TREATMENT OF SERVICE TAX
Companies Act 2013 -Implications on financing, loans, investments and more


    The long-awaited Companies Bill 2013 got its assent from the President of India on 29 August 2013, and became the Companies Act, 2013 (2013 Act). The Act consolidates and amends the law relating to companies .This has changed the way Indian companies will conduct business henceforth. Among the many changes we shall examine some of the important aspects pertaining to Loans, appointment of auditors and depreciation.

    Inter-corporate loans and investments:
    Inter-corporate loans and investments are common in several companies. Section 186 of the 2013 Act states that companies can make investments only through two layers of investment companies subject to exceptions which includes company incorporated outside India .The Sub Section (1) of Section 186 is applicable on all Companies either private Companies or public Companies . As per Sub Section (11) of Section 186 of the Act, the rules in respect of inter corporate loans (subject to few exceptions) shall be applicable on Private Company as well as Public company. There were no such restrictions which were imposed under the 1956 Act. For the above purpose “layer” in relation to a holding company means its subsidiary or subsidiaries- (Explanation (d) of Section 2 (87).The exceptions to the applicability of section 186 are:

    1- Banking Company, Insurance Company, Housing Finance Company etc

    2-Any company whose main business of acquisition of shares or securities
    The Act prescribes a threshold limit in respect of loans to, guarantees on behalf of, or investments in any body corporate exceeding the higher of 60 % paid-up capital, free reserves and securities premium, or 100 % free reserves and securities premium. The board of directors can approve transactions as mentioned above if the aggregate of all such existing plus proposed transactions is within the threshold limits. Prior approval of shareholders is required in case the specified limit is exceeded

    However, Rule 11 of the Companies Rules 2014 excludes loans/ guarantees/ investments made by a holding company to its wholly-owned subsidiary. While the Bill retains the threshold, it significantly increases the scope by covering transactions with ‘any person’ as opposed to the Act’s requirement of “any” body corporate

    Section 186 has been made applicable w.e.f. 01-04-2014. All transactions entered upto 31.03.2014 shall be governed by the corresponding section 372A of the earlier Companies Act (1956).

    Loans to Directors:
    Section 185 of the Companies Act 2013 deals with loans to directors. Section 185 applies to both public as well as private companies. 2013 Act provides that a company cannot, directly or indirectly; – advance any loan, (including a book debt) to any director or any other person in whom the director is interested (as specified); or– give any guarantee or provide any security in connection with any loan taken by its director or such other person
    The expression “to any other person in whom director is interested” has been clarified and includes the following:

    1. Any director of the lending company, or of a company which is its holding company or any partner or relative of any such director;
    2. Any firm in which any such director or relative is a partner;
    3. Any private company of which any such director is a director or member;
    4. Any body-corporate at a general meeting of which not less than 25% of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or
    5. Any body-corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.

    However the above restriction is not applicable to the Loan to a MD / WTD which is as a part of contract of services extended to all its employees or pursuant to any scheme approved by members by special resolution. Further these restrictions do not apply to a company which in the ordinary course of its business provides loan, guarantee or security (for due repayment of any loan) and charges interest which is not less than Bank Rate declared by RBI.

    If any loan is advanced or a guarantee or security is given or provided in contravention, this is considered as a default. The company shall be punishable with fine which shall not be less than 5 lakh rupees but which may extend to 25 lakh rupees, and the director or the other person to whom any loan is advanced or guarantee or security is given or provided in connection with any loan taken by him or the other person, shall be punishable with imprisonment which may extend to 6 months or with fine which shall not be less than Rs. 5 lakh but which may extend to Rs. 25 lakh, or with both.

    It must be noted that in order to remove practical difficulties for companies who wanted to lend to or provide guarantees on behalf of their subsidiaries for genuine business purposes, The MCA subsequently issued circulars to address the issue. The final Rules exempts, loans made by, guarantees given or security provided by a holding company to its wholly owned subsidiaries, from the requirements of section 185. Further, guarantee given or security provided by a holding company to a bank or financial institution for the purpose of loan taken by any subsidiary is also exempt. These loans should, however, be utilized by the subsidiary company for its principal business activities.

    Internal audit requirements:
    The companies act has given recognition to internal audit. Section 138 of the new act prescribes such companies/ or classes of companies which have to mandatorily appoint internal auditors. Such internal auditor shall be appointed by board and may be either chartered accountant or cost accountant or such other professional as may be decided by Board.
    According to Rule 13 of The Companies (Accounts) Rules, 2014 following class or classes of companies shall be required to appoint an internal auditor or firm of internal auditors, namely:

    (a) every listed company;

    (b) every unlisted public company having-

    (i) paid up share capital of 50 crore rupees or more during the preceding financial year; or

    (ii) turnover of 200 crore rupees or more during the preceding financial year; or

    (iii) outstanding loans or borrowings from banks or public financial institutions exceeding 100 crore rupees or more at any point of time during the preceding financial year; or

    (iv) outstanding deposits of 25 crore rupees or more at any point of time during the preceding financial year; and

    (c) every private company having-

    (i) turnover of 200 crore rupees or more during the preceding financial year; or

    (ii) outstanding loans or borrowings from banks or public financial institutions exceeding 100 crore rupees or more at any point of time during the preceding financial year

    Such internal auditor may or may not be an employee of the company (Explanation to Rule 13 of Companies (Accounts) Rules, 2014). As per Sub-rules 4 & 5 of Rule 8 of Companies (Accounts) Rules, 2014, The report of Board of every listed company and every other public company having a paid up share capital of Rs. 25 crore or more shall contain the details in respect of adequacy of internal financial controls with reference to the Financial Statements

    It should be noted that as per Section 144 of the Companies Act, 2013, the statutory auditor appointed under section 139 of Act is not eligible to provide the service of Internal Audit whether rendered directly or indirectly to the company or its holding company or subsidiary company

    Audit and appointment of auditors:
    Section 139 deals with audit requirements and appointment of auditors. The auditor will now be appointed for a period of 5 years, unlike the appointment process at each annual general meeting. The 2013 Act has introduced the concept of rotation of auditors as well as audit firms. It states that in case of listed companies (and other classes of companies as may be prescribed) it would be mandatory to rotate auditors every 5 years in case of the appointment of an individual as an auditor and every 10 years in case of the appointment of an audit firm with a uniform cooling off period of 5 years in both the cases.
    The 2013 Act has allowed a transition period of 3 years for complying with the requirements of the rotation of auditors [section 139(2) of the 2013 Act]. Not only that, but the 2013 Act also grants an option to shareholders to further require rotation of the audit partner and staff at such intervals as they may choose.
    Additionally, the auditor is restricted from providing non audit services like internal audit, investment banking services, Accounts and book keeping services, Actuarial services etc. Also as mentioned earlier, section 144 of the 2013 Act provides that such services cannot be rendered by the audit firm either directly or indirectly through itself or any of its partners, its parent or subsidiary or through any other entity whatsoever, in which the firm or any other partner from the firm has significant influence or control.
    The limit in respect of maximum number of companies in which a person may be appointed as an auditor is 20 companies. In case of a firm, the limit shall be applicable to 20 each partner.
    Depreciation:
    The Companies Act, 2013 has brought a major alteration in the regulations governing depreciation provisions. The Schedule II under the 2013 Act provides for rules pertaining to depreciation. The earlier Schedule XIV of the 1956 Act specified minimum rates of depreciation to be provided by a company. As per schedule II to the companies’ act 2013, Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. The depreciable amount of an asset is the cost of an asset or other amount substituted for cost, less its residual value. The useful life of an asset is the period over which an asset is expected to be available for use by an entity, or the number of production or similar units expected to be obtained from the asset by the entity. The residual value is 5 percent of the original cost of the asset. For the purpose of this Schedule, the term depreciation includes amortization
    While the 1956 act deals with only depreciation of tangible assets, the 2013 Act deals with the amortization of intangible assets also. The previous act contained rates of depreciation of tangible assets; the 2013 act contains only useful lives of tangible assets and does not prescribe depreciation rates.
    Without prejudice to the foregoing provisions,

    (i) In case of such class of companies, as may be prescribed and whose financial statements comply with the accounting standards prescribed for such class of companies under section 133 the useful life of an asset shall not normally be different from the useful life and the residual value shall not be different from that as indicated in Part C of the Schedule II of the act, provided that if such a company uses a useful life or residual value which is different from the useful life or residual value indicated therein, it shall disclose the justification for the same. (ii) In respect of other companies the useful life of an asset shall not be longer than the useful life and the residual value shall not be higher than that prescribed in Part C. (iii) For intangible assets, the provisions of the Accounting Standards mentioned under sub-para (i) or para (ii), as applicable, shall apply
    Whether there will be any retrospective impact if company changes its existing depreciation policy (from WDV to SLM and Vice versa) under Companies Act, 2013 and charge depreciation as per useful life provided is not clear, Also what will be the treatment of the balance depreciable value of the asset in case when useful life of such asset has already expired as per new schedule II of 2013 Act is still unclear. We need to wait for any clarifications or notifications in this regard from the MCA.