BOMBAY CHARTERED ACCOUNTANTS’ SOCIETY

REPRESENTATION ON CONCEPT PAPER ON MODEL CODIFIED COMPANIES LAW

Chapter VIII – ACCOUNTS (Clauses 51 to 55)

01. Clause 51. Books of account to be kept by a company. {Existing Section 209& 209A}

  • The language in sub-clause 2 is confusing and misleading. The same should be replaced as:

“The aforesaid books of accounts should be preserved for such period as may be prescribed and the aforesaid books of accounts shall be open for inspection by such person and in such manner and subject to such conditions as may be prescribed.”

Another suggestion is that procedure for inspection may be clarified as in the existing section 209A.

Period of preservation of records should be inserted in the sub-clause instead of it “to be prescribed” to make it more stable.

  • In sub-clause 3, on a plain reading it appears that the statutory auditor would be covered in (v) “any other person charged with the duty of seeing that the requirements of this section are complied with”. The same cannot be the intention.

It is suggested to add the word “or” in clause (iv) after “The Chief Accounts Officer” to give correct meaning to all the clauses.

It is suggested to add the word “person” after “such” at the beginning of the paragraph and delete the words “managing director or manager, whole time director in charge of finance, Chief Accounts Officer …………this section are complied with”. The reason for such a change is that the words to be deleted reappear for no reason and can be avoided without altering the meaning of the sentence by just adding the word suggested.

02. Clause 52 Annual Accounts and Balance Sheet {Existing Section 210}

  • In sub-clause 1, since the term “Financial Year” is defined in clause 2(32), the same does not need to be again prescribed.
  • Preparation of Consolidated Accounts:

Proviso 2 to sub-clause 1, gives an option to a company to prepare and present consolidated accounts. However if clause 53, sub clause 4 is read, it seems there is no such option. The same needs to be clarified.

For the preparation of Consolidated Accounts, the areas need to be looked into:

  • Whether the option of preparation of consolidated accounts is from year to year?
  • Whether separate accounts of the holding company still need to be prepared if a company has opted for consolidated accounts?
  • What is the role and duty of the statutory auditor on the consolidated accounts?
  • Whether dividend can be paid based on consolidated accounts?

There is no clarity on the above or any other issues that may arise on preparation of consolidated accounts. It is therefore suggested that a separate clause be drafted to take care of various situations if a company opts to prepare consolidated accounts.

  • In sub-clause 2, for the sake of uniformity with various sections in this chapter the sub-clause

may start with the words “In case of default in complying with the provisions of this section, any person, not being a Director, having been charged by the Board with the duty of seeing that the provisions of this section are complied with, and where no such person is there, every director of the company shall be liable for penalty under the Act, in respect of each offence”.

03. Clause 53 Form and contents of Balance Sheet and Profit and Loss Account {Existing Section 210 A & 211}

  • In sub-clause 6, it is mentioned that the National Advisory Committee (NAC) on Accounting Standards would advise the government on formulation and laying down accounting policies and accounting standards. It is however nowhere specified as to whose role it is to draft accounting standards. In the current Companies Act, section 211(3C) clearly mentions that accounting standards would be drafted and formulated by the Institute of Chartered Accountants of India (ICAI).

Further, the constitution of NAC or any other body formed for the purpose of formulating accounting standards should be such that there is adequate representation for representatives of ICAI.

04. Clause 54 Annual Accounts, Board’s Report and matters connected therewith {Existing Section 215, 216, 217 & 218}

  • In sub-clause 1, it is suggested to delete the words “in accordance with the rules prescribed and” in line 2 and contents of existing section 215 which are sought to be put in the Rules, be made part of this sub-clause itself.
  • In sub-clause 2, there is a mention of auditors’ separate, special or supplementary report. In practice, special reports are issued from time to time as per the requirements of CAG, RBI, etc. However, such reports need not be brought to the notice of the shareholders as the annual accounts would then become unwieldy. It is not clear as to what is the exact requirement of this clause since; there is only one auditors’ report in the Companies Act.

In view of the above, it is suggested that the bracket mentioning various reports be deleted.

  • In sub-clause 4, there is reference of documents to be annexed to the company’s accounts. However, no such list of documents is given. It is suggested that such a list be specifically given since in sub clause 6(b) also there is reference to documents to be attached for any circulation of balance sheet.
  • In sub-clause 5, it is mentioned that all directors shall be responsible for non-compliance of clause 54. It is felt that non-executive and independent directors should not be held responsible for such non-compliance since they would not be aware of the day-to-day compliance.

05. Clause 55 Filing of the Balance Sheet with the Registrar and right of Member to copies of Audited Balance Sheet {Existing Section 219}

  • The meaning and requirement of sub-clause 6 is not clear. It is not clear whether the same applies to related party transactions and who is the concerned officer. The same should be suitably modified or deleted.
  • In sub clause 7, the words “and any other employee who is charged with the duty of seeing that the requirements of this section are complied with” should be inserted after “The Chief Accounts Officer” to replace “and any other person”.

Chapter IX – MATTERS RELATING TO AUDIT AND AUDITORS (Clauses 56 to 62)

06. Clause 56 Appointment and removal of Auditors (Existing Section 224 & 225}

  • In sub-clause 3 appointment of auditor by the Central Government should not be applicable in the

circumstances mentioned in sub-clause 2(2), wherein the appointment could not be made of the other

person on account of death, in capacity or a disqualification.

  • In sub-clause 9 last part of the clause mentions “the manner of such an appointment or removal shall be as prescribed”. However it is suggested that the manner of such appointment or removal should be embodied in the clause itself.

07. Clause 57 Remuneration of Auditors {Existing Section 224(8)}

  • The proviso states that auditor’s expenses shall be deemed to be included in the expression remuneration. It is not correct to consider reimbursement of expenses incurred by the auditors as a part of the remuneration. It may create a problem of applicability of service-tax, non-disclosure of actual fee earned by the auditors.

08. Clause 58 Qualifications and disqualifications of Auditors (Existing Section 226}

  • Clause 58 (2) (e) talks about disqualification with respect to appointment as an auditor on account of

business relationship of a material pecuniary nature. The section should provide a definition of the term “material pecuniary nature” to bring more clarity.

09. Clause 59 Powers and duties of Auditors (Existing Section 227}

  • Clause 59 (2) (b) may be deleted as the provisions are covered in sub-clause (4). If at all it is required the matter should from part of the act itself instead of separate rules. Consequential change made in sub-clause (3).
  • In Clause 59 (6) the other services, which cannot be rendered by the auditor, must be mentioned in the act itself and not left for the matter to be prescribed. As such the ICAI has prescribed rules for the fees which can be charged for the other services. This can be modified if required and placed in the act.

It is also not correct to apply the restriction on the auditor proposed to be appointed. In many cases it

may not be known about proposed appointment.

  • In Clause 59 (11) the auditor will also include the branch auditor and in such a case the responsibility of default should not be applicable to the head office / main auditors. It is better to specify the same.

10. Clause 60 Special Audit (Existing Section 233A}

  • In Clause 60 (1) (d) instead of the words “conduct of audit” the word only “audit” should be there. The reason being the management can not be made responsible for the conduct of the audit. Further the erosion of faith and confident should be vis-à-vis management and therefore the word “ Proper” used before “management” should be removed.
  • Clause 60 (1) (f) provides for special audit in case of insider trading or market manipulation. It is to be made clear that at what stage special audit can be conducted. Whether before any independent finding of this condition, special audit can be invoked? Further, if in such circumstances special audit is to be conducted it should be the audit of other records maintained by the company rather than the companies’ accounts.

The duties of special auditors must be defined in the mandate given to him rather than defined as per the clause 59.

  • As per Clause 60 (3) in all the cases it may not be necessary for the special auditor to report all matters required as per clause 59, which is applicable to normal statutory auditor. The clause may be suitably modified.
  • Clause 60 (5) is applicable to the auditor and it may be possible that the Central Government order may not be complied with on account of practical difficulties such as non co-operation by the company. In such case there should not be penalty / punishment for the auditor. It is suggested to incorporate the exclusion of circumstances under which the Special Auditor will not be punishable.

11. Clause 61 Cost Audit {Existing Section 233 B}

  • Clause 61(3) provides that the cost auditor be appointed at the General Meeting of the Company. There may be a practical difficulty to comply this provision in the year in which cost audit is prescribed for the first time for the products manufactured by the Company.

12. Clause 62 Audit Committee {Existing Section 292 A}

  • As per Clause 62 (1) it is not clear whether audit committee can have only independent directors. It

prescribes minimum and maximum number of directors. However, it does not restrict any other

executive / promoter director to be part of audit committee.

It is suggested that this clause should be re-drafted to be in harmony with Clause 49 of the Listing

Agreement, as regards to the appointment of Audit Committee.

  • In Clause 62 (3) the attendance in the Audit Committee Meeting by the auditor shall not be as per the rules prescribed and it may be provided that for each audit committee meeting the auditor should be invited.

It is suggested that this clause be re-drafted on the lines of Clause 59(9) of this Concept Paper, which lays down the manner of communication and attendance of the auditor at the general meetings.

  • For Listed Companies Clause 49 of the Listing Agreement also specifies the duties cast on the Audit Committee. It is suggested to harmonize the requirements in Section 62 and Clause 49 of the Listing Agreement, so that there is a clear understanding as to implementing the provisions and avoidable hardship to the members of the Audit Committee.
  • Provisions relating to Audit Committee are incorporated in Section 62 under Chapter IX “Matters Relating to Audit and Auditors”. It is felt that Audit Committee comprise of the Directors and hence the provisions should be under Chapter X “Matters Relating to Directors, Powers, and Functions Etc”.

CHAPTER X – MATTERS RELATING TO DIRECTORS, POWERS, FUNCTIONS ETC. (Clauses 63 TO 71)

13. Clause 63. Number of Directors.

Clause 63(1) – First Proviso {Existing Section 252(1)}

  • Applicability of the proviso may be only for listed companies and not for all the public companies.

The wordings as to the constitution of board with Independent directors may create a situation where they may be in majority due to the ambiguity in the words “as near to fifty percent”, which should be avoided.

It is suggested that this clause be re-drafted to be in harmony with the SEBI requirements as to the Independent Directors in the constitution of the Board.

  • Attributes of an independent director should be laid down by legislature and should not be left to be ‘prescribed’ by the Executive.

It is suggested that the attributes of an Independent Director be laid down to be in sync with the SEBI requirements.

Clause 63(1) – Second Proviso

  • Time limit for compliance by existing companies should be laid in the Act and should not be left to be ‘prescribed’ since it is not a recurring situation.
  • In view of difficulty in selecting a suitable person who is willing to accept directorship, it is suggested to specify a time limit of one year for such appointments.

14. Clause 64. Appointment of Directors.

Clause 64(1)(a) {Existing – Section 262(1) & (2)}

  • At present it is applicable only to Public Companies, but now it is made applicable to all Companies. It is suggested to continue the applicability only to Pubic Companies as is the current position.

Clause 64(1) (c)

  • The drafting of the appointment and holding of office by Alternate Director in place of Original Director is ambiguous, since it conveys the meaning as if, after an initial absence for a period of more than three months, on return of the Original Director the Alternate Director shall cease to be a director and cannot function as an Alternate Director during the subsequent absence of the Original Director.

Hence the clause should be suitably amended to convey the meaning that on each absence of the Original Director, the Alternate Director will hold office as the director of the Company. Further, the clause may also contain a condition that the Original Director should convey his intimation of return to India and only on such intimation the Alternate Director will cease to be a director of the Company.

Alternatively it is suggested to insert the content as appearing in the existing Section 313(2).

15. Clause 65. Retirement of Directors.

Clause 65(1)(b) {Existing – Section 255 & 256}

  • Manner of ascertaining directors retired by rotation should not be ‘prescribed’.

It is suggested to continue with the requirements as contained in the present Companies Act in Sections 255 & 256.

16. Clause 66. Disqualification and vacation of Office of Director. {Existing – Section 274 & 283}

Clause 66(1) & 66(2) {Existing – Section 274 & 283}

  • Clause 66(1) mentions that ‘Rules’ shall prescribe the conditions under which a director will be disqualified. However as given in Clause 66(2), the conditions as to the office of a director becoming vacant, conditions for disqualification may also be laid down and not left for the ‘Rules’. Existing Act has laid down such conditions in Section 274 which may be adopted.
  • Vacation of director is as regards to a post, whereas disqualification is with regard to a person, hence both should be dealt separately as is the case in the present Companies Act, where there are 2 separate sections dealing with the same viz. Section 274 & 283.
  • Another alternative is that Clause 66(2) should begin as follows:

“The office of the director shall become vacant/a person shall not be capable of being appointed director of a company, if:”

  • Sub-section (3) of Section 283 should be retained by introducing sub-clause (4) in Clause 66, permitting Private Limited Company to specify further grounds of disqualification in its Articles.

17. Clause 67. Removal of Directors.

Clause 67(2) {Existing – Section 284(5) & (6)}

  • Here the wordings are confusing. It is suggested to retain sub-section (5) & (6) of Section 284 separately.

18. Clause 68. Number of Directorships.

Clause 68(1) {Existing – Section 276}

  • Here it should be clarified that maximum number includes office of Additional Director.
  • As in the present Act, there should be a sub-section for an exclusion category of certain directorships (Refer Section 278).
  • Second Proviso to sub-clause (1) may be deleted as it is not desirable that any limits be laid down to acquire any %age of shares to be held by a Director. Further it is not desirable to prescribe %age by the executive. Concept of Independent Directors will be affected.

Clause 68(2) {Existing – Section 277}

  • A time limit for exercise of the option need to be specified. Suggestion may be made for a time limit of three months.

19. Clause 69. Register of Directors.

Clause 69(5)

  • It mentions about reasonable time within which a copy as required under sub-clause (4) is to be sent. ‘Reasonable time’ is not clear and subject to different perceptions. Suggestion is to redraft the clause as follows:

“If any inspection……………. is not sent within one month from the date of receipt of request or realization of payment whichever is later, the Central Government……”

20. Clause 70. Miscellaneous provisions relating to Directors.

Clause 70(1) {Existing – Section 200}

  • Explanation to sub-clause (1) is redundant and should be deleted because there is no ‘super tax’. The words ‘Income tax’ should replace the word ‘tax’ in sub-section (1).

Clause 70(3)

  • Reference is to an Unregistered Company. Definition of Unregistered Company in Section 2(100) should have number of partners as prescribed under the Indian Partnership Act or as mentioned in Clause 4(1).

CHAPTER XI – MEETINGS, PWERS OF THE BOARD AND RELATED PARTY TRANSACTIONS. (Clauses 72 TO 81)

21. Clause 72. Meetings of Directors.

Clause 72(2) (a) – Proviso {Existing – Section 283}

  • In first line of the Proviso word “section” should be substituted by “sub-section”.

This is suggested since the wordings of the Proviso is applicable to Notice of the meeting of the Board of Directors and which is provided in sub-clause (2)(a) only.

22. Clause 74. Powers of the Board.

Clause 74(2) (a) – Second Proviso {Existing – Section 292(1) Second Proviso}

  • In line 1 of the Second Proviso word “not” should be inserted between “shall” and “apply”. This is necessary since the wordings without the insertion gives a completely opposite meaning than what is intended and also from what is the provision as in the existing Companies Act.

23. Clause 75. Restrictions on powers of Board. {Existing – Section 293}

  • Add (e) before “contribute to charitable and other funds” since it is a typographical error.
  • The applicability of this clause is to all the companies, whereas the existing Section 293 is applicable only to public companies. It is suggested to continue with the current status as to the applicability of this clause.
  • Exemption to temporary loans is removed which should be included. The suggestion is to incorporate existing Section 293(1)(d) and Explanation II in this clause suitably so as to avoid practical difficulties in genuine circumstances.
  • Exemption to banking companies as in the existing Section 293(4) should be suitably incorporated so as to avoid practical difficulties.
  • Protection to the lender acting in good faith provided in existing Section 293(5) is not incorporated. It is suggested to incorporate the same in this clause so as to avoid hardships in genuine circumstances.

24. Clause 76. Inter-corporate loans and investments. {Existing – Section 372A}