4.1 Provisions Relating Declaration And Payment of dividend

Declaration and Payment of Dividend under Companies Act 2013, has been enacted for distribution of profit among shareholders of the company. It is defined under section 2(35) of the Companies Act 2013.

It is related to the return on investment, made in equity shares or preference shares. It includes interim dividend. It is paid out of the profits which are not retained by the business. The dividend is distributed among the shareholders in proportion to the shares held by them. Shareholders are entitled to get a dividend as they are the owners of the company .                                                                                 

Regulations for the Declaration and Payment of Dividend

Under Section 205 of the Companies Act, 2013[1] contains the regulations for the declaration and distribution of dividend. According to law, it is mandatory for every company having share capital that makes a profit to declare and distribute a dividend to its shareholders. The dividend which includes interim dividend can be paid out of the current profits or from accumulated profits. Before the declaration of the dividend, it must be assured that depreciation for the whole year has to be provided and for this purpose, it is required for the board to approve unaudited financial statements and the amount is needed to be transferred to reserves.

To declare a dividend, a separate bank account is required to be opened where the amount of the dividend is to be transferred within 30 days of the declaration.

Procedure for the Declaration and Payment of Dividend

Following are the steps involved in the payment of dividend:

Firstly depreciation shall be computed according to the rate specified in Schedule XIV or on any other basis decided by the Central Government.

2.   Transfer of profits to reserves

Before the declaration of the dividend, part of the profits has to be transferred to the reserves of the company. The Higher amount of earnings can be transferred to reserves voluntarily subject to the conditions.

Board Meeting Another important step is to pass board resolution in the board meeting of the directors of the company otherwise it cannot be declared at the annual general meeting.

3.   Annual General Meeting

An ordinary resolution is required to be passed at the general meeting of the members. The notice of the meeting will mention the declaration of the dividend which will be sent to both members as well as creditors of the company.

4.   Time limit

For declaration of the dividend, it is required to to open a separate bank account. The declared amount of dividend shall be transferred to the account. Within 30 days of the annual general meeting, a dividend warrant is required to be sent to the shareholders.

5.   Transfer to unpaid dividend account

Amount remaining unclaimed is required to be transferred to unpaid dividend account within 7 days from the expiry of 30 days of dividend declaration. The unpaid or unclaimed dividend for 7 years is transferred to Investor Education Protection Fund within 30 days.

6.   Circumstances under which dividend is not required to be paid

7.   Tax limit

The dividend declared by the company out of current or accumulated profits is charged with an additional tax rate of 15%. This tax is required to be paid within 14 days of the declaration of the dividend.

8.   Provisions related to Listed Company

All listed companies have to give prior information regarding the board meeting of the company to the stock exchange where the securities of the company are listed.

9.   Penalty in case of non-distribution of dividends

In case where a company fails to pay dividend within 30 days period from the date of its declaration to the shareholders then the company shall be penalized with interest at 18% per annum for the period of default and every director shall be imprisoned for a term which may extend to two years maximum and fine may also be levied of 1000 rupees for the day during which the default continues. 

It may be noted that there are some exceptions to this law and no offence shall be deemed to have committed on occurrence of such exception. You may refer to the above mentioned heading “Circumstances under which dividend is not required to be paid” for exceptions.

Conclusion

It is noteworthy to mention here that no dividend shall be paid except through cash, where payment of dividend payable through cash can also be paid by way of cheque, warrant or electronic mode, to the shareholder who is entitled to dividend.

Key Takeaways:

4.2       Provisions relating to Books Of Accounts

We have talked about the dividends of a company, at length. We shall now talk about the accounts of the company. When we want to know more about the legal aspect of Accounts of a company, we have to refer to the Act.  Section 128 of the Act states that every company must maintain true, and fair financial statements. The accounts must be at a place in India that can be easily accessed within seven days if there was a notice provided. The accounts may as well be placed in an electronic mode. If there is a branch outside India, the company shall keep the records in the registered office and a summarized copy of all returns must be sent periodically to the registered office if the company is registered under the Act.

When it comes to conducting any investigation, all the employees must cooperate in providing any required part of the accounts. It is specified that accounts of at least preceding eight years must be preserved in good order.

There are several important sections from the Companies Act that must be taken into account when we talk about the accounts of any company. The following will represent all the other relevant provisions:

Section of the Companies Act, 2013 and Matters dealt with under that section

Financial Statements of the Company

It should follow Schedule III of the Act.

It must comply with the norms in Section 133.

It must not display any deviation.

2.   Section 130

Presenting the accounts on a court or a tribunal’s order.

3.   Section 131

Revising the financial statements in case of discrepancy.

4.   Section 132

Constitution of a National Financial Regulating Authority.

5.   Section 133

The Central Government shall be making standards for the Company’s accounting standards.

6.   Section 135

The company’s Corporate Social Responsibility Responsibility is contained in the section.

Accounts to comply with accounting standards

The accounting standards are written policies and documents that provide standards for the recognition, measurement, treatment, presentation, and disclosures of accounting transactions in the financial statements. These help with comparing the financial accounts of this year with the previous years. The comparison helps in tracking the growth of the company.

The accounts of a company must comply with accounting standards once set because separate accounting standards have different norms, which are difficult to track. So, the companies are required to follow one set of accounting standards which will be easier for the law to authenticate and verify.

Financial Statements

Section 129 of the Act provides for the maintenance of the financial statements. Section 2(40) must include a balance sheet, profit and loss account/income and expenditure account, cash flow statement, statement of changes in equity. Schedule III includes detailed requirements of the financial statements.

4.3 Provisions Relating to Audit

Audit is an examination of the books and accounts of the company. The examination also includes statutory records, and vouchers of an organization to ascertain the fairness of the financial statements, as well as non-financial disclosures, in order to present a true and fair view of the concern. There are two main types of audits: external audits, internal audits.

External Audits: External Audits are performed by Certified Public Accounting firms, in order to perform an external check.

Internal Audit: This is to make improvements in the company.

4.4 Appointment of auditors

Section 139 of the Companies Act, 2013 states the appointment of an Auditor. In the first annual general meeting, the company shall appoint a person as to its auditor. In each annual general meeting, there must be ratification by the members.  Written consent of the auditor to such appointment certificate that

(a) The auditor is eligible for appointment and is not disqualified for appointment under the Act, the Chartered Accountants Act, 1949 and the rules or regulations made thereunder;

(b) The proposed appointment is as per the term provided under the Act;

(c) The proposed appointment is within the limits laid down by or under the authority of the Act;

(d) The list of proceedings against the auditor or audit firm or any partner of the audit firm pending with respect to professional matters of conduct, as disclosed disclosed in the certificate, is true and correct

After the appointment, the auditor must have a meeting with the ROC within 15 days of appointment. These rules must comply with ADT-1.

Key Takeaways:

4.5 Rotation of Auditors

     {Section 139(2)}Applicability                                                                                                                                

Rotation of auditors will be applicable on the below mentioned class of companies:

Listed company

The following classes of companies excluding one person companies and small companies:

(a) all unlisted public companies having paid up share capital capital of Rs. 10 crore or more

(b) all private limited cocompanies having paid up share capital of Rs. 50 crore or more

(c) all companies having paid up share capital of below threshold limit mentioned in (a) and (b) above, but having public borrowings from financial institutions, banks or public deposits of Rs. 50 crores or more

Non-Applicability: Rotation of auditors will not be applicable on the below mentioned class of companies:

One Person Companies (OPC)

Small Companies

‘‘Small company’’ means a company, other than a public company-

Paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than Rs. 5 crore; or

Turnover of which as per its last profit and loss account does not exceed Rs. 2 crore or such higher amount as may be prescribed which shall not be more than Rs. 20 crore:

Provided that nothing in this clause shall apply to—a holding company or a subsidiary company;

a company registered under section 8; ora company or body corporate governed by any special Act;

Terms of Rotation: The class of companies on which this section is applicable which is prescribed above shall not appoint or re-appoint: –

An individual as auditor for more than one term of five consecutive years (i.e. 5 years)

An audit firm as auditor for more than two terms of five consecutive years (i.e.10 years)

Key Takeaways-                                                                                                                     

Also the individual auditor who has completed his term of 5 years shall not be eligible for re-appointment as auditor in the same company for 5 years from the completion of his term. And that audit firm which has completed its term of 10 years, shall not be eligible for re-appointment as auditor in the same company for 5 years from the completion of such term. That means there must be a gap of 5 years in both the cases either it is an individual auditor or an audit firm after completing the period of 5 years or 10 years as mentioned above. Also it must be noted that if on the date of appointment, there is any common partner/ partners who were in the audit firm whose tenure has expired in the other audit firm, then that audit firm will also be not eligible for appointment.

4.6 Auditors Report                                                                                

For any enterprise, the audit report is a key deliverable which shows the end results of the entire audit process. The users of financial statements like Investors, Lenders, Customers, and others base their decisions and plans on audit reports of any enterprise. An audit report is always critical to influencing the perceived value of any financial statement’s audit.

The auditor should be careful in issuing the audit report as there is are a large number of people placing reliance on such report and taking decisions accordingly. The report should be issued by being unbiased and objective in discharging the functions.

NOTE: The threshold limit of Rs 1 crore for a tax audit is proposed to be increased to Rs 5 crore with effect from AY 2021-22 (FY 2020-21) if the taxpayer’s cash receipts are limited to 5% of the gross receipts or turnover, and if the taxpayer’s cash payments are limited to 5% of the aggregate payments.

4.7 Concept and modes of winding up

IndiaFilings can help you wind up your Company, quickly and simply. IndiaFilings can assist you initiate the completing process within 10 to 14 business days. The whole process for winding up of a company are often completed within 3 to six months, subject to government processing times. The timeline for winding up of a company could also differ from case to case, based on unique circumstances. To discuss more about winding up a company, get in-tuned with an IndiaFilings Advisor.

MODES OF WINDING UP

The main modes of winding up may be discussed under the following three heads, namely:-

1. Compulsory winding up by the court.

2. Voluntary winding up without the intervention of the court.

3. Voluntary winding up with the intervention of the court i.e., under the supervision of the court.

Mode # 1. Compulsory Winding Up by the Court:

Winding up of a Company by an order of the court is called the compulsory winding up. Section 433 of the Companies Act lays down the circumstances under which a Company may be compulsorily wound up. They are:

(a) If the Company has by special resolution, , resolved that the Company may be wound up by the court.

(b) If default is made in delivering the statutory report to the Registrar or in holding the statutory meeting.

(c) If the Company does not commence its business within a year from its incorporation or suspends it for a whole year.

(d) If the number of members is reduced, in the case of a public Company below seven, and in the case of a private company below two.

(e) If the Company is unable to pay its debts.

(f) If the court is of the opinion that it is just and equitable that the company should be wound up.

Persons Entitled to Apply for Liquidation:

The Petition for winding up of a Company may be presented by any of the following persons (Sec. 439):

(1) The Company.

(2) The creditors which include contingent creditors, prospective creditors, secured creditors, debenture holders, or a trustee for debenture holders.

(3) The contributories – comprise present and past shareholders of a Company (Secs. 426 and 428).

(4) The Registrar.

(5) Any person authorised by the Central Government on the-basis of report of inspectors.

Mode # 2. Voluntary Winding Up:

A voluntary winding up occurs without the intervention of the court. Here the Company and its creditors mutually settle their affairs without going to the court.

This mode of winding up takes place on:

(a) The expiry of the prefixed duration of the Company, or the occurrence of event whereby the Company is to be dissolved, and adoption by the Company in general meeting of an ordinary resolution to wind up voluntarily; or

(b) The passing of a special resolution by the Company to wind up voluntarily.

Mode # 3. Winding Up Subject to Supervision of the Court:

Windings up with the intervention of the court are ordered where the voluntary winding up has already commenced. As a matter of fact, it is the voluntary winding up but under the supervision of the court. A court may approve a resolution passed by the Company for voluntary winding up but the winding up should continue under the supervision of the court.

The court will issue such an order only under the following circumstances:

(a) If the resolution for winding up was obtained by fraud by the company; or

(b) If the rules pertaining to winding up are not being properly adhered to; or

The Court may exercise the same powers as it has in the case of compulsory winding up under the order of the court.

Key Takeaways:

4.7 Provisions Relating to Insider Trading And Whistle Blowing

Insider Trading Insider trading is trading in company’s securities and bonds by those individuals who have access to price-sensitive confidential information which is otherwise not available to public about the company.  It is against the principles of fiduciary duty which an individual has undertaken in lieu of his duty and has in consonance of that duty got privileged access. A company is mandatorily required to annually report trading of stocks by corporate officers, directors, or other members of the company who are having access to privileged information to the Securities and Exchange Board of India (“SEBI”) and are duty-bound to disclose such information publicly.

Summarily, insider trading is dealing in stocks and securities of a public/private listed company by a member of the organisation, directors, workers or employees who have access to inside information or any other person such as an internal auditor, legal or financial advisor, consultant, data analyst etc., who have the knowledge or are in potential position to gain access to inside information of price sensitive nature which is otherwise not available to public in general. Exchange Commission all over the globe considers preventing such transactions as an essential obligation to regulate the capital market system because insider trading challenges the confidence of investor in the fairness and integrity of the securities markets. 

SEBI (Insider Trading) Regulations, 1992 were initially framed under Section 11 of SEBI Act, 1992, which was enacted with an intention to prevent and curb the menace of insider trading in securities and stock of companies. The Companies Act, 2013 also attempted to incorporate the provisions of SEBI (Prohibition of Insider Trading) Regulations, 1992 as amended but SEBI has notified the SEBI (Prohibition of Insider Trading) Regulations, 2015(“Insider Trading Regulations”), which changes the law on insider trading considerably. Thus, Section 195 of the Companies Act, 2013, although late, attempts to bring private companies, public companies, and listed companies under its purview.

Key Takeaways

Whistle Blowing The term “whistle-blowing” originates from the practice of British policemen who blew their whistles whenever they observed commission of a crime. Whistle blowing means calling the attention of the top management to some wrongdoing occurring within an organization.

A whistle blower may be an employee, former employee or member of an organisation, a government agency, who have willingness to take corrective action on the misconduct.

As per Sec.177 of the Companies Act,2013, certain companies  have to establish Vigil/Whistle-blowing mechanism to report any unethical behaviour or other concerns to the management.

Make it illegal to “discharge, demote, suspend, threaten, harass or in any manner discriminate against” whistle blowers

Establish criminal penalties of up to 10 years for executives who retaliate against whistle blowers

Require board audit committees to establish procedures for hearing whistle blower complaints.

Allow the secretary of labour to order a company to rehire a terminated employee with no court hearing.

Give a whistle blower the right to a jury trial, bypassing months or years of administrative hearings.

References:

• ‘Company Law’ by Brenda Hannigan
• ‘Elements of Company’ Law by N. D. Kapoor