Tuesday, December 02, 2014


The Union Cabinet, chaired by the Prime Minister Shri Narendra Modi, on 2nd December. 2014 approved the introduction of the Companies (Amendment) Bill, 2014 in Parliament to make certain amendments in the Companies Act, 2013. 

The Companies Act, 2013 (Act) was notified on 29.8.2013. Out of 470 sections in the Act, 283 sections and 22 sets of Rules corresponding to such sections have so far been brought into force. In order to address some issues raised by stakeholders such as Chartered Accountants and professionals, following amendments in the Act have been proposed:

1. Omitting requirement for minimum paid up share capital, and consequential changes. (For ease of doing business) 

2. Making common seal optional, and consequential changes for authorization for execution of documents. (For ease of doing business) 

3. Prescribing specific punishment for deposits accepted under the new Act. This was left out in the Act inadvertently. (To remove an omission) 

4. Prohibiting public inspection of Board resolutions filed in the Registry. (To meet corporate demand) 

5. Including provision for writing off past losses/depreciation before declaring dividend for the year. This was missed in the Act but included in the Rules. 

6. Rectifying the requirement of transferring equity shares for which unclaimed/unpaid dividend has been transferred to the IEPF even though subsequent dividend(s) has been claimed. (To meet corporate demand) 

7. Enabling provisions to prescribe thresholds beyond which fraud shall be reported to the Central Government (below the threshold, it will be reported to the Audit Committee). Disclosures for the latter category also to be made in the Board’s Report. (Demand of auditors)

8. Exemption u/s 185 (Loans to Directors) provided for loans to wholly owned subsidiaries and guarantees/securities on loans taken from banks by subsidiaries. (This was provided under the Rules but being included in the Act as a matter of abundant caution).

9. Empowering Audit Committee to give omnibus approvals for related party transactions on annual basis. (Align with SEBI policy and increase ease of doing business)

10. Replacing ‘special resolution’ with ‘ordinary resolution’ for approval of related party transactions by non-related shareholders. (Meet problems faced by large stakeholders who are related parties)

11. Exempt related party transactions between holding companies and wholly owned subsidiaries from the requirement of approval of non-related shareholders. (corporate demand)

12. Bail restrictions to apply only for offence relating to fraud u/s 447. (Though earlier provision is mitigated, concession is made to Law Ministry & ED) 

13. Winding Up cases to be heard by 2-member Bench instead of a 3-member Bench. (Removal of an inadvertent error) 

14. Special Courts to try only offences carrying imprisonment of two years or more. (To let magistrate try minor violations). 

[1]  Press Information Bureau,  Government of India dated  02-December-2014


By K P C Rao, LLB, FCMA, FCS.,
CMA (USA)., FIPA (Australia)
Practicing Company Secretary
I            What is International Financial Reporting Standards (IFRS)?

International Financial Reporting Standards (IFRS) is a set of accounting standards developed by an independent, not-for-profit organization called the International Accounting Standards Board (IASB). The goal of IFRS is to provide a global framework for how public companies prepare and disclose their financial statements. IFRS provides general guidance for the preparation of financial statements, rather than setting rules for industry-specific reporting.  Having an international standard is especially important for large companies that have subsidiaries in different countries. Adopting a single set of world-wide standards will simplify accounting procedures by allowing a company to use one reporting language throughout. A single standard will also provide investors and auditors with a cohesive view of finances.

Currently, over 120 countries permit or require IFRS for public companies, with more countries expected to transition to IFRS by 2015. Proponents of IFRS as an international standard maintain that the cost of implementing IFRS could be offset by the potential for compliance to improve credit ratings. IFRS is sometimes confused with IAS (International Accounting Standards), which are older standards that IFRS has replaced.

II        IFRS reporting in India – Proposed Timelines

As per pronouncements made by the Ministry of Corporate Affairs (the ‘Ministry’ or the ‘MCA’) large companies will be required to start preparing their financial statements under accounting standards that are converged with International Financial Reporting Standards (IFRS).  IFRSs are increasingly being viewed as the single set of accounting standards for global capital market participants. It is still too early to tell whether non-profits, private companies and governmental entities will eventually adopt IFRS. However, it is clear that IFRS will play an increasing role in the global business community.

The Ministry issued a roadmap on India’s convergence to IFRS. As per this roadmap, there will be two separate sets of Accounting Standards under Section 211(3C) of the Companies Act, 1956/ Section 133 of the Companies Act, 2013[1]. The first set would comprise Indian Accounting Standards which are converged with the IFRSs (‘Converged Standards’) and will be applicable to the specified class of companies. The second set would comprise existing Indian Accounting Standards and will be applicable to other companies, including Small and Medium Companies (SMCs). The Converged Standards would apply in a Phased manner as indicated below:

Companies covered
Opening balance sheet
Phase I
-     Companies that are part of NSE – Nifty 50 Index
-     Companies that are part of BSE Sensex 30 Index
-     Companies that have shares or other securities listed in overseas stock exchanges ; and
-     Listed and Unlisted Companies with net worth in excess of Rs 1000 Crores

1 April; 2011

Phase II
Listed & Unlisted Companies with networth in excess of Rs 500 Crores but not exceeding Rs. 1000 Crores.
1 April; 2013
Phase III
Listed entities with networth of Rs 500 Crores or less
1 April; 2014
Unlisted Companies with net worth lesser than Rs 500 Crores and Small and Medium sized Companies are exempt.

The Ministry also issued a separate roadmap for companies in the financial services sector as below:
Class of companies
Opening balance sheet
Insurance Companies
April 1, 2012
Banking Companies
Scheduled Commercial Banks
April 1, 2013
Urban Co-operative Banks (USB)
Net worth in excess of Rs. 300 crores
April 1, 2013
Net worth in excess of Rs. 200 crores but not exceeding Rs. 300 crores
April 1, 2014
Net worth not exceeding Rs. 200 crores
Regional Rular Banks (RRB)

Non-Banking Financial Companies (NBFC)
Companies which are a part of NSE – Nifty 50

April 1, 2013
Companies which are a part of BSE – Sensex 30
Companies, whether listed or not, which have a net worth in excess of Rs. 1,000 crores
All NBFCs that do not fall in the above categories
April 1, 2014
Non-listed, which have a net worth in excess of Rs. 500 crores
April 1, 2014
Non-listed, which have a net worth not exceeding Rs. 500 crores

III     Current Status
As of date, thirty five Indian Accounting Standards converged with International Financial Reporting Standards (called ‘IND-AS’) have been notified by the Ministry and placed on the MCA website. In addition, the Ministry announced that it would implement the IFRS converged Indian Accounting Standards in a phased manner after various issues, including tax related issues, were resolved with the concerned Departments. In February 2011, the Ministry announced that the date of implementation of the IND AS will be notified at a later date.

IV      Conclusion
Convergence with IFRS has strategic implications and will require harmonization of internal and external reporting. Business plans, earnings estimates and management remuneration plans that have reported earnings as the basis will require revisiting as these are expected to undergo change due to the impact of IFRS convergence. Managing investor and market expectations will also be of paramount importance for the management and would form a critical component of the convergence process.

The key to successfully managing this change is by preparing for it. It is important that companies plan the transition process and anticipate issues that the business will face on using the IFRS converged standards.

[1] Section 133 : Central Government to prescribe accounting standards:—
The Central Government may prescribe the standards of accounting or any addendum thereto, as recommended by the Institute of Chartered Accountants of India, constituted under Section 3 of the Chartered Accountants Act, 1949 (38 of 1949), in consultation with and after examination of the recommendations made by the National Financial Reporting Authority.

Friday, October 03, 2014


By K P C Rao, LLB, FCMA, FCS.,
CMA (USA), FIPA (Australia)
Practicing Company Secretary
Registration of Charges

Part V of the Companies Act 1956 contains provisions related to Registration of the charges (Section 142 to 145)[1]. These contain provisions of charge including mortgage, date of notice of charge, registration of charges, registration in case of debentures, certificate of registration, register of charges, inspection, penalties, etc.

These provisions prescribe for the registration of charges with the Registrar of the Companies and also provide a list of assets and separate them from the unencumbered assets. Registration of charge acts as protection to the lenders and creditors, banks and liquidators. Register of charges is to be maintained by Registrar of Companies as well as the companies concerned.[2]

 Consequences of Non-registration

Non-registration would not prejudice any contract or obligation for payment of money secured by the charge and where the charge becomes void for registration, the debt secured becomes immediately payable. Also a charge on becoming void, no right of lien can be claimed on the documents of title as they were only ancillary to the charge and were delivered in pursuant to the charge.

If a registerable charge is not registered, the transaction does not become void or debt does not become irrecoverable but the security created by the charge or mortgage becomes void against liquidator and creditors.

It is mandatory for a company to file the particulars of charge and failure to do so or contravene the provisions of section 125 is punishable under Section 142 with fine extending up to rupees Five Thousand  for every day of default.[3] 

Conflicting Priorities
There has not been any concerted, cohesive effort either to think or to codify the law of priorities over last several decades. Therefore, there are fragments of laws scattered over different enactments, each of which seems to assert its own preponderance disregarding other claims or interests. It is rather unfortunate that such a significant area on secured lending is left to be settled by case law rather than by well-knit policy of the government. Law-making in this very serious area has been sporadic and ad-hoc – just limited to achieving a limited result, rather than comprehensive review of the matter.

There are several enactments currently competing for super-priority – Sec. 529A of the Companies Act creates a pari passu interest between secured lenders and workmen[4]. Sec 11 of Employees' Provident Funds and Miscellaneous Provisions Act, 1952, provides that in case of insolvency of the employer or winding up of the company, the amount so due from the employer shall be deemed to be the first charge on the assets and shall be paid in
priority to other debts. Sales tax laws of most states, for instance, Sec 38C of Bombay Sales Tax Act, 1959, provides that subject to the provisions regarding first charge in any Central Act, any sum of money due under this Act shall be the first charge on the property. Likewise Sec 14A of Workmen’s Compensation Act, 1923 provides that any liability accrued with respect of any compensation to be paid by the employer shall have first charge on the assets, on the other hand, Sec 11 of the Central Excise Act, 1944 read with Sec142 of the Customs Act 1962 says that the amount of duty may be recovered by attachment and sale of excisable goods.

While these are the different laws that provide for stacking order of priorities, there are several “special recovery” laws enacted from time to time, such as Recovery of Debt due to Banks and Financial Institutions Act, 1993, SARFAESI Act, SFC Acts, IDBI Act, IFCI Act, etc. These special recovery laws either provide the secured lender direct right to sell (for instance, SARFAESI Act, SFC Acts, IDBI Act, IFCI Act, SIDBI Act), or empower a DRT to order the sale of assets to meet the claims of the secured lender.

The question of priority order of different claims will arise (a) in the event of distribution of liquidation proceeds in liquidation proceedings; (b) on recovery orders of a body like DRT; (c) self-help repossession and sale of assets by secured lenders under SARFAESI Act, IFCI Act, and SFC Act etc.

Ruling in Central Bank of India vs. State of Kerala

In the case of Central Bank of India vs. State of Kerala & others[5], the Supreme Court in its judgment dated February 27, 2009, in the matter of priorities between statutory first charges and secured lenders makes the landscape of conflicting priorities of charges over assets even more complex.

In this case, the Supreme Court was concerned with the significant question whether the statutory first charges created by various central and state laws will prevail over the claims of the secured lender even while disposing of assets under the DRT law or the SARFAESI Act. After considering a series of rulings given in the past, such as Bank of Bihar vs. State of Bihar[6], Dena Bank vs. Bhikhabhai Prabhudas Parekh & Co. and others[7], Central Bank of India vs. Siriguppa Sugars & Chemicals Ltd[8], State Bank of Bikaner & Jaipur vs. National Iron & Steel Rolling Corporation and others [9], the Supreme Court came to the conclusion that the primacy of statutory first charges prevails even in case of recovery under the DRT law and the SARFAESI Act.

Some important principles to decide the stacking order of priorities that emerge out of the SC ruling are as follows:

a)     Central Law prevails over a State Law – Hence, if a Central Law provides for a statutory first charge, it has to gain primacy over a conflicting State Law. Sec 38C of the Bombay Sales Tax Act, clearly states that;
“…if any Central Act provides for first charge, the charge created under Section 38C of Bombay Sales Tax Act is overridden”
b)     As usual, the doctrine that a later law prevails over an earlier law applies here too. So, if there are several central laws providing for priority, the later law will prevail over the earlier one.
c)     Unless the law clearly provides for a “first charge”, a mere provision for attachment or recovery as land revenue does not by itself create a first charge. Based on analysis of the provisions of the Central Excise Act, in the case of SICOM vs. Union of India [10] the Supreme Court came to a conclusion that the Excise dues rank only above the claims of ordinary creditors, and not secured creditors.
d)     If the law creates a first charge, the date of creation of the charge is irrelevant - that is, the normal rule of priorities based on the date of creation of the charge is not relevant in case of statutory first charges.

Position of unpaid Government dues under SARFAESI Act

An important provision of the SARFAESI Act [Sec13(9)] is that in case there are multiple security interests on an asset, no secured lender may take an action against such asset without the consent, in writing, of at least 75% of the secured lenders. As per the principles of statutory first charges, obviously, the government becomes a security interest holder over an asset to the extent of unpaid taxes. This is automatic, and without any need for registration of charges or any similar act of creation or perfection of security
interests. The question is, if such a security interest exists, is a bank or financial institution, as secured lender, entitled to take action against an asset without consulting the government as a security interest holder? The word “secured creditor” is defined in Sec 2(zd) of the Act to mean only such persons who have extended financial facility against an asset. An unpaid Government is certainly a security interest holder, but not a secured lender. Hence, Sec. 13(9) does not seem applicable to need the consent of the government before taking of any action under sec 13(4). However, surely enough, in light of the statutory first charge, the distribution of assets upon sale by the secured lender will have to be first towards the statutory first charge holders, and thereafter, to other secured lenders.


Assuming the value of assets of an entity is ` 10 crores, and the entity has the following
out standings:
o   Dues to banks, holding charges over the assets: ` 15 crores
o   Excise dues: `1 crore
o   Sales-tax dues `1 crore
o   EPF dues `1 crore
o   Workmen’s Compensation dues `1 crore
o   Workmen’s dues `3 crore

Assuming the company is not under liquidation, the order of priorities will run as follows:
1.      Workmen’s Compensation Dues – `1 crores
2.      Sales Tax Dues – `1 crores
3.      Dues to Banks – ` 8 crores

Assuming the company is under liquidation, the order of priorities will run as follows:
1.      EPF dues –` 1 crores
2.      Workmen’s Compensation Dues – `1 crores
3.      Sales Tax Dues – `1 crores
4.      Dues to Banks (pari passu with Workmen’s Dues) – `5.83 crores
5.      Workmen’s Dues (pari passu with Bank Dues) –`1.17 crores

Ruling in EPF Commissioner Vs Official Liquidator

In another significant judgment (November 8, 2011) in the case of Employees Provident Fund Commissioner Vs. O.L. of Esskay Pharmaceuticals Limited[11],  the Supreme Court while allowing the applications filed by the appellant held that  in terms of Section 530(1), all revenues, taxes, cesses and rates due from the company to the Central or State Government or to a local authority, all wages or salary or any employee, in respect of the services rendered to the company and due for a period not exceeding 4 months, all accrued holiday remuneration, etc. and all sums due to any employee from provident fund, a pension fund, a gratuity fund or any other fund for the welfare of the employees maintained by the company are payable in priority to all other debts. The court also directed the Official Liquidator appointed by the High Court to deposit the dues of provident fund payable by the employer within a period of 3 months.

An interesting question was resolved by the Supreme Court in this case. This sprang up a rather unusual situation where the Court was required to decide between non obstante clauses contained in two different legislations that ran somewhat contrary to each other.

Section 529-A of the Companies Act provides that “notwithstanding anything contained in any other provision of this Act or any other law for the time being in force”, in case of a winding up, the workmen’s dues and debts due to secured creditors shall be paid in priority to all debts[12]. On the other hand, section 11(2) of the Employees Provident Fund and Miscellaneous Provisions Act, 1952 (EPF Act) provides that amounts due under that Act from an insolvent employer shall be deemed to be a first charge and be paid in priority to all other debts “notwithstanding anything contained in any other law for the time being in force”. The argument made by the company was that since section 529-A was introduced by an amendment to the Companies Act and was later in point of time, that should prevail. However, the court refused to accept that contention.

Of course, after the amount due from an employer under the EPF Act is paid, the other dues of the workers will be treated at par with the debts due to secured creditors and payment thereof will be regulated by the provisions contained in Section 529(1) read with Section 529(3), 529A and 530 of the Companies Act.

The Supreme Court’s reasoning was based on principles of statutory interpretation, and the court was also persuaded by the fact that the EPF Act is a welfare legislation that must be given importance.

[1] Under The Compnies Act, 2013, Chapter VI (Sections 77 to 87) deals with the Registration of Charges.These provisions are yet to be enforced. The New Act specifically provides that any subsequent registration of a charge shall not prejudice any rights acquired in respect of any property before the charge is actually registered [Section 77(1)].
Under this section the additional period for registration of charge has been increased from 30 to 300 days. Wherein the charge is not registered within extended days, then application will be required to be made to the Central Government for extension in terms of section 87 of the Act as to rectification in register of charges.
[2] The provisions as to registration of charge and by whom this application is to be made Under The Compnies Act, 2013 have been made more clear to indicate that registration of charge may also be allowed if filed by charge holder, in case debtor company fails to get the same registered.[Section 78]
[3] Under the New Act, 2013 Punishment for contravention of  any provision of ChapterVI, shall be with fine which shall not be less than one lakh rupees but which may extend to ten lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees, or with both.
[4] Section 326 is having the similar provisions dealing with the Overriding preferential payments under   The Compnies Act, 2013.
[5] Central Bank of India vs. State of Kerala & others ; (2009)4 SCC 94
[6] Bank of Bihar vs. State of Bihar; [(1972) 3 SCC 196]
[7] Dena Bank vs. Bhikhabhai Prabhudas Parekh & Co. and others; [(2000) 5 SCC 694]
[8] Central Bank of India vs. Siriguppa Sugars & Chemicals Ltd; [(2007) 8 SCC 353]
[9] State Bank of Bikaner & Jaipur vs. National Iron & Steel Rolling Corporation and others;[(1995) 2 SCC 19]
[10] SICOM vs Union of India; Bom 1, I (2007) BC 82; 2006 (6) Bom CR 159
[11] Employees Provident Fund Commissioner Vs. O.L. of Esskay Pharmaceuticals Limited; (2011) 10 SCC 727
[12] Section 326 is having the similar provisions dealing with the Overriding preferential payments under   The Compnies Act, 2013.
style='> �-- i �� X � ;font-family: "Times New Roman","serif"'>  Jagannath Ganeshram Agarwala v. Shivnarayan Bhagirath and Ors;  AIR 1940 Bombay 247

[11] Lachhman Joharimal v. Bapu Khandu and Tukaram Khandoji (1869) 6 Bombay High Court Reports 241
[12] State Bank of India v. M/s. Indexport Registered ; 1992 AIR 1740, 1992 SCR (2)1031
[13] Jagannath Ganeshram Agarwala v. Shivnarayan Bhagirath and Ors; AIR 1940 Bombay 247
[14] The Hukumchand Insurance Co. Ltd. v. The Bank of Baroda & Others; AIR 1977 Kant 204
[15] Transcore v. Union of India & Another; (2008) 1 SCC 125

[16] A.P. State Financial Corporation v. M/s Gar Re- Rolling Mills & Another; (1994) 2 SCC 647