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PRESENTATION AT NAVI MUMBAI CHAPTER OF ICSI ON Analysis of SEBI’s Working Group Report Analysis of MCA’s Report on proposed amendments – Audit Highlights of the Cos. (Amendment) Act, 2019

By Gaurav Pingle, Practising Company Secretary

AGENDA FOR TODAY’S DISCUSSION

Analysis of SEBI's Working Report on RPTs Analysis of MCA’s Consultation Paper to examine existing provisions of law & make suitable amendments to enhance Audit Independence & Accountability Key amendments in the Cos. (Amendment) Act, 2019 Key Recommendations of Co. Law Committee (2019)

February 16, 2020 Presentation at Navi Mumbai Chapter (ICSI) By Gaurav Pingle, Company Secretary

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Analysis of SEBI’s Working Report on RPTs

February 16, 2020 Presentation at Navi Mumbai Chapter (ICSI) By Gaurav Pingle, Company Secretary

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BACKGROUND OF THE WORKING GROUP REPORT ON RELATED PARTY TRANSACTIONS

• Facts of the case – ITC Vs SEBI [SAT order dated Sep. 26,

2019]

• Nature of transactions involved
• SAT’s Observations
• SAT’s Conclusion
• Reference to the SAT order.

February 16, 2020 Presentation at Navi Mumbai Chapter (ICSI) By Gaurav Pingle, Company Secretary

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ANALYSIS OF SEBI’S WORKING REPORT ON RPT

• Proposed amendments to definition of ‘Related Party’
• Proposed amendments to definition of ‘Related Party Transactions’
• Materiality threshold
• Audit Committee Approval
• Shareholders Approval
• Exemptions
• Disclosures.

Reference to SEBI’s Working Report on RPT

February 16, 2020 Presentation at Navi Mumbai Chapter (ICSI) By Gaurav Pingle, Company Secretary

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Analysis of MCA’s Consultation Paper to examine existing provisions of law & make suitable amendments to enhance Audit Independence & Accountability

February 16, 2020 Presentation at Navi Mumbai Chapter (ICSI) By Gaurav Pingle, Company Secretary

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IMPORTANT POINTS OF THE MCA’s CONSULTATION PAPER

• Self-interest Threat
• Self-review
• Advocacy Threat
• Familiarity Threat
• Intimidation Threat

February 16, 2020 Presentation at Navi Mumbai Chapter (ICSI) By Gaurav Pingle, Company Secretary

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Suggestions to overcome the said situations which worsened independence of the Auditors

TO REMOVE THE SELF – INTEREST THREAT:

• Prohibition of providing non-audit services;
• Fees based on reasonable estimates of time & expertise reqd.;
• Stringent independence guidelines and monitoring by firms;
• Disclosure of previous business relationship with Co. in Audit

Report;

• Legislative restrictions on auditors regarding independence

February 16, 2020 Presentation at Navi Mumbai Chapter (ICSI) By Gaurav Pingle, Company Secretary

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… Suggestions to overcome the said situations which worsened independence of the Auditors

TO REMOVE THE SELF-REVIEW THREAT:

• Stringent quality review procedures within firms;
• Prohibition of retired partners joining clients within cooling

period;

• Confidentiality of information;
• Prohibition of personal relationships with clients;
• Prohibition of providing certain assurance engagements for

client

February 16, 2020 Presentation at Navi Mumbai Chapter (ICSI) By Gaurav Pingle, Company Secretary

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… Suggestions to overcome the said situations which worsened independence of the Auditors

TO REMOVE THE ADVOCACY THREAT:

• Prohibition of business relationships;
• Strict rules on promoting clients;
• Rotation of audit partners

February 16, 2020 Presentation at Navi Mumbai Chapter (ICSI) By Gaurav Pingle, Company Secretary

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… Suggestions to overcome the said situations which worsened independence of the Auditors

TO REMOVE THE FAMILIARITY THREAT:

• Restriction of personal relationships;
• Rotation of audit partners and possibly senior auditors;
• Disclosure of commission and other relationships.

TO REMOVE THE INTIMIDATION THREAT:

• Appointment of auditors by external authorities like CAG of

India.

February 16, 2020 Presentation at Navi Mumbai Chapter (ICSI) By Gaurav Pingle, Company Secretary

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MCA has observed foll. further points which require thorough examination & proper inclusion in existing law

• Economic Concentration of audit [Big 4] – beneficent and

maleficent effect on economy

• Non-audit services not to be taken by auditors
• Joint Audit – should it be made mandatory for bigger

companies?

• Mandatory comment of Holding Company’s auditor on

account of subsidiary companies?

• Methodology for creation and maintenance of proposed panel
• f auditors – CAG/RBI/NFRA

February 16, 2020 Presentation at Navi Mumbai Chapter (ICSI) By Gaurav Pingle, Company Secretary

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MCA has observed foll. further points which require thorough examination & proper inclusion in existing law

• Audit

Engagement letter – where mandated and assessment of its utility and mis-use

• Utilisation of Borrowed funds – Concurrent Audit?
• Restriction on number of audit firms a group [Big 4] can

have in whole of India.

• Disclosure / requirement on Probability of default? – On

the lines of Credit Rating Agencies

February 16, 2020 Presentation at Navi Mumbai Chapter (ICSI) By Gaurav Pingle, Company Secretary

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MCA has observed foll. further points which require thorough examination & proper inclusion in existing law

• Unlisted Co. whose parent company is a listed company will

also require submitting quarterly returns to SEBI

• Development of a ‘Composite Audit Quality Index’ to

improve accountability of auditors and audit firms

• Strengthening Deterrence of conducting improper audits by

inspection of audit engagements

• Resignation of auditors

February 16, 2020 Presentation at Navi Mumbai Chapter (ICSI) By Gaurav Pingle, Company Secretary

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Analysis of Companies (Amendment) Act, 2019 & Key Recommendations of Company Law Committee Report (2019)

February 16, 2020 Presentation at Navi Mumbai Chapter (ICSI) By Gaurav Pingle, Company Secretary

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EXTRACT OF STATEMENT OF OBJECTS & REASONS OF COMPANIES (AMENDMENT) BILL, 2019

The recommendations made by the Committee were examined by the Government and it was noted that the changes in the Companies Act, 2013 suggested by the said Committee would fill critical gaps in the corporate governance and compliance framework as enshrined in the said Act while simultaneously extending greater ease

• f doing business to law abiding corporates.

Accordingly, it was proposed to amend certain provisions of the Companies Act, 2013. However, in view of the urgency, the Companies (Amendment) Ordinance, 2018 was promulgated on November 2, 2018. To replace the aforesaid Ordinance, a Bill, namely, the Companies (Amendment) Bill, 2018 was introduced in the Lok Sabha and passed in the said House on January 4, 2019. However, the said Bill could not be taken up for consideration in the Rajya Sabha.

February 16, 2020 Presentation at Navi Mumbai Chapter (ICSI) By Gaurav Pingle, Company Secretary

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EXTRACT OF STATEMENT OF OBJECTS & REASONS OF COMPANIES (AMENDMENT) BILL, 2019

…. It is now proposed to bring the Companies (Amendment) Bill, 2019 to replace the Companies (Amendment) Second Ordinance, 2019 with certain

• ther

amendments which are considered necessary to ensure more accountability and better enforcement to strengthen the corporate governance norms and compliance management in corporate sector.

February 16, 2020 Presentation at Navi Mumbai Chapter (ICSI) By Gaurav Pingle, Company Secretary

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• COS. (AMENDMENT) ACT, 2019

Cos. (Amendment) Ordinance, 2019 Few more amendments introduced in Bill Cos. (Amendment) Bill, 2019

February 16, 2020 Presentation at Navi Mumbai Chapter (ICSI) By Gaurav Pingle, Company Secretary

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KEY PROVISIONS OF COS. (AMENDMENT) ACT, 2019

(NOT PART OF COS. (AMENDMENT) ORDINANCE, 2019)

• ‘Registration of Prospectus’ being changed to ‘mere Filing
• r Prospectus’ with ROC
• De-mat of shares of Unlisted Public Company
• De-mat of shares of Private Companies?
• Now, it is the responsibility of Co. to identify individual who

is SBO & require him to comply with provisions

• CG can issue directions for provisions relating to SBO

February 16, 2020 Presentation at Navi Mumbai Chapter (ICSI) By Gaurav Pingle, Company Secretary

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KEY PROVISIONS OF COS. (AMENDMENT) ACT, 2019

(NOT PART OF COS. (AMENDMENT) ORDINANCE, 2019)

• Treatment of unspent amount of CSR,
• Provision for bail by special courts in case of SFIO
• Declaration by NCLT of a person ‘not fit or proper’ for being

director or officer of Co. & his removal

February 16, 2020 Presentation at Navi Mumbai Chapter (ICSI) By Gaurav Pingle, Company Secretary

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KEY PROVISIONS OF COS. (AMENDMENT) ACT, 2019

(PART OF COS. (AMENDMENT) ORDINANCE, 2019)

February 16, 2020 Presentation at Navi Mumbai Chapter (ICSI) By Gaurav Pingle, Company Secretary

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‘Fine’ or ‘Imprisonment’ for under offences under Cos. Act, 2013

‘Penalty’ by Registrar

• f Companies or

Regional Director . Adjudication Process. Parameters for ‘Penalty’

KEY PROVISIONS OF COS. (AMENDMENT) ACT, 2019

(PART OF COS. (AMENDMENT) ORDINANCE, 2019)

• Change of FY with permission of RD (earlier NCLT)
• Provision of declaration for ‘Commencement of business’

re-introduced

• Conversion of Public Co. into Private Co. with approval of

RD (earlier NCLT)

• Time limit for filing charge has been reduced. Provision of

‘Rectification of Register of Charges’ for delayed submission

• f charge omitted;

February 16, 2020 Presentation at Navi Mumbai Chapter (ICSI) By Gaurav Pingle, Company Secretary

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KEY PROVISIONS OF COS. (AMENDMENT) ACT, 2019

(PART OF COS. (AMENDMENT) ORDINANCE, 2019)

• RoC empowered to remove name of Co., if subscription

amount not paid or Co. not carrying on business

• Penalties only 50% of normal penalty in case of OPC &

Small Co.,

February 16, 2020 Presentation at Navi Mumbai Chapter (ICSI) By Gaurav Pingle, Company Secretary

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• COS. (ADJUDICATION OF PENALTIES) RULES, 2014

While adjudging quantum of penalty, the adjudicating officer shall have due regard to the following factors, namely: (a) Size of the company (b) Nature of business carried on by the company (c) Injury to public interest (d) Nature of the default (e) Repetition of the default (f) The amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default; and (g) Amount of loss caused to an investor or group of investors or creditors as a result of the default:

February 16, 2020 Presentation at Navi Mumbai Chapter (ICSI) By Gaurav Pingle, Company Secretary

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‘Penalty’ instead of ‘Fine’ or ‘Imprisonment’

Section ‘Penalty’ instead of ‘fine’ or ‘imprisonment’ 10A Declaration before commencement of business (also name of company can be removed) 53(3) Issue of shares at discount 64(2) Failure to give Notice to Registrar for alteration of capital 92(5) Penalty for default in filing annual return 102(5) Not complying with provisions relating to explanatory statement with notice of general meeting 105(3) If notice of general meeting does not indicate about provisions of proxy 117(2) Non-compliance of provision relating to filing of resolutions and agreements 121(3) Not filing report of AGM by listed company 137(3) Non-compliance of provisions relating to filing of financial statement 140(3) If auditor does not file statement of his Resignation to ROC

February 16, 2020 Presentation at Navi Mumbai Chapter (ICSI) By Gaurav Pingle, Company Secretary

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‘Penalty’ instead of ‘Fine’ or ‘Imprisonment’

Section ‘Penalty’ instead of ‘fine’ or ‘imprisonment’ 157(2) If company does not inform DIN to ROC within 15 days 159 Violation of provisions by director relating to DIN 165(6) Violating provisions relating to restriction on number of Directorships 191(5) Violation of provisions relating to payment to director for loss of office, etc. 197(15) Contravention of provisions in respect of managerial remuneration 203(5) Not appointing Key Managerial Personnel when mandatory 238(3) Violating provision of section 238(1)(c) in respect of circular for offer of scheme involving transfer of shares 446(B) Lesser penalties for OPC and small companies 454A Double penalty for offence repeated within 3 years

February 16, 2020 Presentation at Navi Mumbai Chapter (ICSI) By Gaurav Pingle, Company Secretary

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WHAT NEXT?

• Govt. constitutes Company Law Committee for examining

and making recommendations on various provisions and issues pertaining to implementation of the Companies Act?

• PIB PR – dated September 18, 2019

February 16, 2020 Presentation at Navi Mumbai Chapter (ICSI) By Gaurav Pingle, Company Secretary

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CLC formed in line with Govt.’s objective of:

 Promoting Ease of Living in the country  By providing Ease of Doing Business to law abiding corporates,  Fostering improved corporate compliance for stakeholders at large and  To address emerging issues having impact on working of corporates

February 16, 2020 Presentation at Navi Mumbai Chapter (ICSI) By Gaurav Pingle, Company Secretary

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Terms of Reference of the Committee

• Analyze

the nature

• f

the

• ffences

(compoundable and non- compoundable) and submit its recommendation as to whether any of the

• ffences could be re-categorized as ‘civil wrongs’ along with measures to
• ptimize the compliance requirements under the Companies Act, 2013

and concomitant measures to provide further Ease of Doing Business;

• Examine the feasibility of introducing settlement mechanism, deferred

prosecution agreement, etc., within the fold of the Companies Act, 2013;

• Study the existing framework under the Limited Liability Partnership Act,

2008 and suggest measures to plug the gaps, if any, while at the same time enhancing the Ease of Doing Business;

February 16, 2020 Presentation at Navi Mumbai Chapter (ICSI) By Gaurav Pingle, Company Secretary

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Terms of Reference of the Committee

• Propose measures to further de-clog and improve the functioning of the

NCLT;

• Suggest measures for removing any bottlenecks in the overall functioning
• f the statutory bodies like SFIO, IEPFA, NFRA, etc. under the Act ;
• Identify specific provisions under the Companies Act, 2013 and the

Limited Liability Partnership Act, 2008 which are required to be amended to bring about greater Ease of Living for the corporate stakeholders including but not restricted to review of Forms under the two Acts;

• Any other relevant recommendation as it may deem necessary.

February 16, 2020 Presentation at Navi Mumbai Chapter (ICSI) By Gaurav Pingle, Company Secretary

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KEY RECOMMENDATIONS OF COMPANY LAW COMMITTEE REPORT

February 16, 2020 Presentation at Navi Mumbai Chapter (ICSI) By Gaurav Pingle, Company Secretary

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BROAD TIMELINES

Formation of CLC – Sep. 18, 2019 Meetings of CLC Submission

• f Report –

Nov. 18, 2019

February 16, 2020 Presentation at Navi Mumbai Chapter (ICSI) By Gaurav Pingle, Company Secretary

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FURTHER DECRIMINALISING OFFENCES UNDER THE ACT

• Re-categorising 23 offences out of 66 remaining compoundable offences

under the Act, to be dealt with in the in-house adjudication framework wherein these defaults would be subject to a penalty levied by AO;

• Quantum of ‘penalties’ recommended are lower than quantum of ‘fines’;
• Omitting, altogether, 7 compoundable offences;
• Limiting punishment for 11 compoundable offences to only fine by

removing provision for imprisonment and recommending that 5 offences be dealt under alternative frameworks;

February 16, 2020 Presentation at Navi Mumbai Chapter (ICSI) By Gaurav Pingle, Company Secretary

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FURTHER DECRIMINALISING OFFENCES UNDER THE ACT

• Reducing quantum of penalties in respect of 6 provisions,

which were shifted to in-house adjudication framework through recently passed Cos. (Amendment) Act, 2019;

• Retention of status-quo in case of non-compoundable
• ffences.

February 16, 2020 Presentation at Navi Mumbai Chapter (ICSI) By Gaurav Pingle, Company Secretary

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RECOMMENDATIONS TARGETED TOWARDS PROVIDING EASE OF LIVING FOR LAW ABIDING CORPORATES

• Power to exclude certain Class of Cos. from definition of ‘Listed

Co.’, mainly for listing of debt securities;

• Clarifying the trial court’s jurisdiction on the basis of place of

commission of offence under Sec. 452 of the Act (for wrongful withholding of property of Co. by its officers/employees);

• Including provisions of Part IXA (Producer Companies) of Cos.

Act, 1956 in Cos. Act, 2013;

• Proposing Benches of NCLAT;

February 16, 2020 Presentation at Navi Mumbai Chapter (ICSI) By Gaurav Pingle, Company Secretary

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RECOMMENDATIONS TARGETED TOWARDS PROVIDING EASE OF LIVING FOR LAW ABIDING CORPORATES

• Provisions for allowing payment of adequate remuneration to NEDs in

case of inadequacy of profits, by aligning the same with the provisions for remuneration to EDs in such cases;

• Relaxing provisions related to imposition of higher additional fees

under 3rd proviso to Section 403(1) of the Act;

• Extending applicability of Section 446B (Lower penalties for Small Cos.

& OPCs) to:

• All provisions which attract monetary penalties &
• Extending the benefit to Producer Cos. and Start-ups also.
• Excluding certain Cos. /bodies corporate from applicability of Section

89 & Chapter XXII (companies incorporated outside India);

February 16, 2020 Presentation at Navi Mumbai Chapter (ICSI) By Gaurav Pingle, Company Secretary

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RECOMMENDATIONS TARGETED TOWARDS PROVIDING EASE OF LIVING FOR LAW ABIDING CORPORATES

• Reducing timelines for speeding up Rights Issues u/s 62 of Act;
• Extending exemptions from filing of certain resolutions to

certain classes of NBFCs u/s 117 of Act (RBI to be consulted);

• Providing

power to enhance thresholds which trigger applicability of CSR provisions;

• Non-levy of penalties for delay in filing Annual Returns &

Financial Statements in certain cases.

February 16, 2020 Presentation at Navi Mumbai Chapter (ICSI) By Gaurav Pingle, Company Secretary

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ISSUES DELIBERATED BY COMMITTEE, REQUIRING WIDER CONSULTATION (AMENDMENTS IN THE LATER STAGE)

• Providing for appeal against the orders of RDs before NCLT
• Exempting certain Private Placement requirements for QIPs
• Reviewing provisions on disqualification of directors
• Reviewing provisions in respect of debarment of audit

firms.

February 16, 2020 Presentation at Navi Mumbai Chapter (ICSI) By Gaurav Pingle, Company Secretary

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February 16, 2020 Presentation at Navi Mumbai Chapter (ICSI) By Gaurav Pingle, Company Secretary

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THANK YOU NAVI MUMBAI CHAPTER OF ICSI FOR THE OPPORTUNITY!  THANK YOU PROFESSIONAL COLLEAGUES FOR YOUR ACTIVE PARTICIPATION! 

GAURAV PINGLE, PRACTISING COMPANY SECRETARY (M) +91 9975565713 | (E) GP@CSGAURAVPINGLE.COM