Associate Company

1. Due to various scams, with relation to establishment of inter-corporate group relationships, the term “associate” has been widely under discussion for sometime.
2. Under Companies Act, 1956:
   1. Companies Act, 2015 did not provide a definition for “associate companies”. The companies were considered to be associates on establishment of a holding-subsidiary relationship or defining them as Companies under the same management.
   2. The provisions of Section 370(1B) were used to determine whether the companies were under the same management or not. It stated that two body corporates shall be deemed to be under the same management if:
      1. The managing director or manager of one body corporate is a managing director or manager of the other body corporate; or
      2. A majority of the directors of one body corporate constitute, or at any time within the 6 months immediately preceding constituted, a majority of the directors of the other body corporate; or
      3. Not less than 1/3^rd of the total voting power with respect to any matter relating to each of the two body corporates is exercised by the same individual or body corporate; or
      4. If the holding company of one body corporate is under the same management as the other body corporate within the meaning of clause 2.1,2.2.2 or 2.2.3; or
      5. If one or more directors of one of the body corporates, along with their relatives, hold majority of the shares of both the body corporates.
   3. Under Companies Act, 2013:
      1. With an intention to curb all the shortcomings of the previous definition and to provide a more rational and objective framework of associate relationship, the Companies Act, 2013 has defined “associate company”.
      2. It provides that an associate company in relation to another company, means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence. It says that associate company includes a Joint Venture Company.
      3. The term “significant influence”, for the purpose of the above definition, means control of atleast 20% of total share capital, or of business decisions under an agreement.

Dormant Company

1. In today’s economic environment, a lot of companies are being formed for the purpose of holding any assets or Intellectual Property rights or for a future project. Such company keeps complying with the provisions of the Companies Act, even if no business is being transacted. Hence, the Companies Act, 2013 has introduced the concept of “Dormant Company”.
2. Where the company is formed and registered under this act for a future project, or to hold an asset or intellectual property and has no significant accounting transaction, it is a dormant company.
3. The new law also includes the definition of “Inactive Company”. It is defined as a company which has not been carrying on any business or operation, or has not made any significant accounting transaction during the last 2 financial years, or has not filed financial statements and annual returns during the last 2 financial years.
4. “Significant accounting transaction” has been defined as any transaction other than
   1. Payment of fees by a company to the Registrar,
   2. Payments made by it to fulfill the requirements of the Companies Act, 2013 or any other law,
   3. Allotment of shares to fulfill the requirements of the Companies Act, 2013 and
   4. Payments for maintenance of its office and records.
5. Such a company or an inactive company can apply to the Registrar for obtaining the status of a “Dormant Company”.
6. The Registrar after considering the application shall allow the status of a dormant company to the applicant and issue a certificate to that effect.
7. The Registrar shall maintain a register of Dormant Companies.
8. In case of a company which has not filed financial statements or annual returns for 2 financial years consecutively, the Registrar shall issue a notice to that company and enter the name of such company in the register of dormant companies.
9. The Dormant Companies can be converted into active companies by filing an application for the same with the Registrar.

Rotation of auditors

1. Under the Companies Act, 1956, there was no provision for compulsory rotation of auditors. This more often than not results into an auditor continuing in the company for endless number of years. To overcome this issue, the Companies Act, 2013 has provided with a provision for rotation of auditors to ensure independence of the auditor and strengthen diligence in their conduct.
2. The following companies (excluding one person company & small company) shall have to compulsorily rotate its auditor or audit firm after a specific time frame:
   1. All listed companies,
   2. All unlisted public companies having paid-up share capital of Rs 10 crore or more,
   3. All private limited companies having paid-up share capital of Rs 20 crore or more,
   4. All companies having paid-up share capital lower than as mentioned in clause 2 and 2.3 above, but having public borrowings from financial institutions, banks or public deposits of Rs 50 crore or more.
3. Rotation of Auditor/ Audit firm
   1. The companies mentioned in clause 2 above shall not appoint or re-appoint
      1. An individual as auditor for more than 1 term of 5 consecutive years,
      2. An audit firm for more than 2 terms of 5 consecutive years.
   2. The individual auditor or the audit firm, as the case may be, shall not be eligible for re-appointment as the auditor of the same company for 5 years from the completion of the term.
   3. As on the date of appointment the audit firm which is being appointed shall not have a common partner or partners to the other firm whose tenure has expired in the company in the immediately preceding financial year.
4. A transitional period of 3 years has been provided to the companies to comply with the requirements as stated above.
5. Freedom has been provided to the members of a company to resolve that,
   1. In the audit firm appointed by it, the auditing partner and his team shall be rotated at such intervals as may be resolved by the members, or
   2. The audit shall be conducted by more than one auditor.
6. Where the company has appointed two or more individuals or firms or a combination thereof as joint auditors, the company may follow the rotation of auditors in such a manner that both or all the joint auditors do not complete their term in the same year.

Secretarial Audit

1. The Companies Act, 1956 provided for a Compliance Certificate to be issued by a Company Secretary in practice and attach it to the Board Report by certain classes of the company. However, the scope of such compliance certificate has been widened by introduction of the concept of Secretarial Audit.
2. The following companies shall have to compulsorily attach a Secretarial audit report to their Board report, which is circulated to all the shareholders:
   1. All listed companies,
   2. All public companies having a paid-up share capital of Rs 50 crore or more,
   3. All public listed companies having a turnover of Rs 250 crore or more.
3. It shall be the duty of the company to give all the assistance and facilities to the Company Secretary in practice for auditing the secretarial and related records of the company.
4. The Board of directors shall have to provide an explanation in its Board Report to every qualification, reservation, adverse remark or disclaimer made by the Company Secretary in the Secretarial Audit Report.
5. In case of contravention by the company or any of its officers or the Company Secretary in practice, the company, every officer of the company or the Company Secretary in practice, who is in default shall be punishable with a fine which shall not be less than Rs 1 lakh but shall extend upto Rs 5 lakh.