted including the resolution proposed, the result of the voting thereon and the summary of the scrutinizer’s report have to be entered in the minutes book of general meetings along with the date of such entry within 30 (thirty) days from the date of passing of resolution.

Bombay High Court has in its very recent judgment1 given on May 8, 2014 inter alia held that:

all provisions for compulsory voting by postal ballot do not apply to court convened meetings (like meetings for approving the schemes of arrangements like merger, amalgamation etc) and at such meetings provisions must be made for postal ballots in addition to an actual meeting.

To the extent provisions of Companies Act, 2013 mandate a compulsory or even optional conduct of certain items of business by postal ballot to the exclusion of an actual meeting are matters that require a fuller consideration.

Elimination of all shareholder participation at an actual meeting is anathema to some of the most vital of shareholders’ rights and that till the time the issue in that case was fully heard and decided, no authority or any company should insist upon such a postalballot-only meeting to the exclusion of an actual meeting

Provision for a postal ballot is an additional facility to be provided, so that there is greater inclusiveness and that a shareholder has an option of voting either by a postal ballot or electronic voting or in person

Secretarial standards with respect to Board and Members’ Meetings [Ref: Section 118]

Unlike the 1956 Act in which observance of secretarial standards was just recommendatory in nature, under the 2013 Act, every company is required to compulsorily follow the secretarial standards with respect to Board and members’ meetings. The new secretarial standards in presently in the process of being notified.

Tampering of minutes of meetings [Ref: Section 118]

If a person is found guilty of tampering with the minutes of the proceedings of meeting, he is liable to punishment of imprisonment for a term of maximum 2 years and with fine which of minimum Rs. 25,000 and maximum Rs. 1,00,000.

Maintenance and inspection of documents in electronic form [Ref: Section 120 and Companies (Management and Administration) Rules, 2014]

Any document, record, register, minutes, etc. required to be kept by a company; or allowed to be inspected or copies to be given to any person by a company, may be kept or inspected or copies given, as the case may be, in electronic form.

Every listed company or a company having not less than one thousand shareholders, debenture holders and other security holders, has to maintain its records, as required to be maintained under the Act or rules made there under, in electronic form.

in case of existing companies, data shall be converted from physical mode to electronic mode within six months from April 1, 2014.

the records must be capable of being readable, retrievable and reproducible in printed form.

the records, once dated and signed digitally, shall not be capable of being edited or altered.

“records” means any register, index, agreement, memorandum, minutes or any other document required by the Act or the rules made there under to be kept by a company.

Security of records to be maintained in electronic form [Ref: Companies (Management and Administration) Rules, 2014]

The Managing Director, Company Secretary or any other director or officer of the company as the Board may decide shall be responsible for the maintenance and security of electronic records.

The person who is responsible for the maintenance and security of electronic records shall inter alia provide adequate protection against unauthorized access, alteration or tampering of records;

ensure that computer systems, software and hardware are adequately secured and validated to ensure their accuracy, reliability and consistent intended performance;

ensure that the computer systems can discern invalid and altered records;

ensure that records are kept in a non-rewriteable and non-erasable format like pdf. version or some other version which cannot be altered or tampered;

ensure that at least one backup, taken at a periodicity of not exceeding one day, are kept of the updated records kept in electronic form, every backup is authenticated and dated and such backups shall be securely kept at such places as may be decided by the Board;

limit the access to the records to the managing director, company secretary or any other director or officer or persons performing work of the company as may be authorized by the Board in this behalf;

ensure that any reproduction of non-electronic original records in electronic form is complete, authentic, true and legible when retrieved arrange and index the records in a way that permits easy location, access and retrieval of any particular record

Report on an annual general meeting [Ref: Section 121 and Companies (Management and Administration) Rules, 2014]

Every listed public company is required to prepare in the prescribed manner a report on each annual general meeting including the confirmation to the effect that the meeting was convened, held and conducted as per the provisions of this Act and the rules made there under.

The company also has to file with the RoC a copy of the aforesaid report in the prescribed form within 30 (thirty) days of the conclusion of the annual general meeting.

Manner of passing resolutions by One Person Company (“OPC”) [Ref: Section 122]

Any business which is required to be transacted at an annual general meeting or other general meeting of a company by means of an ordinary or special resolution, it shall be sufficient if, in case of an OPC, the resolution is communicated by the member to the company and entered in the minutes-book and signed and dated by the member and such date shall be deemed to be the date of the meeting.

Where there is only one director on the Board of Director of a OPC, any business which is required to be transacted at the meeting of the Board of Directors of a company, it shall be sufficient if, in the report has to be signed and dated by the Chairman of the meeting or in case of his inability to sign, by any 2 (two) directors of the company, one of whom shall be the Managing director, if there is one and company secretary of the company.

Declaration and payment of dividend [Ref: Section 123]

Unlike Companies Act, 1956 which required the Company to transfer specified percentage of its profits to the reserves before declaring dividend, 2013 Act gives flexibility to the Company to transfer such percentage of its profits for that financial year as it may consider appropriate to the reserves.

Consolidation of financial statements [Ref: Section 129 and Companies (Accounts) Rules, 2014]

As per section 129 (3) read with the explanation thereof, Company is required to prepare a consolidated financial statements of the Company and also of all the associate companies, joint venture companies and 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.

Financial statements includes a balance sheet, profit and loss account, cash flow statement for the financial year, statement of changes in equity of applicable and explanatory note annexed to, of forming part of, any of the aforesaid documents.

As per the Companies (Accounts) Rules, 2014, the consolidation of financial statements of the company shall be made in accordance with the provisions of Schedule III of the Act and the applicable accounting standards.

“associate company”, in relation to another company, means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company.

“Significant influence” means control of at least 20 % (twenty per cent) of total share capital, or of business decisions under an agreement.

About Bulwark Solicitors

Bulwark Solicitors is a law firm pioneered by Solicitor Chirag Sancheti and Advocate Deep Shridharani. The firm has expertise in the areas of both Litigation and non-Litigation. Under the non-litigation Law practice, the firm practices in the areas of Corporate Law, Intellectual Property Law, Bankruptcy & Insolvency Law, Competition Law, Real Estate and Conveyancing and DTAA Advisory. Further, under Corporate Law area, we practice Company Law, Securities Law, Mergers and Amalgamations, Private Equity and Venture Capital Investment Transactions, Legal Due Diligence and Foreign Exchange Management Law.