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Audit of Payments of Company

INDEX

Sr. No. Particulars Page No.

1. Introduction 3-4

2. Overall Maximum Managerial Remuneration and

Managerial Remuneration in Case of Absence or

Inadequacy of Profits

5-7

3. Calculation of Profits 8-9

4. Recovery of Remuneration in Certain Cases 10

5. Central Government or Company to Fix Limit with

Regard to Remuneration

11

6. Company to Contribute to Bona Fide and Charitable

Funds etc.

12

7. Prohibition and Restrictions Regarding Political

Contributions

12

8. Power of Board and Other Persons to make

Contributions to national Defence Fund, etc.

14

9. Compensation for Loss of Office of Managing or

Whole-Time Director or Manager

14

10. Declaration of Dividend 15-17

11. Corporate Social Responsibility 18-19

12. Audit of Liabilities 20-26

13. Webliography 27

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INTRODUCTION

Audit season in India can be a hectic and confusing time for foreign invested enterprises (FIEs)

operating in the country. While most foreign executives in India leave auditing to chartered

accountants and professional services firms, it is important to maintain at least a basic

understanding of the audit process, how to prepare an FIE for audit, and key considerations that

should be taken into account.

There are two primary objectives associated with annual audit in India. The first objective is for

auditors to report to shareholders and the government whether or not the company’s balance sheet

provides a true and fair reflection of its state of affairs and any profit or loss derived during the

financial year. The second, an incidental objective, concerns the detection and prevention of fraud

and error. Hiring an experienced firm to complete annual audit in a timely and accurate manner is

critical to achieving both of these objectives.

Audits of company accounts have been compulsory in India since the passing of the first

Companies Act in 1913. Since then, the Institute of Chartered Accountants of India (ICAI), a

statutory body established under the Chartered Accountants Act, 1949, has regulated the

profession of chartered accountants in India and ensured the maintenance of India’s accounting

standards. All chartered accountants are members of the ICAI, and must comply with the standards

stipulated by the ICAI and the Audit and Assurance Standards Board (AASB).

Essentially, an audit is the inspection of an individual, business or organization’s accounts, and is

traditionally completed by an independent individual or firm with specialized skills and knowledge

of auditing procedures in the country in question. In other words, accountants verify that a

company’s business transactions were recorded accurately, and provide a true and fair reflection

of that company’s financial situation.

The importance of the audit process cannot be understated, as the results can be used for the

following purposes:

• Helping investors know the financial health of the company

• Assuring the government that the company is properly discharging its legal duties

• Helping lenders evaluate the credibility of the company

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• Drawing management’s attention to any shortcomings in the company’s business

operations

• Helping management improve business efficiency

MEANING OF AUDIT

An audit is an objective examination and evaluation of the financial statements of an organization

to make sure that the records are a fair and accurate representation of the transactions they claim

to represent. It can be done internally by employees of the organization, or externally by an outside

firm.

The IRS can perform audits to verify the accuracy of a taxpayer’s returns or other transactions.

When an audit is being performed by the IRS, it usually carries a negative connotation and is seen

as evidence of some type of wrongdoing by the taxpayer.

Audits performed by outside parties on private companies can be extremely helpful in removing

any bias when it comes to the state of a company's financials. Audits look for what can be called

a "material error" in statements on any specific object. They help provide stakeholders with a sense

of accuracy when regarding the state of the subject being audited and can help enable them to

make better, more informed decisions regarding the subject being audited. When audits are

performed by third parties, the opinion on whatever is being audited (a business’ books, an

organization as a whole or a system) can be candid and honest without it effecting daily work

relationships.

Most all companies receive an audit once a year, while even larger companies can receive audits

monthly. For some companies, audits are a legal requirement due to the compelling incentives to

intentionally misstate financial information in an attempt to commit fraud. For some publicly

traded companies, auditors are used as a resource to evaluate the effectiveness of internal controls

on financial reports.

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OVERALL MAXIMUM MANAGERIAL REMUNERATION AND

MANAGERIAL REMUNERATION IN CASE OF ABSENCE OR

INADEQUACY OF PROFITS

The total managerial remuneration payable by a public company, to its directors, including

managing director and whole-time director, and its manager in respect of any financial year shall

not exceed eleven per cent. of the net profits of that company for that financial year computed in

the manner laid down in section 198 except that the remuneration of the directors shall not be

deducted from the gross profits:

Provided that the company in general meeting may, with the approval of the Central Government,

authorize the payment of remuneration exceeding eleven per cent. of the net profits of the

company, subject to the provisions of Schedule V:

Provided further that, except with the approval of the company in general meeting, —

(i) the remuneration payable to any one managing director; or whole-time director or manager

shall not exceed five per cent. of the net profits of the company and if there is more than one such

director remuneration shall not exceed ten per cent. of the net profits to all such directors and

manager taken together;

(ii) the remuneration payable to directors who are neither managing directors nor whole-time

directors shall not exceed, —

(A) one per cent. of the net profits of the company, if there is a managing or whole-time director

or manager;

(B) three per cent. of the net profits in any other case.

(2) The percentages aforesaid shall be exclusive of any fees payable to directors under sub-section

(5).

(3) Notwithstanding anything contained in sub-sections (1) and (2), but subject to the provisions

of Schedule V, if, in any financial year, a company has no profits or its profits are inadequate, the

company shall 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)

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hereunder except in accordance with the provisions of Schedule V and if it is not able to comply

with such provisions, with the previous approval of the Central Government.

(4) The remuneration payable to the directors of a company, including any managing or whole-

time director or manager, shall be determined, in accordance with and subject to the provisions of

this section, either by the articles of the company, or by a resolution or, if the articles so require,

by a special resolution, passed by the company in general meeting and the remuneration payable

to a director determined aforesaid shall be inclusive of the remuneration payable to him for the

services rendered by him in any other capacity:

Provided that any remuneration for services rendered by any such director in other capacity shall

not be so included if—

(a) the services rendered are of a professional nature; and

(b) in the opinion of the Nomination and Remuneration Committee, if the company is covered

under sub-section (1) of section 178, or the Board of Directors in other cases, the director possesses

the requisite qualification for the practice of the profession.

(5) A director may receive remuneration by way of fee for attending meetings of the Board or

Committee thereof or for any other purpose whatsoever as may be decided by the Board:

Provided that the amount of such fees shall not exceed the amount as may be prescribed:

Provided further that different fees for different classes of companies and fees in respect of

independent director may be such as may be prescribed.

(6) A director or manager may be paid remuneration either by way of a monthly payment or at a

specified percentage of the net profits of the company or partly by one way and partly by the other.

(7) Notwithstanding anything contained in any other provision of this Act but subject to the

provisions of this section, an independent director shall not be entitled to any stock option and may

receive remuneration by way of fees provided under sub-section (5), reimbursement of expenses

for participation in the Board and other meetings and profit related commission as may be

approved by the members.

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(8) The net profits for the purposes of this section shall be computed in the manner referred to in

section 198.

(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.

(10) The company shall not waive the recovery of any sum refundable to it under sub-section (9)

unless permitted by the Central Government.

(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.

(12) Every listed company shall disclose in the Board’s report, the ratio of the remuneration of

each director to the median employee’s remuneration and such other details as may be prescribed.

(13) Where any insurance is taken by a company on behalf of its managing director, whole-time

director, manager, Chief Executive Officer, Chief Financial Officer or Company Secretary for

indemnifying any of them against any liability in respect of any negligence, default, misfeasance,

breach of duty or breach of trust for which they may be guilty in relation to the company, the

premium paid on such insurance shall not be treated as part of the remuneration payable to any

such personnel:

Provided that if such person is proved to be guilty, the premium paid on such insurance shall be

treated as part of the remuneration.

(14) Subject to the provisions of this section, any director who is in receipt of any commission

from the company and who is a managing or whole-time director of the company shall not be

disqualified from receiving any remuneration or commission from any holding company or

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subsidiary company of such company subject to its disclosure by the company in the Board’s

report.

(15) If any person contravenes the provisions of this section, he shall be punishable with fine which

shall not be less than one lakh rupees but which may extend to five lakh rupees.]

Exceptions/ Modifications/ Adaptations

1. In case of Nidhi company - Second proviso shall apply with the modification that the

remuneration of a director who is neither managing director nor whole-time director or manager

for performing special services to the Nidhis specified in the articles of association may be paid

by way of monthly payment subject to the approval of the company in general meeting and also to

the provisions of section 197 :

Provided that no approval of the company in general meeting shall be required where, —

(a) a Nidhi does not have a managing director or a whole-time director or a manager;

(b) the remuneration payable during a financial year to all the directors of the Nidhi does not

exceed ten per cent, of the net profits of such Nidhi or fifteen lakh rupees, whichever is less; and

(c) a remuneration payable under clause (b) is approved by a special resolution passed in this behalf

by the Nidhi. - Notification dated 5th June, 2015.

2. In case of Government company - Section 197 shall not apply. - Notification dated 5th june,

2015.

3. In case of Specified IFSC Public Company - Section 197 shall not apply. - Notification Dated

4th January, 2017

CALCULATION OF PROFITS

(1) In computing the net profits of a company in any financial year for the purpose of section 197,

—

(a) credit shall be given for the sums specified in sub-section (2), and credit shall not be given for

those specified in sub-section (3); and

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(b) the sums specified in sub-section (4) shall be deducted, and those specified in sub-section (5)

shall not be deducted.

(2) In making the computation aforesaid, credit shall be given for the bounties and subsidies

received from any Government, or any public authority constituted or authorized in this behalf, by

any Government, unless and except in so far as the Central Government otherwise directs.

(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;

(b) profits on sales by the company of forfeited shares;

(c) profits of a capital nature including profits from the sale of the undertaking or any of the

undertakings of the company or of any part thereof;

(d) profits from the sale of any immovable property or fixed assets of a capital nature comprised

in the undertaking or any of the undertakings of the company, unless the business of the company

consists, whether wholly or partly, of buying and selling any such property or assets:

Provided that where the amount for which any fixed asset is sold exceeds the written-down value

thereof, credit shall be given for so much of the excess as is not higher than the difference between

the original cost of that fixed asset and its written down value;

(e) any change in carrying amount of an asset or of a liability recognized in equity reserves

including surplus in profit and loss account on measurement of the asset or the liability at fair

value.

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

(a) all the usual working charges;

(b) directors’ remuneration;

(c) bonus or commission paid or payable to any member of the company’s staff, or to any engineer,

technician or person employed or engaged by the company, whether on a whole-time or on a part-

time basis;

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(d) any tax notified by the Central Government as being in the nature of a tax on excess or abnormal

profits;

(e) any tax on business profits imposed for special reasons or in special circumstances and notified

by the Central Government in this behalf;

(f) interest on debentures issued by the company;

(g) interest on mortgages executed by the company and on loans and advances secured by a charge

on its fixed or floating assets;

(h) interest on unsecured loans and advances;

(i) expenses on repairs, whether to immovable or to movable property, provided the repairs are not

of a capital nature;

(j) outgoings inclusive of contributions made under section 181;

(k) depreciation to the extent specified in section 123;

(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;

(m) any compensation or damages to be paid in virtue of any legal liability including a liability

arising from a breach of contract;

(n) any sum paid by way of insurance against the risk of meeting any liability such as is referred

to in clause (m);

(o) debts considered bad and written off or adjusted during the year of account.

(5) In making the computation aforesaid, the following sums shall not be deducted, namely: —

(a) income-tax and super-tax payable by the company under the Income-tax Act, 1961, or any

other tax on the income of the company not falling under clauses (d) and (e) of sub-section (4);

(b) any compensation, damages or payments made voluntarily, that is to say, otherwise than in

virtue of a liability such as is referred to in clause (m) of sub-section (4);

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(c) loss of a capital nature including loss on sale of the undertaking or any of the undertakings of

the company or of any part thereof not including any excess of the written-down value of any asset

which is sold, discarded, demolished or destroyed over its sale proceeds or its scrap value;

(d) any change in carrying amount of an asset or of a liability recognised in equity reserves

including surplus in profit and loss account on measurement of the asset or the liability at fair

value.

RECOVERY OF REMUNERATION IN CERTAIN CASES

Without prejudice to any liability incurred under the provisions of this Act or any other law for the

time being in force, where a company is required to re-state its financial statements due to fraud

or non-compliance with any requirement under this Act and the rules made thereunder, the

company shall recover from any past or present managing director or whole-time director or

manager or Chief Executive Officer (by whatever name called) who, during the period for which

the financial statements are required to be re-stated, received the remuneration (including stock

option) in excess of what would have been payable to him as per restatement of financial

statements.

CENTRAL GOVERNMENT OR COMPANY TO FIX LIMIT WITH

REGARD TO REMUNERATION

Notwithstanding anything contained in this Chapter, the Central Government or a company may,

while according its approval under section 196, to any appointment or to any remuneration under

section 197 in respect of cases where the company has inadequate or no profits, fix the

remuneration within the limits specified in this Act, at such amount or percentage of profits of the

company, as it may deem fit and while fixing the remuneration, the Central Government or the

company shall have regard to—

(a) the financial position of the company;

(b) the remuneration or commission drawn by the individual concerned in any other capacity;

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(c) the remuneration or commission drawn by him from any other company;

(d) professional qualifications and experience of the individual concerned;

(e) such other matters as may be prescribed.

COMPANY TO CONTRIBUTE TO BONA FIDE AND CHARITABLE

FUNDS ETC.

The Board of Directors of a company may contribute to bona fide charitable and other funds:

Provided that prior permission of the company in general meeting shall be required for such

contribution in case any amount the aggregate of which, in any financial year, exceed five per cent.

of its average net profits for the three immediately preceding financial years.

PROHIBITIONS AND RESTRICTIONS REGARDING POLITICAL

CONTRIBUTIONS

Notwithstanding anything contained in any other provision of this Act, a company, other than a

Government company and a company which has been in existence for less than three financial

years, may contribute any amount directly or indirectly to any political party:

Provided that the amount referred to in sub-section (1) or, as the case may be, the aggregate of the

amount which may be so contributed by the company in any financial year shall not exceed seven

and a half per cent. of its average net profits during the three immediately preceding financial

years:

Provided further that no such contribution shall be made by a company unless a resolution

authorising the making of such contribution is passed at a meeting of the Board of Directors and

such resolution shall, subject to the other provisions of this section, be deemed to be justification

in law for the making and the acceptance of the contribution authorized by it.

(2) Without prejudice to the generality of the provisions of sub-section (1), —

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(a) a donation or subscription or payment caused to be given by a company on its behalf or on its

account to a person who, to its knowledge, is carrying on any activity which, at the time at which

such donation or subscription or payment was given or made, can reasonably be regarded as likely

to affect public support for a political party shall also be deemed to be contribution of the amount

of such donation, subscription or payment to such person for a political purpose;

(b) the amount of expenditure incurred, directly or indirectly, by a company on an advertisement

in any publication, being a publication in the nature of a souvenir, brochure, tract, pamphlet or the

like, shall also be deemed, —

(i) where such publication is by or on behalf of a political party, to be a contribution of such amount

to such political party, and

(ii) where such publication is not by or on behalf of, but for the advantage of a political party, to

be a contribution for a political purpose.

(3) Every company shall disclose in its profit and loss account any amount or amounts contributed

by it to any political party during the financial year to which that account relates, giving particulars

of the total amount contributed and the name of the party to which such amount has been

contributed. (See General Circular No.19/2013)

(4) If a company makes any contribution in contravention of the provisions of this section, the

company shall be punishable with fine which may extend to five times the amount so contributed

and every officer of the company who is in default shall be punishable with imprisonment for a

term which may extend to six months and with fine which may extend to five times the amount so

contributed.

Explanation. —For the purposes of this section, “political party” means a political party registered

under section 29A of the Representation of the People Act, 1951.

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POWER OF BOARD AND OTHER PERSONS TO MAKE

CONTRIBUTIONS TO NATIONAL DEFENCE FUND, ETC.

(1) The Board of Directors of any company or any person or authority exercising the powers of

the Board of Directors of a company, or of the company in general meeting, may, notwithstanding

anything contained in sections 180, 181 and section 182 or any other provision of this Act or in

the memorandum, articles or any other instrument relating to the company, contribute such amount

as it thinks fit to the National Defense Fund or any other Fund approved by the Central Government

for the purpose of national defence.

(2) Every company shall disclose in its profits and loss account the total amount or amounts

contributed by it to the Fund referred to in sub-section (1) during the financial year to which the

amount relates.

COMPENSATION FOR LOSS OF OFFICE OF MANAGING OR WHOLE-

TIME DIRECTOR OR MANAGER

202. (1) A company may make payment to a managing or whole-time director or manager, but not

to any other director, by way of compensation for loss of office, or as consideration for retirement

from office or in connection with such loss or retirement.

(2) No payment shall be made under sub-section (1) in the following cases, namely:—

(a) where the director resigns from his office as a result of the reconstruction of the company, or

of its amalgamation with any other body corporate or bodies corporate, and is appointed as the

managing or whole-time director, manager or other officer of the reconstructed company or of the

body corporate resulting from the amalgamation;

(b) where the director resigns from his office otherwise than on the reconstruction of the company

or its amalgamation as aforesaid;

(c) where the office of the director is vacated under sub-section (1) of section 167;

(d) where the company is being wound up, whether by an order of the Tribunal or voluntarily,

provided the winding up was due to the negligence or default of the director;

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(e) where the director has been guilty of fraud or breach of trust in relation to, or of gross

negligence in or gross mismanagement of, the conduct of the affairs of the company or any

subsidiary company or holding company thereof; and

(f) where the director has instigated, or has taken part directly or indirectly in bringing about, the

termination of his office.

(3) Any payment made to a managing or whole-time director or manager in pursuance of sub-

section (1) shall not exceed the remuneration which he would have earned if he had been in office

for the remainder of his term or for three years, whichever is shorter, calculated on the basis of the

average remuneration actually earned by him during a period of three years immediately preceding

the date on which he ceased to hold office, or where he held the office for a lesser period than three

years, during such period:

Provided that no such payment shall be made to the director in the event of the commencement of

the winding up of the company, whether before or at any time within twelve months after, the date

on which he ceased to hold office, if the assets of the company on the winding up, after deducting

the expenses thereof, are not sufficient to repay to the shareholders the share capital, including the

premiums, if any, contributed by them.

(4) Nothing in this section shall be deemed to prohibit the payment to a managing or whole-time

director, or manager, of any remuneration for services rendered by him to the company in any

other capacity.

DECLARATION OF DIVIDEND

(1) No dividend shall be declared or paid by a company for any financial year except—

(a) out of the profits of the company for that year arrived at after providing for depreciation in

accordance with the provisions of sub-section (2), or out of the profits of the company for any

previous financial year or years arrived at after providing for depreciation in accordance with the

provisions of that sub-section and remaining undistributed, or out of both; or

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(b) out of money provided by the Central Government or a State Government for the payment of

dividend by the company in pursuance of a guarantee given by that Government:

Provided that a company may, before the declaration of any dividend in any financial year, transfer

such percentage of its profits for that financial year as it may consider appropriate to the reserves

of the company:

3[Provided further that where, owing to inadequacy or absence of profits in any financial year, any

company proposes to declare dividend out of the accumulated profits earned by it in previous years

and transferred by the company to the reserves, such declaration of dividend shall not be made

except in accordance with such rules as may be prescribed in this behalf:]

Provided also that no dividend shall be declared or paid by a company from its reserves other than

free reserves.

1[Provided also that no company shall declare dividend unless carried over previous losses and

depreciation not provided in previous year or years are set off against profit of the company for

the current year.]

(2) For the purposes of clause (a) of sub-section (1), depreciation shall be provided in accordance

with the provisions of Schedule II.

(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 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 the immediately preceding three financial years.

4[(4) The amount of the dividend, including interim dividend, shall be deposited in a scheduled

bank in a separate account within five days from the date of declaration of such dividend.]

2[(5) No dividend shall be paid by a company in respect of any share therein except to the

registered shareholder of such share or to his order or to his banker and shall not be payable except

in cash:

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Provided that nothing in this sub-section shall be deemed to prohibit the capitalisation of profits

or reserves of a company for the purpose of issuing fully paid-up bonus shares or paying up any

amount for the time being unpaid on any shares held by the members of the company:

Provided further that any dividend payable in cash may be paid by cheque or warrant or in any

electronic mode to the shareholder entitled to the payment of the dividend.]

(6) A company which fails to comply with the provisions of sections 73 and 74 shall not, so long

as such failure continues, declare any dividend on its equity shares.

Amendments

1.Inserted by Companies Amendment Act, and is effective from 29th May 2015

Exceptions/ Modifications/ Adaptations

2. In case of Nidhi Company - Sub-section (5) of Section 123 shall apply subject to the

modification that any dividend payable in cash may be paid by crediting the same to the account

of the member, if the dividend is not claimed within 30 days from the date of declaration of the

dividend. - Notification dated 5th June, 2015.

3. In case of Government Company - Second proviso of Section 123(1) shall not apply in which

the entire paid up share capital is held by the Central Government, or by any Stale Government or

Governments or by the Central Government and one or more State Governments. - Notification

dated 5th june, 2015.

4. In case of Government Company Section 123(4) shall not apply in which the entire paid up

share capital is held by the Central Government, or by any Stale Government or Governments or

by the Central Government and one or more State Governments or by one or more Government

Company. - Notification dated 5th june, 2015.

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CORPORATE SOCIAL RESPONSIBILITY

(1) Every company having net worth of rupees five hundred crores or more, or turnover of rupees

one thousand crores or more or a net profit of rupees five crores 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.

(2) The Board's report under sub-section (3) of section 134 shall disclose the composition of the

Corporate Social Responsibility Committee.

(3) The Corporate Social Responsibility Committee shall, —

(a) formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall

indicate the activities to be undertaken by the company as specified in 1,2 Schedule VII;

(b) recommend the amount of expenditure to be incurred on the activities referred to in clause (a);

and

(c) monitor the Corporate Social Responsibility Policy of the company from time to time.

(4) The Board of every company referred to in sub-section (1) shall, —

(a) after taking into account the recommendations made by the Corporate Social Responsibility

Committee, approve the Corporate Social Responsibility Policy for the company and disclose

contents of such Policy in its report and also place it on the company's website, if any, in such

manner as may be prescribed; and

(b) ensure that the activities as are included in Corporate Social Responsibility Policy of the

company are undertaken by the company.

(5) The Board of every company referred to in sub-section (1), shall ensure that the company

spends, in every financial year, at least two per cent. of the average net profits of the company

made during the three immediately preceding financial years, in pursuance of its Corporate Social

Responsibility Policy:

Provided that the company shall give preference to the local area and areas around it where it

operates, for spending the amount earmarked for Corporate Social Responsibility activities:

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Provided further that if the company fails to spend such amount, the Board shall, in its report made

under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount.

Explanation. —For the purposes of this section “average net profit” shall be calculated in

accordance with the provisions of section 198. ]

1.Clarification related to Schedule VII -Dated 18.06.2014. (Point (iv) has been Omitted - Refer

Clarification Dated-17.09.2014)

2.Clarification related to above Clarification Dated-17.09.2014.

Exceptions/Modifications/Adaptations

1. In case of Specified IFSC Public Company - Section 135 shall not apply for a period of five

years from the commencement of business of a Specified IFSC public company - Notification

Dated 4th January, 2017.

2. In case of Specified IFSC Private Company - Section 135 shall not apply for a period of five

years from the commencement of business of a Specified IFSC private company - Notification

Dated 4th January, 2017

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AUDIT OF LIABILITIES

POWER OF BOARDS

(1) The Board of Directors of a company shall be entitled to exercise all such powers, and to do

all such acts and things, as the company is authorised to exercise and do:

Provided that in exercising such power or doing such act or thing, the Board shall be subject to the

provisions contained in that behalf in this Act, or in the memorandum or articles, or in any

regulations not inconsistent therewith and duly made thereunder, including regulations made by

the company in general meeting:

Provided further that the Board shall not exercise any power or do any act or thing which is directed

or required, whether under this Act or by the memorandum or articles of the company or otherwise,

to be exercised or done by the company in general meeting.

(2) No regulation made by the company in general meeting shall invalidate any prior act of the

Board which would have been valid if that regulation had not been made.

2&3[(3) The Board of Directors of a company shall exercise the following powers on behalf of the

company by means of resolutions passed at meetings of the Board, namely: —

(a) to make calls on shareholders in respect of money unpaid on their shares;

(b) to authorise buy-back of securities under section 68;

(c) to issue securities, including debentures, whether in or outside India;

1[(d) to borrow monies;

(e) to invest the funds of the company;

(f) to grant loans or give guarantee or provide security in respect of loans;]

(g) to approve financial statement and the Board’s report;

(h) to diversify the business of the company;

(i) to approve amalgamation, merger or reconstruction;

(j) to take over a company or acquire a controlling or substantial stake in another company;

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(k) any other matter which may be prescribed:

Provided that the Board may, by a resolution passed at a meeting, delegate to any committee of

directors, the managing director, the manager or any other principal officer of the company or in

the case of a branch office of the company, the principal officer of the branch office, the powers

specified in clauses (d) to (f) on such conditions as it may specify:

[Provided further that the acceptance by a banking company in the ordinary course of its business

of deposits of money from the public repayable on demand or otherwise and withdrawable by

cheque, draft, order or otherwise, or the placing of monies on deposit by a banking company with

another banking company on such conditions as the Board may prescribe, shall not be deemed to

be a borrowing of monies or, as the case may be, a making of loans by a banking company within

the meaning of this section.]

Explanation I.—Nothing in clause (d) shall apply to borrowings by a banking company from other

banking companies or from the Reserve Bank of India, the State Bank of India or any other banks

established by or under any Act.

Explanation II.—In respect of dealings between a company and its bankers, the exercise by the

company of the power specified in clause (d) shall mean the arrangement made by the company

with its bankers for the borrowing of money by way of overdraft or cash credit or otherwise and

not the actual day-to-day operation on overdraft, cash credit or other accounts by means of which

the arrangement so made is actually availed of.

(4) Nothing in this section shall be deemed to affect the right of the company in general meeting

to impose restrictions and conditions on the exercise by the Board of any of the powers specified

in this section.

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RESTRICTIONS ON POWERS OF BOARD

(1) The Board of Directors of a company shall exercise the following powers only with the consent

of the company by a special resolution, namely:—

(a) to sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of

the company or where the company owns more than one undertaking, of the whole or substantially

the whole of any of such undertakings.

Explanation. —For the purposes of this clause,—

(i) “undertaking” shall mean an undertaking in which the investment of the company exceeds

twenty per cent. of its net worth as per the audited balance sheet of the preceding financial year or

an undertaking which generates twenty per cent. of the total income of the company during the

previous financial year;

(ii) the expression “substantially the whole of the undertaking” in any financial year shall mean

twenty per cent. or more of the value of the undertaking as per the audited balance sheet of the

preceding financial year;

(b) to invest otherwise in trust securities the amount of compensation received by it as a result of

any merger or amalgamation;

(c) to borrow money, where the money to be borrowed, together with the money already borrowed

by the company will exceed aggregate of its paid-up share capital

and free reserves, apart from temporary loans obtained from the company’s bankers in the ordinary

course of business:

Provided that the acceptance by a banking company, in the ordinary course of its business, of

deposits of money from the public, repayable on demand or otherwise, and withdrawable by

cheque, draft, order or otherwise, shall not be deemed to be a borrowing of monies by the banking

company within the meaning of this clause.

Explanation. —For the purposes of this clause, the expression “temporary loans” means loans

repayable on demand or within six months from the date of the loan such as short-term, cash credit

arrangements, the discounting of bills and the issue of other short-term loans of a seasonal

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character, but does not include loans raised for the purpose of financial expenditure of a capital

nature;

(d) to remit, or give time for the repayment of, any debt due from a director.

(2) Every special resolution passed by the company in general meeting in relation to the exercise

of the powers referred to in clause (c) of sub-section (1) shall specify the total amount up to which

monies may be borrowed by the Board of Directors.

(3) Nothing contained in clause (a) of sub-section (1) shall affect—

(a) the title of a buyer or other person who buys or takes on lease any property, investment or

undertaking as is referred to in that clause, in good faith; or

(b) the sale or lease of any property of the company where the ordinary business of the company

consists of, or comprises, such selling or leasing.

(4) Any special resolution passed by the company consenting to the transaction as is referred to in

clause (a) of sub-section (1) may stipulate such conditions as may be specified in such resolution,

including conditions regarding the use, disposal or investment of the sale proceeds which may

result from the transactions:

Provided that this sub-section shall not be deemed to authorise the company to effect any reduction

in its capital except in accordance with the provisions contained in this Act.

(5) No debt incurred by the company in excess of the limit imposed by clause (c) of sub-section

(1) shall be valid or effectual, unless the lender proves that he advanced the loan in good faith and

without knowledge that the limit imposed by that clause had been exceeded.

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PROHIBITION ON ACCEPTANCE OF DEPOSITS FROM PUBLIC

(1) On and after the commencement of this Act, no company shall invite, accept or renew deposits

under this Act from the public except in a manner provided under this Chapter:

Provided that nothing in this sub-section shall apply to a banking company and non-banking

financial company as defined in the Reserve Bank of India Act, 1934 (2 of 1934) and to such other

company as the Central Government may, after consultation with the Reserve Bank of India,

specify in this behalf.

(2) A company may, subject to the passing of a resolution in general meeting and subject to such

rules as may be prescribed in consultation with the Reserve Bank of India, accept deposits from

its members on such terms and conditions, including the provision of security, if any, or for the

repayment of such deposits with interest, as may be agreed upon between the company and its

members, subject to the fulfilment of the following conditions, namely:—

1&2[(a) issuance of a circular to its members including therein a statement showing the financial

position of the company, the credit rating obtained, the total number of depositors and the amount

due towards deposits in respect of any previous deposits accepted by the company and such other

particulars in such form and in such manner as may be prescribed;

(b) filing a copy of the circular along with such statement with the Registrar within thirty days

before the date of issue of the circular;

(c) depositing such sum which shall not be less than fifteen per cent 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;

(d) providing such deposit insurance in such manner and to such extent as may be prescribed;

(e) certifying 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]

(f) 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:

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Provided that in case where a company does not secure the deposits or secures such deposits

partially, then, the deposits shall be termed as "unsecured deposits" and shall be so quoted in every

circular, form, advertisement or in any document related to invitation or acceptance of deposits.

(3) Every deposit accepted by a company under sub-section (2) shall be repaid with interest in

accordance with the terms and conditions of the agreement referred to in that sub-section.

(4) Where a company fails to repay the deposit or part thereof or any interest thereon under sub-

section (3), the depositor concerned may apply to the Tribunal for an order directing the company

to pay the sum due or for any loss or damage incurred by him as a result of such non-payment and

for such other orders as the Tribunal may deem fit.

(5) The deposit repayment reserve account referred to in clause (c) of sub-section (2) shall not be

used by the company for any purpose other than repayment of deposits.

INTER CORPORATE LOANS AND INVESTMENTS

A company cannot: -

• Make any loan to any other body corporate

• Give guarantee or security in connection with any loan made by any person to another body

corporate

• Acquire, by subscription, purchase or in any other manner, securities in any other body

corporate

exceeding 60 % of its paid-up share capital and free reserves or 100 % of its free reserves,

whichever is more, unless approved by a special resolution passed at a general meeting of

members.

The Board of the company may give a guarantee without being previously authorised by a special

resolution of members if all the following conditions are satisfied :-

• a Board resolution is passed to this effect

• there exist exceptional circumstances which prevent the company from obtaining previous

authorization by special resolution

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• the Board resolution is confirmed within 12 months in a general meeting or its next Annual

general meeting, whichever is earlier.

Notice of such resolution must clearly indicate the specific limits, the particulars of the body

corporate in which the investment / loan / guarantee / security is proposed, the purpose of the

investment / loan / guarantee / security, sources of funding, etc.

No investment / loan / guarantee / security may be made or given unless the Board resolution

sanctioning it is with the consent of all directors present at the meeting and prior approval of the

public financial institution ( if any term loan is outstanding ) is obtained. Approval of the public

financial institution is not required if the investment / loan / guarantee / security is with the 60 %

limit as mentioned above and there has been no default in repaying the term loan and / or interest

thereon.

No loan can be made at a rate of interest lower than the bank rate prescribed by the Reserve Bank

of India. A company which has defaulted in repaying public fixed deposits cannot make or give

any investment / loan / guarantee / security unless the fixed deposit is fully repaid along with

interest due as per the terms and conditions of the fixed deposit.

A register of such inter-corporate loans and investments must be maintained giving the relevant

details. The above provisions do not apply to :-

• Any loan / guarantee / security made or given by :-

• a banking company or an insurance company or a housing finance company in the

ordinary course of its business or a company established with the object of financing

industrial enterprises or providing infrastructural facilities

• a company whose principal business is the acquisition of shares, stocks, debentures or

other securities

• a private company unless it is a subsidiary of a public company

• Investment made under Rights issue of securities

• Loan made by holding company to its wholly subsidiary company

• Guarantee or security given by a holding company for loan to its wholly owned

subsidiary Acquisition of securities by a holding company in its wholly owned

subsidiary.

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WEBLIOGRAPHY

• Http://taxguru.in/company-law/section-143-companies-act-2013.html

• Http://rvseckarcompanylaw.blogspot.in/2013/10/managerial-remuneration-under-

section.html

• Http://www.caclubindia.com/articles/managerial-remuneration-under-the-companies-act-

2013-25116.asp

• Https://indiankanoon.org/doc/289374/

• Https://lawdb.in/section-208-in-the-companies-act-1956-294195

• http://ebook.mca.gov.in/default.aspx