The Companies Act, 2013 has become the law of the land after being notified on 30 August, 2013. The law, which was in the making for more than a decade, ushers in a new era for corporate regulation in India. It introduces massive changes in the way companies govern themselves, raise money and interact with stakeholders. By laying stress on self-regulation and disclosure with minimal Government intervention, the law lays more responsibility on corporates. With 99 sections out of a total of 470 sections already in force, the legislation is amending the way companies operate and are regulated in the country. CII has been instrumental in ensuring that industry voices were heeded to during each stage of evolution of the Act. Due to concerted efforts, the current form of the Act is a marked progression over the earlier versions which prescribed more rigorous and stringent provisions. Our advocacy still continues with formal submissions on subordinate legislation that forms part of over 70% provisions of the Act. With the Ministry of Corporate Affairs currently working on finalizing rules with views from stakeholders, CII recommendations to the first batch of draft rules have already been submitted on 10 October, 2013. Building up of industry views is currently underway, based on which detailed inputs would be submitted on the remaining sets of rules as well. Submission of formal representations is also being supplemented with industry interactions with the Minister for Corporate Affairs and others at the helm of affairs at the Ministry. This issue of Policy Watch focuses on the highlights of the new law while intending to apprise members of challenges that corporate regulation now beholds. The issue is also aimed at updating members of CII views on specific provisions while seeking views on draft rules that amplify the requirements.

1. Policy
October 2013, Volume 2, Issue 5
Focus: The Companies Act 2013
T
he Companies Act, 2013
was passed by the
Parliament on 29 August
2013, after being in the making for
more than a decade. The Act introduces
several new concepts, empowers investors,
outlines duties and liabilities of Directors,
prescribes rotation of auditors, mandates
new disclosure requirements and prescribes
Corporate Social Responsibility (CSR)
activities.
While the entire law comprising 29
chapters - containing 470 sections and VII
Schedules - has been enacted, currently
only 99 sections have been notified. The
remaining provisions of the Act would
be notified separately by the Central
Government specifying the dates on which
the provisions would come into force.
The new Act provides the broad framework,
relying heavily on subordinate legislation
to amplify the implementation procedures.
These would be detailed in various sets of
rules to be promulgated by the Central
Government. Thus, the implementation
of many substantive provisions of the
Act is subject to the rules, and various
provisions would become effective only
once the rules are finalized. In this regard,
flexibility forms an integral part of the new
regulatory framework since the subordinate
legislation may be changed from time to
time based on the needs of the dynamic
economic environment.
Inside this Issue
Message From the
Director General........... 1
Chandrajit Banerjee,
Director General, CII
CII has contributed significantly to the
evolution of the new Act. Many industry
concerns were put forward during the
finalization of the Companies Bill (2008,
2009 and 2012 versions) and sustained
advocacy was undertaken by CII. As
a result, the Act in its current form is
a marked progression over the earlier
versions which prescribed more rigorous
and stringent versions.
With the formulation of rules currently
occupying center stage, CII is in the process
of building up industry’s viewpoints on the
suggested procedures and requirements.
Various state-level and national platforms
are being organized to deliberate on the
Draft Rules as exposed by the Ministry
of Corporate Affairs for consultation and
based on a considered and consensual
view emerging out of various deliberations,
CII will be submitting its detailed inputs
on the draft with the objective of making
the process conducive to the business
environment.
Currently, the Ministry of Corporate Affairs
has developed Draft Rules for the various
chapters and posted them on the Ministry’s
website for comments from stakeholders.
The Ministry has provided a 30 day window
for industry and other stakeholders to
respond to the Draft Rules.
While providing specific technical and legal
inputs on the rules, CII shall underscore the
need for ensuring that the new law aims at
progression and development of business
instead of impeding it. The law needs to
contemplate and weigh the interests not
just of stakeholders but also take forward
the business objects of the corporates.
Many new concepts are being introduced
in the legislation for the first time, and
practices with respect to these need to
be allowed to evolve over time.
Meanwhile, CII has also suggested that
the Government consider establishing an
institutionalized mechanism for finalization
of the rules which has representation of all
stakeholders. This will ensure that industry’s
concerns are taken note of and addressed,
to the extent possible, during the process
of devising subordinate legislation under
the Act.
While presenting this issue of CII Policy
Watch on the Companies Act, 2013, we
have a twin-agenda in mind - one, to
provide members with a detailed overview
of what the new law entails and two, to
stimulate and receive considered inputs
from members on Draft Rules. This will
help to ensure that the new corporate
framework is pro-industry and one which
allows enhanced and responsible selfregulation and reduced Government
intervention, which has been the basis of
the revision of the Act throughout. n
Chandrajit Banerjee
Director General
Confederation of Indian Industry
CEO Speak............................................................................................ 2
Policy Barometer.......... 6
S Gopalakrishnan, President, CII and Executive Vice Chairman, Infosys Limited
Industry Voices.......... 11
.
Adi Godrej, Immediate Past President, CII; Chairman, India@75 Foundation;
Chairman, CII Special Task Force on Reforms and Chairman, Godrej Group
Shailesh Haribhakti, Chairman, DH Consultants Pvt. Ltd.
policy watch
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2. CEOSpeak
Two and a Half Cheers for the
Companies Act !
Acid Test Yet to Come
The Companies Act, 2013, passed by the
Parliament on 29 August 2013 provides the
framework for the regulatory environment
for business in India and will change the
way companies are governed. The Act
establishes stricter standards in governance,
auditing and accounting, investor protection,
disclosures, shareholders’ rights, selfregulation, etc. It defines duties and liabilities
of Directors, placing greater responsibility and
accountability on the Board and strengthens
the role of Independent Directors.
In many ways, the Act is commensurate with
global standards of management, governance,
transparency and accountability. The role,
rights and duties of auditors have been clearly
outlined while recognizing both accounting
and auditing standards. To strengthen
investor protection, it allows shareholders to
take legal action as class action suits and
provides for Special Courts for speedy trial.
Recognizing cross-border mergers, it allows
amalgamation of an Indian company with a
foreign company. It introduces the concept of
One Person Company entrusted with a simpler
compliance regime and multiple exemptions
to encourage corporatization of business and
entrepreneurship.
CII has been engaged with the Government
in the evolution of the Act and several
concerns highlighted by CII have been
addressed to the satisfaction of industry.
These include removal of blanket restriction
on step-down subsidiaries, increasing the
number of investment companies through
which investments could be made from
one to two, extending immunity from
liability under provisions of the Act to all
Non-Executive Directors instead of only to
Independent Directors, etc. Relief has also
been provided to promoters, who would
not be categorized en masse as ‘Officers
in Default’ for non-compliances by the
company. Further, in case companies find
it advantageous to have the Chairman as
MD/CEO also, it will be possible through
an amendment of the Articles specifically
2
policy watch
S Gopalakrishnan
President, CII and
Executive Vice Chairman, Infosys Limited
providing for such a clause.
However, the Act also introduces certain
new provisions which are of concern to the
industry. With the passage of the new law,
India would become the first country in
the world to prescribe spend on Corporate
Social responsibility (CSR) activities in its
company law. CII has all along advocated
that CSR initiatives should be allowed to
evolve naturally and should not be imposed
on industry. Indian companies are anyways
recognized for their voluntary CSR initiatives.
Provisions specifying the manner, etc might
be restrictive and could stifle the innovative
strategies that companies are developing.
The Act also provides that companies holding
public deposits must return all such deposits
within one year of the commencement of
the new Act. This would be rather onerous
and is uncalled for. Existing deposits
should be allowed to run till maturity and
stricter provisions, that are proposed to
be prescribed, should apply to deposits
mobilized after the passage of the new
law. Going forward, in an instance where a
Director has been convicted for an offence
against which he has filed an appeal, he
would still have to mandatorily vacate
his office. Further, companies have been
restricted from giving loans to Directors,
their relatives, partners, etc. Some checks
and balances should have been resorted to
instead of imposing blanket bans.
A wide range of provisions of the Act
would be implemented through subordinate
legislation, which would be prescribed by
the Central Government. Many new concepts
such as CSR, appointment of Independent
Directors, cross border mergers have been
introduced in the Act. Industry has expressed
concerns vis-à-vis various such provisions and
has also recommended how they need to be
dealt within the regulatory framework. The
rules need to be facilitative and provide an
enabling framework rather than a narrow
and prescriptive one. For example, rules being
drafted for implementation of the provisions
relating to CSR should allow meaningful
CSR initiatives to be undertaken in a selfregulating manner. In fact, industry bodies
like CII should be encouraged to prepare
voluntary guidelines, suggesting ways in
which social responsibility could be integrated
into business persuasion by companies.
Another focus area relates to the role of
promoters/majority shareholders who provide
the initial investment. Given that a majority
of companies in the country are driven by
families or promoters, the new law should
be able to achieve fine balancing of power
between ownership and management.
The true test of the new statute would be
when the subordinate legislation under the
new law is finalized. Since a large part
of this legislation would be implemented
through delegated legislation, it is important
that the rules are adopted and implemented
after a thorough debate in public space. It is
heartening to note that the rules have been
exposed for public comments before adoption.
It is only when the process is consultative and
transparent, against the backdrop of enhanced
shareholders’ democracy and the Government
chooses to exercise selective controls by
stepping in only when it is necessary to do
so in public interest, that industry can ring in
the new statute with three cheers! n
This is an updated version of the article
that appeared in the Hindustan Times,
29 August 2013.

3. CEOSpeak
The Companies Act, 2013 and the
Acceptance of Deposits from Public
The newly legislated Companies Act, 2013
contains detailed provisions dealing with
acceptance of deposits by companies.
The provisions will have a far reaching
impact since the old provisions have been
completely overhauled to provide for more
stringent measures for companies to accept
deposit henceforth. The provisions may
pose some practical problems, especially for
companies which presently hold deposits
under the Companies Act, 1956.
Provisions Under the New Companies
Act, 2013
Section 73 of the new Act corresponds to
section 58A of the Companies Act, 1956
and seeks to provide that no company
shall invite, accept or renew deposits from
public. It can do so only from members of
the company subject to fulfillment of certain
conditions. Only public companies having
net worth and turnover of the amount to be
prescribed are allowed to accept deposits
from persons other than its members as
per Section 76.
Section 74 is a new provision which seeks
to provide that all deposits or any interest
due thereon shall be repaid within one
year of the commencement of the new Act.
Extension of time for repayment may be
granted by the Tribunal on an application.
Focussing on eradication of fraud, Section
75 seeks to provide that in case the
company fails to pay the deposit or any
interest thereon and it is proved that the
deposits had been accepted with intent to
defraud the depositors, every officer who
was responsible for acceptance of deposits
shall be personally responsible, without
any limitation of liability for all losses or
damages incurred by the depositors.
Interpretation and Applicability to
Companies Which May Have Existing
3-year Deposits
Section 76(1) overrides only the provisions
of Section 73 that restricts deposits to
Issues and Practical Difficulties to
Companies and Depositors
Adi Godrej
Immediate Past President, CII;
Chairman, India@75 Foundation;
Chairman, CII Special Task Force on Reforms and
Chairman, Godrej Group
those from members only. However, it does
not supersede Section 74 which mandates
compulsory premature repayment of
existing deposits, within one year of the
commencement of the relevant provision
of the new Act. This means that even
if a company is eligible to issue public
deposits under new Section 76, its existing
3-year deposits would still be subject to
mandatory premature repayment as per
Section 74. As drafted, the only course of
action currently available to a company
with existing deposits if it wishes to
continue holding / accepting deposits is:
• Stop accepting new deposits from the
public immediately on the commencement
of the relevant provision of the new
Companies Act, 2013.
• File details of such outstanding public
deposits with the Registrar of Companies
(ROC) within 3 months.
• Refund all such public deposits on
due date or within one year of the
commencement of the Act, whichever
is earlier.
• Take steps prescribed in Section 76 to
commence accepting unsecured deposits
from public viz resolution in general
meeting, compliance with rules, credit
rating, ROC filing, maintenance of liquid
deposits, etc.
Given its current form, the provisions
imply that companies shall have to
immediately stop accepting and renewing
deposits upon the commencement of the
relevant provision of the Act. This would
pose practical difficulties since a company
usually sends out renewal notices well
in advance of the due date. Since many
investors place deposits through brokers,
there is the possibility of money or renewal
notices being processed prior to the
commencement of the relevant provisions
of the Act, in advance, in terms of deposits
maturing after such commencement.
It would be a challenge to ensure full
compliance, and would necessitate refunds
and refusals to existing deposit holders.
Compulsory repayment within one year
would inconvenience depositors, and
deprive a large section of investors of the
interest income which they are earning
from the existing deposits, leading to
financial loss. A large number of depositors
are senior citizens, and this would cause
unnecessary inconvenience to them. The
financial burden imposed on the companies
to prematurely refund the deposits as well
as the administrative inconvenience, time
and work involved in this exercise would be
enormous, with no clear benefit to either
the depositors or the companies.
Premature repayment would also tantamount
to companies being forced to renege the
terms of the original deposits related to
tenor, as well as financial loss to depositors
since it would attract a mandatory reduction
in interest as per the existing rules, which
would need to be unfavourably adjusted in
the premature refund.
Suggestions Towards Achieving a Fair
Balance Between Investor Protection
and Corporate Convenience
Given the challenges explained above, it is
suggested that companies with nil default
policy watch
3

4. CEOSpeak
track record be permitted to continue the
existing deposits to their maturity, whereas
any fresh deposits should be allowed to be
accepted following the stipulated conditions
post commencement of the relevant
provisions of the new Act. This will ensure
that the companies have a maximum three
year transition period where they will have
the public deposits both under the old Act
and the new Act, and the Tribunal will
not be required to handle requests from
hundreds of companies to allow repayment
of their existing deposits within one year
or on maturity, whichever is later. This
will also safeguard the interest of all the
depositors and the sanctity of their earlier
deposit contracts with the company will be
fully observed.
seamlessly to the requirement of the
new Act, whereas otherwise it would put
pressure on companies to augment their
resources for pre-payment plus write
off the cost incurred on sourcing these
deposits. For depositors, this will prevent
any financial loss to them in the event of
fall in the interest rates. n
This would help companies to transit
Taking Board Independence and Role of
Independent Directors to the Next Level
Transparency and accountability, two of the
most salient objectives of the Companies
Act, 2013, will not be achieved without
Independent Directors, whose responsibilities
have gone up multiple times under the
new legislation. Though the concept of
Independent Directors is not alien to India
Inc., its formal introduction in the Act
establishes the growing importance of their
need and role in corporate governance in
general and in listed and unlisted large
companies in particular.
Considering the high stakes and the growing
expectations of all stakeholders, not just
amongst the listed entities, the introduction
of the concept of Independent Directors
is a major milestone in the history of our
corporate laws. Independent Directors are
considered to be the conscious-keepers of
the Board of Directors, and in that sense their
presence on the Board is in the best interest
of the company and all its stakeholders.
More than their presence, the experience
they bring to the table is invaluable and
brings huge credence to the decisions of the
Board in the course of managing the affairs
of a company. As regards listed companies,
so far, Clause 49 of the Listing Agreement
dealt with corporate governance issues
through composition, compensation, code of
conduct and various other provisions related
to the Board of Directors, audit committee
and Independent Directors. However, with
the new Act, Independent Directors will now
be required to play a far more inclusive and
4
policy watch
functioning.
With the proposed ‘Code for Independent
Directors’, it is expected that there will be
far more consistency and uniformity in their
functioning across companies.
Shailesh Haribhakti
Chairman
DH Consultants Pvt. Ltd.
proactive role in running the company. They
are now required to step into the shoes of
management and go into the details rather
than just act as a guest of the company.
However, the most pertinent question is
whether companies will be able to find
enough good quality people to fill the
Board positions given the stringent eligibility
criteria, or rather will there be enough people
with mettle interested enough to wear the
hat of Independent Director.
Aligning Expectations
The new law has introduced various sections
related to Independent Directors. To start
with, it outlines that the appointment of
Independent Directors will be independent
of the company management and also
prescribes stringent eligibility criteria for
them with a view to avoid any possibility
of ‘threat to independence’ of their
The Act also provides for creating a
data bank on Independent Directors so
that there is better transparency in the
information about them. The proposed
data bank will be maintained by an
independent institute or association that
will be notified by the Central Government,
thus ensuring neutrality to the data made
public. It is expected that such a thirdparty data pool about quality talent in the
industry, which is a must for Independent
Directors, will bring about better credence
to the whole process of selecting and
appointing them. However, the new
law prescribes that ultimately, it is the
responsibility of the Board to evaluate
the skills, experience and knowledge
of Independent Directors. The Act also
requires that appointment of Independent
Directors shall be through a letter of
appointment, which shall set out, among
others, the terms of the appointment,
expectation of the Board, remuneration,
code of business ethics etc. This practice
will establish far more clarity on the
expectations front on either side.
To ensure that Independent Directors would
not and should not misuse their position but
offer quality time to each of the companies

5. CEOSpeak
Focus
they represent, the Act restricts a person
from being a Director of not more than 20
companies, out of which up to 10 could be
public companies. Another quality-control
feature of the Act is that the members can
restrict the number of Independent Directors
as well. This will help in ensuring that an
Independent Director is able to devote
quality time to the companies which he
may serve.
Further, to ensure that the desired level of
independence is maintained at all times by
them, the Act states that an Independent
Director cannot be appointed for more
than two consecutive terms of five years
each. The Act also sets a three-year cooling
period after the 10-year term to take up
the job afresh.
The Act provides that an Independent
Director can be an ‘officer in default’
under specified situations and is liable to
be penalised or punished or imprisoned or
face any other punitive measures. However,
the Act stipulates that an Independent
Director shall be held liable only if he/she
did not act diligently or was a willing and
knowing party to the acts of omissions
or commissions of the company. Again
his consent to the misdeeds/connivance/
lack of diligence should be attributable
through Board processes. These provisions
will help in ensuring a fine balancing act
between ‘the roles and responsibilities’ of
Independent Directors.
Further, the fact that performance evaluation
of Independent Directors shall be done by the
entire Board, there could either be dilution
of performance evaluations at both ends or
there could be some extreme situations.
Directors, to embrace the changes and
take on the challenges. Companies and the
fraternity of Independent Directors will have
to get the basic rules of the game right to
ensure fair play on both sides.
In a broader sense, the very purport of
the Act is to promote ‘good governance’
but considering the onerous clauses, there
is every possibility that the most soughtafter Independent Directors will only take
up offers from already well-governed
companies, thereby denying the services
of ‘good Independent Directors’ to those
companies which are aspiring to improve
their corporate governance record. Such
polarisation could be contrary to the overall
objective of having more and more ‘wellgoverned companies’.
With a view to ensure that a fine balance is
maintained at all times, there will be a need
for professional firms to come forward and
impart high-level training to Independent
Directors and also Non-Independent
Directors and key management personnel
to avoid any conflicting situations.
The fact that the Act requires compliance
with all the clauses within a year of its
coming into force is also expected to create
a lot of pressure on companies.
Last, but not the least, considering that
most companies are family-owned and
managed, acceptance of and alignment
with the concept and the provisions related
to Independent Directors will be a major
challenge for the owner promoters.
Way Forward
Lots of thoughts and actions and
realignments will be required to be done,
both by companies as well as Independent
Further, with a view to ensure that there is
adequate motivation for deserving persons
to act as Independent Directors, the reward
will have to be commensurate with the
underlying risks and the onerous tasks they
will have to perform.
Even the regulators will have to act as
facilitators till the time the changes are fully
accepted and stabilized or else the whole
purpose of bringing in the new law will be
defeated. Various regulators will also have
to work towards ensuring that there are
no conflicting provisions, if any, around the
Independent Directors to avoid unwarranted
confusion in compliance.
Unless all the three stakeholders – the
companies, the Independent Directors and
the regulators – act in tandem, the desired
objectives may not be achieved, and instead,
the new law will only be counterproductive
for India Inc. n
Skepticism and Challenges
There is no gainsaying that the Act is clearly
fraught with a lot of skepticism and there
are perceived challenges around the onerous
clauses which may deter deserving and
desiring persons from taking up the role of
Independent Directors. On the other hand,
there are also apprehensions that these
stringent clauses may lead to ‘heightened
activism, involvement and interference’ by
Independent Directors.
Moreover, the Act provides for a yearly
‘separate meeting without attendance of
Non-Independent Directors and members
of the management’ for evaluating the
performance of Non-Independent Directors,
the Board as a whole and the chairperson
and also assessing the quality, quantity and
timeliness of flow of information between
the management and the Board.
policy watch
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6. Policy Barometer
Highlights of the Companies Act, 2013
The Companies Act, 2013 was notified by the
Government on 30 August 2013. While the
law has been enacted in its entirety, currently,
only 99 sections have come into force. The
Government is empowered to notify different
dates when the remaining provisions of this
Act shall come into force.
While the Act provides the broad framework,
a substantial part of the details of the new
regime will be governed by various sets
of rules to be promulgated by the Central
Government. The implementation of the Act
will be subject to finalization of the rules,
and hence various substantive provisions will
become effective once the respective rules are
promulgated and the sections are notified.
Corporate Social Responsibility
The Act provides that every company, which
has a net worth of Rs. 500 crore or more,
or turnover of Rs.1,000 crore or more or a
net profit of Rs. 5 crore or more during any
financial year, shall spend at least 2 per cent
of its average net profits made during the
three immediately preceding financial years,
towards CSR activities. The company shall
give preference for spending the amount
earmarked for CSR initiatives to local
areas where it operates. Such a company
would also be required to constitute a
CSR Committee of the Board consisting of
three or more Directors, of which at least
one should be an independent Director. The
Committee shall formulate and recommend
to the Board a CSR policy indicating the
activities to be undertaken by the company,
as specified in Schedule VII of the Act.
The Board shall –
i) disclose the contents of the Policy in
its report and also place it on the
company’s website;
ii) ensure that activities as included in
the CSR policy are undertaken by the
company;
This provision would be implemented on
‘comply-or-explain’ basis i.e. in case the
company is unable to spend at least 2 per
6
policy watch
cent of its average net profit in any year, it
would have to cite reasons for not spending
the amount in its Annual Report.
Rotation of Auditors
The Act provides for compulsory rotation of
auditors every 5 years in listed companies
and certain other classes of companies, as
may be prescribed. In case the auditor is an
audit firm, it shall be allowed two terms of
five years each. Appointment of auditors for
five years shall be subject to ratification by
members at every Annual General Meeting.
An auditor appointed may be removed from
his office before the expiry of his term
only by a special resolution passed by the
company. Further, members may voluntarily
resolve to rotate the audit partner (and his
team) at such interval as may be decided.
A transition periods of three years from
the commencement of the Act would be
provided to comply with the provision of
rotation of auditors.
Constitution of National Financial
Reporting Authority
The Act prescribes the constitution of the
National Financial Reporting Authority
(NFRA) which shall make recommendations
to the Central Government on formulation
of accounting and auditing policies and
standards. The Authority shall monitor and
enforce compliance with accounting and
auditing standards by corporates; oversee
the quality of service of the professionals
associated with ensuring compliance with
such standards, and suggest measures
required for improvement in quality of services
etc. The chairperson and members, who
would be in full-time employment with NFRA
shall not be associated with any audit firm
(including related consultancy firms) during
the course of their appointment and two years
after ceasing to hold such office.
Subsidiary Company
Such class or classes of holding companies
as may be prescribed would be restricted
from having layers of subsidiaries beyond
such number as may be prescribed.
Investment Companies
A company shall not make investments
through more than two layers of investment

7. Policy Barometer
companies. However the restriction will not
apply in case of acquisition of a company
incorporated outside India if the company
being acquired has investment subsidiaries
beyond two layers as per the laws of such
country. Exemption from this provision would
also be available to a subsidiary company
which has an investment subsidiary for the
purposes of meeting the requirements under
any law or under any rule or regulation
framed under any law for the time being
in force.
Loans and Investments
The Act provides the manner in which
and limits up to which a company shall
give any loan or give any guarantee or
provide security in connection with a loan
to any other body corporate or person and
acquire by way of subscription, purchase or
otherwise, the securities of any other body
corporate. The provision does not apply to
banking companies, insurance companies,
housing finance companies, companies
engaged in the business of financing of
companies or of providing infrastructural
facilities; and acquisition made by a
RBI registered NBFC whose principal
business is acquisition of securities; a
company whose principal business is the
acquisition of securities and shares allotted
in pursuance of Section 62 (1) (a) i.e.
rights issue.
Wholly owned subsidiaries are not granted
exemption from the provisions governing
loans and investment by a company,
as is exempted under the Companies
Act, 1956.
Cost Records
The Central Government may, after
consultation with a regulatory body (in this
case, the Institute of Cost Accountants of
India), direct a class of companies engaged
in production of such goods or providing
such services as may be prescribed to
maintain cost accounts i.e. include in the
books of accounts particulars relating to
utilisation of material or labour or to such
other items of cost.
The Central Government may also direct
the audit of cost records of the company
by a cost accountant in practice. The cost
auditor shall be appointed by the Board
and comply with the cost auditing standards
while conducting the audit.
Number of Directors on a Board
The minimum number of Directors shall
be three in the case of a public company,
two in the case of a private company, and
one Director in the case of a One Person
Company. The maximum number of Directors
has been fixed at 15, which can be increased
by passing a special resolution.
Certain class or classes of companies, as
may be prescribed, would be required to
have at least one woman Director.
Number of Directorships an Individual
can Hold
A person would not be allowed to hold
the office of Director in more than 20
companies at the same time. Any alternate
directorship held would be included in this
number. Within this overall limit, the number
of directorships in public companies shall
not exceed 10. For reckoning the limit of
public companies, directorship in private
companies that are either holding or
subsidiary companies of a public company
shall be included.
Duties of Directors
The Act defines duties of Directors. A Director
of a company shall:
• act in accordance with the articles of
the company.
• act in good faith in order to promote
the objects of the company for the
benefit of its members as a whole, and
in the best interests of the company,
its employees, the shareholders, the
community and for the protection of
environment.
• exercise his duties with due and
reasonable care, skill and diligence and
shall exercise independent judgment.
• not be involved in a situation in which
he may have a direct or indirect interest
that conflicts, or possibly may conflict,
with the interest of the company.
• not achieve or attempt to achieve any
undue gain or advantage either to
himself or to his relatives, partners, or
associates and if such Director is found
guilty of making any undue gain, he
shall be liable to pay an amount equal
to that gain to the company.
• not assign his office and any assignment
so made shall be void.
Independent Directors
The Act introduces the concept of
Independent Directors. All listed companies
would be required to appoint Independent
Directors. At least one-third of the Board
of such companies should comprise
Independent Directors. Such other public
companies as may be prescribed by the
Central Government shall also be required
to appoint Independent Directors. Nominee
Director appointed by any institution, or in
pursuance of any agreement, or appointed
by any Government to represent its
policy watch
7

8. Policy Barometer
for safeguards against victimization of
whistle blowers and makes provision for
direct access to the chairperson of the Audit
Committee in appropriate or exceptional
cases. Establishment of such a mechanism
would need to be disclosed in the Board’s
report and on the company’s website.
Nomination and Remuneration
Committee and Stakeholders
Relationship Committee
shareholding shall not be deemed to be
an Independent Director.
Term of Independent Directors
and Maintenance of Databank of
Independent Directors
Independent Directors shall not be subject
to retirement by rotation and would be
appointed for a term of five years, subject
to a maximum of two such terms. Thereafter,
the director shall be eligible for appointment
only after the expiration of three years’
cooling-off period.
An Independent Director may optionally be
selected from a data bank containing names,
addresses, and qualifications of persons who
are eligible and willing to act as Independent
Directors. This data bank may be maintained
by a body, institute or association, as may
be notified by the Central Government.
Liability of Independent Directors
The Act limits the liability of Independent
Directors and other Non-Executive Directors,
not being promoters or key managerial
personnel. Such Director shall be held liable,
only in respect of such acts of omission
or commission by a company, which had
occurred with his knowledge, attributable
through Board processes, and with his
consent or connivance or where he had
not acted diligently.
The application of knowledge test before
holding Non-Executive Directors liable for
offences etc by companies would provide
relief to such Directors who are not involved
8
policy watch
in day-to-day management or discharge of
executive functions. Devolution from liability
in respect of acts which occur without their
consent and connivance has been a longtime demand of Non-Executive Directors
and would encourage competent individuals
to come forward and take up Independent
Directorships.
Promoter
Definition of ‘promoter’ is included in the
Act along with his liability in appropriate
cases.
Key Managerial Personnel
Whole-Time Director and CFO have been
included in the definition of the term
'key managerial personnel' along with
Managing Director / Chief Executive Officer /
Manager / Whole-Time Director and Company
Secretary.
Audit Committee and Whistle Blowing
Policy
Every listed company and such class of
companies as may be prescribed shall
constitute an Audit Committee which shall
consist of a minimum of three Directors,
with Independent Directors forming a
majority. Further, the majority of members
of the Committee including its chairperson
shall be persons with the ability to read
and understand financial statements. Such
companies shall also establish a vigil
mechanism for Directors and employees to
report genuine concerns. The Act provides
The constitution of a Nomination and
Remuneration Committee has been made
mandatory in the case of listed companies
and such other class or description of
companies as may be prescribed. This
Committee shall consist of three or more
Non-Executive Directors, with at least onehalf being independent. The chairperson of
the company (whether executive or nonexecutive) may be appointed as a member
of this committee but may not chair the
Committee.
The Committee shall formulate the criteria
for determining qualifications, positive
attributes and independence of a Director
and recommend to the Board a policy,
relating to the remuneration for the
Directors, key managerial personnel and
other employees.
The Nomination and Remuneration
Committee shall identify persons who are
qualified to become Directors and who
may be appointed in senior management
in accordance with the criteria laid down,
recommend to the Board their appointment
and removal and shall carry out evaluation
of every Director’s performance.
A Stakeholders’ Relationship Committee
to consider and resolve the grievances
of security holders of the company shall
be constituted where the combined
membership of the shareholders, debenture
holders, deposit holders and other security
holders is more than 1000 at any time
during the financial year. The Chairman of
the Committee shall be a Non-Executive
Director.
Liability of Auditors
The Act provides for liability of auditors
in case of conviction for contravention of
the provisions applicable to them. In case
of a firm, the liability shall be of the firm

9. Policy Barometer
and that of the partner or partners who
acted in a fraudulent manner or abetted
or colluded in any fraud by, or in relation
to, the company or its Directors.
Non-Audit Services
Auditors are prohibited from rendering
specified services to the company/its holding
company / subsidiary company including:
(a) accounting and book keeping services
(b) internal audit
(c) design and implementation of any
financial information system
(d) actuarial services
(e) investment advisory services
(f) investment banking services
(g) rendering of outsourced financial
services
(h) management services and
(i) any other kind of services as may be
prescribed
The provisions relating to restrictions on nonaudit services shall not apply to associate
companies. An auditor or audit-firm, who
or which has been performing non-audit
services on or before the commencement
of the proposed Act shall comply with
these provisions before the closure of the
first financial year after the date of such
commencement.
Related Party Transactions
In case of companies with the prescribed
share capital, no contract or arrangement or
transactions exceeding prescribed amount,
shall be entered into with its related party,
unless the same has been approved by
the shareholders of such company by way
of passing a special resolution. A member
who is a related party to any contract or
arrangement shall not vote on the special
resolution for approval of such contract or
arrangement. However, this requirement shall
apply to only such transactions which are
not in the ordinary course of business or
not on arm's length.
One Person Company
The concept of One Person Company (OPC
Limited) has been introduced in the Act.
OPCs can be formed as private limited
companies and among other exemptions,
have been given the option to dispense with
the requirement of holding an AGM.
Acceptance of Public Deposits
A public company may accept deposits from
persons other than its members subject
to obtaining a rating from a recognised
credit rating agency, providing such deposit
insurance in such manner and to such
extent as may be prescribed, etc. In case
of secured loans, a charge would need to
be created on the assets of the company
which would not be less than the amount
of the deposits accepted.
The Act provides that companies would have
to mandatorily return all public deposits
within one year of commencement of the
new Act. However, the Tribunal may, on an
application made by the company, extend
the time period.
Declaration of Dividend
Before the declaration of dividend in any
financial year, a company may transfer such
percentage of its profits for that financial
year as it may consider appropriate to the
reserves of the company. In any financial
year, owing to inadequacy or absence
of profits, dividend may be paid out of
the accumulated profits earned by it in
previous years and transferred to reserves
only in accordance with rules as may be
prescribed.
companies or between a holding company
and its wholly-owned subsidiary company
or such other class or classes of companies
as may be prescribed. This would require
approvals of Registrar, Official Liquidators,
members holding at least 90 per cent of
the total number of shares of the respective
companies; and majority representing ninetenths in value of creditors of respective
companies. Each of the companies would
have to file a declaration of solvency with
the Registrar.
Mergers and amalgamations between
companies registered under this Act and
companies incorporated in jurisdictions of
such countries as may be notified from
time to time by the Central Government
has been provided for.
Class Action Suits
The concept of class action suits has
been introduced in the Act, providing that
specified number of members or specified
number of depositors may file an application
before the Tribunal on behalf of the members
and depositors, if they are of the opinion
that the management or conduct of the
affairs of the company are being conducted
in a manner prejudicial to the interests of
the company or its members or depositors.
The order passed by the Tribunal shall be
binding on the company and all its members,
depositors and auditors.
Delegated Legislation
Merger or Amalgamation
A scheme of merger or amalgamation may
be entered into between two or more small
The Act provides for scope for delegated
legislation through provisions that mandate
rule making. n
policy watch
9

10. Message
Policy Barometer
CII’s Key Recommendations on Draft
Rules Under the Companies Act, 2013
substantial borrowings from banks or
financial institutions should be exempted
from certain provisions of the Act, e.g.
rotation of auditors, provisions relating
to loans and investments, sharing of
unpublished price sensitive information,
etc. Such companies cannot be treated at
par with other public interest entities.
• Allow Freedom to Undertake CSR :
– Industry should be allowed adequate
legroom to comply with the CSR
provision in a self-responsible
manner. Onerous provisions would
hold back innovation, defeat
legislative intent and shift the focus
from ‘comply with conscience’ to
‘tick-box compliance.’
– The Draft Rules allow companies to
implement CSR activities through
Trusts or Section 8 Companies, or
Societies or Foundations set up by
them. Doing so, would make the
companies liable to comply with
provisions with respect to related
party transactions. A clarification /
carve-out may be considered to be
provided exempting such transactions
i.e. where companies undertake CSR
through their own Trusts, etc.
– A clarification should be provided
to the effect that contribution to
the corpus fund of the Trusts or
Section 8 Companies, or Societies
or Foundations, through which a
company may choose to carry out its
CSR activities would be eligible to be
counted towards the company’s 2 per
cent spend on CSR in that year.
• Low Thresholds for Applicability of
Provisions Pertaining to Related
Party Transactions: The Rules provide
for seeking general body approval
for related parties’ transactions by
companies having a paid-up share
capital of rupees one crore or more. This
threshold needs to be revised since the
limit of rupees one crore was applicable
since 1975 under Section 297 of the
Companies Act, 1956.
Growth in the corporate sector has
been manifold since then in terms
of paid-up capital etc. The limit is
significant since this provision requires
approval by a disinterested quorum
at a general meeting i.e. a member
who is a related party to any contract
or arrangement shall not vote on the
special resolution for approval of such
contract or arrangement.
• Definition of Share Capital: The
proposed definition of ‘Total Share
Capital’ for the purpose of determining
associate company or subsidiary would
include both paid-up equity share capital
and paid-up preference share capital.
This would have far-reaching impact on
classification of companies.
• Definition of Related Party Should
be Pruned: The scope of related party
has been widened to include a director
or Key Managerial Personnel (KMP)
of the holding, subsidiary or associate
company of such company or his relative.
It also includes senior management of
the company or its holding, subsidiary
or associate company including all
members of management one level
below the Executive Directors, including
the functional heads. It is suggested that
KMP and senior management not holding
any equity should not be considered as
related parties, particularly if they are not
part of the Board of Directors.
• Exemptions for Private Companies:
Private companies which are neither
subsidiaries of listed companies nor have
• Balance Interests of Multiple
Stakeholders: Legislation should
balance interests of multiple stakeholders
– At least a 100 per cent weighted
deduction for tax purposes should be
provided for the spent of companies
in CSR. The Ministry of Corporate
Affairs should take up this issue
with the Ministry of Finance.
10 policy watch
and equity of shareholders must apply
to both big and small shareholders to
avoid ‘reverse oppression’ i.e. oppression
of the majority.
• Ensure Transparent Rule-Making
Mechanism: Subordinate legislation
should be finalized in a manner so
as not to be too disruptive of existing
business processes.
• Devise Progressive Regulations : There
is a need for ensuring balance between
ownership and management to foster
entrepreneurship and trade. India has to
be seen as a jurisdiction with progressive
regulations.
• Introduce New Concepts Gradually :
Ground-level challenges should be acceded
to while finalizing the thresholds for
applicability of provisions like appointment
of Independent Directors, appointment of
woman Directors, performance evaluation,
etc. A staggered approach should be
adopted. Some of the provisions which
need precision in implementation are class
action, code of conduct for Independent
Directors, SFIO, etc.
• Avoid Retrospective Applicability
of Provisions: It would be way too
excessive to implement any provision with
retrospective effect. For example, rotation
of auditors with retrospective effect will
cause hardship to companies since most
auditors may have already exhausted their
maximum permissible tenure. Similarly,
mandatory return of all public deposits
within one year of commencement of the
new Act will cause hardship to companies
and depositors alike.
• Minimize the Risk of Future
Litigation : It is imperative to ensure
that rules are prescribed keeping in
mind the stated periphery of law.
This, supplemented with absolute and
clear rules, will enable unambiguous
interpretation, ultimately ensuring
minimal litigation for future. n

11. Industry Voices
Now that the new law for companies has been passed, the focus has shifted to its implementation guidelines since
more than 70 per cent of the new Companies Act, 2013 would be implemented through subordinate legislation.
It is important that these guidelines are drafted in a manner that facilitates business instead of impeding it. The
Law should not only protect the interests of stakeholders but also support the business objects of corporates.
Adi Godrej
Immediate Past President, CII; Chairman, India@75 Foundation;
Chairman, CII Special Task Force on Reforms and Chairman, Godrej Group
Many new concepts such as Independent Directors for unlisted public companies, rotation of auditors, internal
controls, CSR spending, Board’s performance appraisal etc. are being introduced in the legislation for the
first time. Practices with respect to these should be allowed to evolve over time. It needs to be ensured
that the rigour for listed and unlisted companies should be commensurate with the level of public interest
in those entities.
Rahul Bajaj
Past President, CII and Chairman, Bajaj Auto Limited
On governance there has been a significant shift in favour of the minority, in favour of making sure that
there is no formal or informal oppression of the minority by the majority. We need to balance that with the
fact that entrepreneurship is an extremely important aspect of India and the balance between protection of
the minority and, at the same time, retaining the drive of entrepreneurship, is the key spirit that should drive
how we will evolve the rules as we go into the future.
Uday Kotak
Chairman, CII National Council on Financial Sector Development and
Executive Vice Chairman & MD, Kotak Mahindra Bank Limited
The new Act's special focus on social welfare, strengthening corporate governance, protection of investors
against fraud and bringing in transparency in the working of the company is commendable. In many ways,
the Act is commensurate with global standards of management, transparency and accountability and has
introduced enhanced corporate governance standards.
Rajiv Memani
Chairman, CII National Committee on Indirect Taxes / GST and
Country Managing Partner, Ernst & Young LLP
policy watch 11

12. Industry Voices
By replacing the six decade old Companies Act with the new crisp and compact Companies Act, 2013, the Ministry
of Corporate Affairs has given form to its intention of creating an industry as well as an investor-friendly environment
which will fuel the country's economic growth in this era of globalisation. This 21st century legislation sketches out
a commendable set of guidelines for today’s dynamic and evolving corporate world. The Act has been built on
the bedrock of the best corporate governance ideologies marking the beginning of a new era of self regulation,
enhanced disclosures, accountability and investor democracy. Besides, the new legislation also encourages responsible
entrepreneurship by mandating CSR activities to promote economic, environmental and social objectives.
Nimesh Kampani
Chairman & Managing Director, JM Financial Limited
The Companies Act, 2013 is a sweeping and long-awaited reform of the existing Companies Act, 1956. The
new Act is an effective makeover of the present Companies Act, and not just an amendment.
It would appear that while the Act may have started off trying to make the law simpler and more innovative,
in the backdrop of corporate frauds such as Satyam, the focus appears to have slowly shifted more towards
better governance and transparency.
While several innovative measures have been introduced, such as the concept of a small company, a one
person company, cross border mergers, fast track mergers, class actions etc., in the endeavour to strengthen
governance, the new Act does seem to have over-reached in some cases which may result in making the
day-to-day functioning of companies more cumbersome.
Apart from the content of the new law, which is significantly different from the existing position, the staggered
manner in which the Act is being implemented is also leading to some confusion as to the status of matters
that have been approved but not yet implemented. The Draft Rules have also caused some concerns, such
as with regard to the retrospective application of auditor tenure provisions for instance.
One will need to await further implementation of the Act and the rules, including in particular the establishment
of the completely new NCLT enforcement mechanism to assess the true impact of the new law.
Zia Mody
Senior Partner, AZB & Partners
For suggestions please contact Priya Shirali, Corporate Communications at priya.shirali@cii.in
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12 policy watch