Corporate Compliance Statutory Requirements

The Companies (Amendment) Act, 1999 introduced provisions relating to buy-back of specified securities by a company (Companies Act, sec 77A, 77 AA and 77B). Regulations have been laid down by the Securities and Exchange Board of India (SEBI) in relation to the buy-back of shares by listed companies and by the Central Government in relation to other companies. A company may also issue sweat equity shares of a class of shares already issued under certain conditions specified under the newly inserted sec 79 A. Section 372A has been inserted to provide for the regulation of inter-corporate loans and investments. Companies may give loans, invest monies or provide guarantees or securities of up to 60% of aggregate of its paid-up share capital and free reserves or up to 100% of its free reserves, whichever is more, without shareholder approval. A higher amount is permitted with shareholders’ approval.

Minimum paid-up capital

All private and public companies are required to have a minimum paid-up capital of INR 100,000 and INR 500,000 respectively. Incase certain key words like manufacturing, India, etc, are to be used, then there are additional minimum paid-up capital requirements.

Two kinds of share capital

The share capital of a company may be of two types, namely, equity share capital and preference share capital. The equity share capital may be issued with voting rights or with differential rights as to dividend, voting or otherwise in accordance with the rules and subject to such conditions prescribed by the Companies (Issue of shares with Differential Voting Rights) Rules, 2001. The preference share capital enjoys a preferential right in the payment of dividends during the lifetime of the company and repayment of capital when the company is wound up. The preference share can be of the following types:

• Cumulative and Non-cumulative preference shares.
• Convertible and Non-convertible preference shares;
• Participating and Non-participating preference shares; or
• Redeemable and Irredeemable preference shares.

  New issues of equity share capital with different voting rights

  A public company may issue equity shares with differential rights as to dividends, voting or otherwise in accordance with the rules made in that behalf. This amendment would help management to raise capital without diluting control by issuing shares without voting rights. At the same time, investors would have the benefit of receiving dividends and bonus shares.

  Shifting of registered office

  A company proposing to shift its registered office from one state to another is required to pass a special resolution (resolution passed with three-fourths majority) at a meeting of its shareholders in addition to obtaining the confirmation of the Central Government to that effect. A company proposing to change the place of its registered office from the jurisdiction of one Registrar of Companies to the jurisdiction of another Registrar of Companies (RoC) within a state will have to obtain confirmation from the Regional Director. The Regional Director is required to confirm the change within four weeks of receipt of the application. The company is required to file with RoC, the certified copy of the order of the Central Government or, as the case may be, certified copy of the confirmation of the Regional Director. The RoC is required to register the same and certify the registration within one month from the date of filing the documents.

  Buy back of securities

  Subject to the provisions of sec 77A, a company may buy back its own securities up to a maximum extent of 25% of its paid-up share capital in any financial year, subject to fulfilling certain conditions. A company may also issue sweat equity shares of a class of shares already issued subject to certain conditions specified under sec 79A.

  Directors

  Every public company is required to have at least three directors and every private company to have at least two directors, subject to a maximum of 12 directors.
  1. A listed public company in India is required to comply with the corporate governance requirements. Accordingly, such a company is mandatorily required to have not less than 50% of the total strength of the board of directors comprising non-executive directors. Depending on whether or not the Chairman is executive or non-executive, the total number of independent directors that it shall appoint will vary between half or one third respectively. Independent directors have been defined to mean directors, who apart from receiving director’s remuneration, do not have any other material pecuniary relationship or transaction with the company, its promoters, its management or its subsidiaries which in the judgment of the board, may affect the independence of judgment of the director.
  2. (No person can hold office of director in more than 15 companies at a time. This number excludes directorship in private companies and alternate directorship
  3. A director of a public company which has failed to file annual accounts or annual returns for a period of three consecutive financial years commencing on or after 1 April 1999 or has failed to repay its deposits or interest thereon on due date or redeem its debentures on due date or pay dividend and such failure continues for one year or more, will not be eligible to be appointed as a director of a public company for a period of five years.
  4. The board of directors are required to meet at least once in three months and at least four such meetings shall be held in a year. No such meetings need be held compulsory in India and can be held anywhere in the world.
  For a listed public company, in accordance with the provisions ensuring corporate governance, the board of directors are required to meet at least four times a year, with a maximum time gap of four months between any two meetings.

  Corporate Governance

  As a step in the direction of corporate governance, the following provisions have been introduced in the Companies Act:
  1. The Directors Report to include a statement on the maintenance of accounts by the company in accordance with standard accounting practice.
  2. In case of companies with a paid-up share capital of INR 1,000,000 or more which are not required to appoint a company secretary, are required to file a secretarial compliance certificate with the Registrar of Companies and a copy of such certificate should be attached to the Directors’ Report. A company secretary in whole time practice should certify the secretarial compliance certificate.
  3. Mandatory requirement for setting up an Audit Committee in public companies having a paid-up share capital of not less than INR 50,000,000. The Audit Committee to comprise three and such number of other directors as may be decided by the Board. Two-thirds of the total number of members shall be directors other than the managing or whole time directors.

  Statutory accounts

  At every annual general meeting of a company, the company is required to lay a balance sheet and a profit and loss account. The profit and loss account shall relate to the financial year of the company and the balance sheet, as at the end of the financial year. The financial year cannot exceed 15 months. However, it can be extended to 18 months with the special permission of the RoC.

  Annual return

  An Indian company with a share capital must, within 60 days of its annual general meeting, file with the Registrar a return containing the required particulars pertaining to:
  • its registered office.
  • the register of its members and debenture holders;
  • its shares and debentures;
  • its indebtedness;
  • its members and debenture holders (past and present); and
  • its director and managing directors (past and present).