What is Companies Act 2013?

The Companies Act, 2013 was made applicable from 1st April 2014, though the 98 sections of the Act were made applicable in the year 2013. The Act is applicable all over India. It is divided into 470 sections, 7 schedules, and 29 chapters, against the 658 sections of the Companies Act, of 1956.

The emphasis is more on e-management, compliance and enforcement, disclosure norms, auditors, mergers and acquisitions, and governance practices. The new Companies Act has introduced the norms of disclosures, corporate social responsibility, etc.

Objectives of Companies Act 2013

The Companies Act, 2013 is enacted to regulate companies and protect the interest of shareholders and other stakeholders.

The new Companies Act, 2013 is implemented for achieving the following objectives:

• To make the key managerial personnel and directors accountable by defining their duties.
  
  
• To make more stringent norms for the disclosure of various information at periodic intervals.
  
  
• To make norms wherein, in many cases, prior approval from the shareholders of the company is required.
  
  
• To make mandatory contributions towards corporate social responsibility.

The Companies Act, 2013 introduced a new type of business entity (or company) to the existing list, including public and private limited companies. This new business entity is termed a One Person Company (OPC).

According to the Companies Act 2013, “An OPC means a company with only one person as its member [section 3(1) of 2013 Act]. The draft rules state that only a natural person who is an Indian citizen and resident in India can incorporate an OPC or be a nominee for the sole member of an OPC“.

Audit Provisions under the New Companies Act, 2013

Audit provisions under the new Companies Act, 2013 are as follows:

• Mandatory Auditor Rotation and Joint Auditors
  
• Non-audit Services
  
• Auditing Standards
  
• Cognizance of Indian Accounting Standards (Ind as)
  
• Secretarial Audit for Bigger Companies
  
• Secretarial Standards
  
• Internal Audit
  
• Audit of Items of Cost

Mandatory Auditor Rotation and Joint Auditors

The Companies Act, 2013 now mandates the rotation of auditors after the specified time period. The Act also includes an enabling provision for joint audits.

Non-audit Services

The Companies Act, 2013 states that any services to be rendered by the auditor should be approved by the board of directors or the audit committee. Additionally, the auditor is also restricted from providing certain specific services.

Auditing Standards

The standards on auditing have been accorded legal sanctity in the Companies Act, 2013, and would be subject to notification by the National Financial Reporting Authority (NFRA). Auditors are now mandatorily bound by the Act to ensure compliance with standards on auditing.

Cognizance of Indian Accounting Standards (Ind as)

The Companies Act, 2013, in several sections, has given cognizance to the Indian Accounting Standards, which are standards converged with the International Financial Reporting Standards, for their applicability in the future.

For example, the definition of a financial statement includes a ‘statement of changes in equity’, which would be required under the Ind AS. [Section 2(40) of 2013 Act]

Secretarial Audit for Bigger Companies

In respect of the listed companies and other classes of companies as may be prescribed, the Companies Act, 2013 provides for a mandatory requirement to have a secretarial audit. The draft rules make it applicable to every public company with a paid-up share capital of > ₹100 crores.

As specified in the Companies Act, 2013, such companies would be required to annex a secretarial audit report given by a company secretary in practice with its board’s report. [Section 204 of 2013 Act]

Secretarial Standards

The Companies Act, 2013 requires every company to observe secretarial standards specified by the Institute of Company Secretaries of India with respect to general and board meetings [Section 118 (10) of the 2013 Act], which were hitherto not given cognizance under the 1956 Act.

Internal Audit

The importance of an internal audit has been well acknowledged in Companies (Auditor Report) Order, 2003 (the ‘Order’), pursuant to which the auditor of a company is required to comment on the fact that the internal audit system of the company is commensurate with the nature and size of the company’s operations.

However, the order did not mandate that an internal audit should be conducted by the internal auditor of the company. The Order acknowledged that an internal audit can be conducted by an individual who is not appointed by the company.

The Companies Act, 2013 now moves a step forward and mandates the appointment of an internal auditor who shall be either a chartered accountant or a cost accountant, or such other professional as may be decided by the board to conduct an internal audit of the functions and activities of the company.

The companies that shall be required to mandatorily appoint an internal auditor as per the draft rules are as follows:

• Every listed company
  
  
• Every public company having a paid-up share capital of more than 10 crores
  
  
• Every other public company that has any outstanding loans or borrowings of more than 25 crores from banks or public financial institutions or has accepted deposits of more than 25 crores at any point of time during the last financial year.

Audit of Items of Cost

The Central Government may, by order, in respect of such class of companies engaged in the production of such goods or providing such services as may be prescribed, direct that particulars relating to the utilization of material or labor or to other items of cost, as may be prescribed, shall also be included in the books of account kept by that class of companies.

By virtue of this section of the Companies Act, 2013, the cost audit would be mandated for certain companies [Section 148 of the 2013 Act]. It is pertinent to note that similar requirements have recently been notified by the Central Government.

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Scope and Major Provisions of Companies Act, 2013

The Companies Act, 2013 is applicable to all companies registered and incorporated in India. Its major provisions are as follows:

• It lays down the procedure for incorporating a new company.
  
  
• It lays down the procedure for making changes in the chartered documents of a company such as the Memorandum of Association and Articles of Association
  
  
• It lays down the procedure for conducting the meetings of the Board of Directors.
  
  
• It lays down the procedure for conducting the meetings of members.
  
  
• It lays down the procedure for voting in the matters of the decision to be passed at the meeting of the Board of Directors or members.
  
  
• It lays down the procedure for appointing Directors and Managing Directors.
  
  
• It lays down the procedure for appointing the other key managerial persons such as the Chief Executing Officer, Company Secretary, and Chief Financial Officer.
  
  
• It lays down the procedure for signing financial accounts and presenting the same to the members.
  
  
• It lays down the procedures for prosecuting and punishing the key managerial personnel and Directors in case of default.

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Difference Between Companies Act 1956 and Companies Act 2013

Some of the key differences between Companies Act 1956 and Companies Act 2013 are as follows:

• Incorporation of One Person’s Company is allowed under the new Companies Act, of 2013.
  
  
• The number of members in a private company is allowed to be increased to 200, while in the Companies Act, of 1956, it was restricted to 50.
  
  
• The listed company or other prescribed company needs to have one woman director, while this provision was not there in the Companies Act, 1956.
  
  
• One of the directors should have mandatorily stayed in India for at least 182 days in the previous year.
  
  
• Definitions of the key managerial personnel CEO, CFO, and Company Secretary are included.
  
  
• The responsibilities of the key managerial personnel are stated under this Act.
  
  
• Appointment of independent directors is made mandatory under the new Companies Act, of 2013.
  
  
• Under the new Act, the Director can hold directorship in a maximum of 20 companies, including private companies, while in the earlier Act, one could serve as a director in 20 companies, excluding private companies.

From the point of view of sections, the following changes have taken place in the Companies Act, 2013 as compared with the Companies Act, 1956:

Basis of Difference	Companies Act, 2013	Companies Act, 1956
Charge Definition Sec 2(16)	Charge means an interest or lien created over the property or asset.	No Provision.
Appointment of Auditors	Section 139 states that auditors shall be appointed for a period of 5 years and have to compulsorily retire at the end of the 5th year (in the case of the firm, 10 years).	No restriction on the appointment of auditors.
Concept of Independent Directors (Section 149)	For the specified classes of the company, the appointment of independent Directors is mandatory.	No such requirement and independent Directors were only required for listed companies.
Loans to Directors	Loans to Directors under Section 295 are restricted.	Approval of the Central Government was required.
Related Party Transaction	As per Section 188 of the Companies Act, 2013, prior approval is required to be taken for related party transactions.	Central Government’s approval was required for related party transactions.
Small companies	No concept of small companies.	The concept of small companies was introduced, and the same was defined as a company, other than a public company: I. having the paid-up share capital not exceeding ₹50 lakhs or such amount, not exceeding ₹5 Crores, as may be prescribed or II. having turnover not exceeding ₹2 Crores or such amount, not exceeding ₹20 Crores, as may be prescribed, as per its last profit and loss account. [Clause 2(85)]
One Person Company	No concept of One Person’s Company	The concept of One Person Company was introduced. Special features: One Person company is not bound to include a cash flow statement in its financial statement. Memorandum of the One Person Company shall indicate the name of the other person, with his/her prior written consent in the prescribed form. Such other person may withdraw his/her consent in such manner as may be prescribed, provided that the member of the One Person Company may at any time, change the name of such other person by giving notice in such manner as may be prescribed. It is not bound to hold an annual general meeting.
Auditors	Every company shall, at each annual general meeting, appoint an auditor or auditors to hold office from the conclusion of that meeting until the conclusion of the next annual general meeting. Section 224.	Every company shall appoint an individual or a firm as an auditor at the first annual general meeting, who shall hold office till the conclusion of its sixth annual general meeting and thereafter till the conclusion of every sixth meeting. In the case of listed companies and certain other prescribed companies, compulsory rotation of individual auditors every five years and of audit firms every 10 years has been provided. Limited Liability Partnership is allowed to be appointed as an auditor.
Accounting Standards	Accounting standards are mandatory.	In addition accounting standards have also been made mandatory.
Directors	All the directors can be foreigners, not residing in India. The maximum limit of directors in a company is 12.	Every company shall have at least one director resident in India for at least one hundred and eighty-two days. [Clause 149(2)]. The maximum limit of directors in a company has now been increased to 15.
Board Committees		Besides the Audit Committee, the constitution of the Nomination and Remuneration Committee has also been made mandatory in the case of listed companies and such other classes or classes of companies as may be prescribed. [Clause 178(1)].
National Company Law Tribunal and Appellate Tribunal		The Central Government shall, by notification, constitute a Tribunal to be known as the National Company Law Tribunal and an Appellate Tribunal to be known as the National Company Law Appellate Tribunal. (Clause 408 and 410)
Class Action Suits		For the first time, a provision has been made for class action suits. It is provided that a specified number of member(s), depositor(s), or any class of them may if they are of the opinion that the management or control of the affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members or depositors, file an application before the Tribunal on the behalf of the mem- bers or depositors
		Where the members or depositors seek any damages or compensation or demand any other suitable action from or against an audit firm, the liability shall be of the firm as well as of each partner who was involved in making any improper or misleading statement of particulars in the audit report or who acted in a fraudulent, unlawful, or wrongful manner. The order passed by the Tribunal shall be binding on the company and all its embers, depositors, and auditors, including the audit firm or expert or consultant or advisor, or any other person associated with the company. (Clause 245)