The Companies (Amendment) Bill, 2016-Finally some breath of fresh air

Introduction

It is an admitted fact that ever since the companies Act, 2013 (hereinafter called “The Act”) and the slew of Rules there under notified by the MCA from time to time, have been set in motion, it has been an uphill task for corporate professionals to grapple with the complexities  and  to withstand the burden  of  the additional compliances thrown up by it. The Act has inexplicably been long on procedure, harsh on marginal private companies and the confusion caused by the numerous drafting anomalies has not exactly made life comfortable for practitioners of the Law. The Act, has,  in a manner of speaking, set the cat amongst the pigeons. Understandably therefore there has been a clamor from all quarters to soft pedal on the procedure particularly where it is needless, to  ameliorate the misery brought to bear upon marginal companies  and to usher in  a better environment for the Eco-system to function seamlessly. As a fore-runner to the above Bill, the Government  had appointed a high powered Committee to review and revisit the difficulties encountered by stakeholders in the nascent stage of implementation of the new Act. The Report of the Committee was made public recently and some of the recommendations contained in the Report   do find a place in the Bill.

The bill,  if it  hopefully, gets transformed into a law will lead to a paradigm shift to the legislation and it will have the effect of ironing out substantially  the difficulties faced by the corporate sector. Given the enormity of the changes brought about, it is well neigh impossible to capture the nuances of all the proposed changes, considering the limitations of  a discussion paper. In this discussion, we have therefore, ‘cherry-picked” only some of the provisions and have endeavored to bring home the ramifications of the proposed changes.

Chapter I - Major changes

Associate Company-Section2(6)

As per the existing definition, the term  ”significant influence”, inter alia,  means control of at least twenty percent of total share capital .The term ”total share capital” has again been defined under Rule 2(1)(r) of the companies(Specification of Definitions Details)Rules, 2014, to mean the aggregate of the paid-up equity share capital and convertible preference share capital. This is proposed to be amended to provide that “significant influence” would now mean control over at least twenty percent of   the total voting power..As voting power   generally stems out of  holding equity shares unless  of course , preference shareholders get clothed under Section 47 with the  voting rights of equity shareholders due to non-payment of preference dividend for two years or more, significant influence over a company can now emerge  only out of holding of 20% or more of the equity capital of the other company.

“Joint Venture” Defined in Section 2(6)

Although the term  ”joint venture” has been used in the definition of “Associate Company” in the Act , inexplicably what constitutes a” joint venture” was not defined  in the Section.

“Joint venture” has now been defined   to mean a joint arrangement whereby the parties that have joint control of the arrangement ,have rights to the net assets of the arrangement.

“Debenture”-Section 2(30)-clarified

The term has been defined inclusively and could even cover other debt instruments such as commercial paper which evidence a debt. The inclusive nature of the definition is being pruned to exclude the following from the ambit of the definition:

a) Instruments referred to in Chapter III-D of the RBI Act, 1934 and

b) such other instrument, as may be prescribed by the central Govt in consultation with RBI , issued by the company.

The above changes will bring in the much needed clarity as to what constitutes a “Debenture”.

“Financial Year”-Section 2(41)-Associate company also to follow financial year

The above section defines   a “financial year” and  also  provides that every company should align its financial year as per the requirements of the Section within two years from the date of commencement of the Act.

Subsidiaries of the company are also required to align their financial years accordingly subject however to the exception that where  the holding company or Subsidiary company of a company is incorporated outside India and is required to follow a different financial year for consolidation of Accounts outside India, the Tribunal may, on an application , if it is satisfied, allow any period as its financial year whether or not that period is a year. The exception carved out by the proviso to the section is   proposed to be extended to an Associate Company as well.

It follows from the above that an Associate company, subject to the exception as stated above, is also expected to align its Accounting year suitably.

Section 2(51)-Key Managerial Personnel (KMP)

The definition of the above term is being extended to cover in addition to the persons already specified in the Section, any other officer of the company who is not more than one level below the directors and who is in whole time employment and has been designated by the Board as a KMP.

Section 2(57) –“Net Worth”

There exists an anomaly in the existing definition by which aggregate value of the accumulated losses had to be deducted from the net worth. This portion of the definition is being substituted by the words ”debit or credit balance of profit and loss Account” which would make it clear that any credit balance in the profit and loss Account would be an addition to the “net worth” and vice versa.

“Related Party”-Section 2(76)

Existing Clause (viii) in the Section is being substituted  a new clause (viii) in terms of which a Body corporate (which term under Section 2(11) includes a company incorporated outside India) which is the holding or subsidiary or Associate  company of such company will also be considered as a related party. In addition, a Body corporate which is an Investing company or the  venturer  of a company would be a related party. The existing clause (viii) in the Section only covered an Indian Company. The effect of this amendment would be to extend the contours of the definition of a Related Party.

Section 2(85)-Small company-Thresholds eased

The maximum  threshold  for the paid up share capital of  a small company   involved  is being raised to Rupees Ten crore from the existing Rupees Five Crores. Threshold for maximum turnover will be hiked up to Rupees one hundred crore from twenty crores.This would mean that many more companies particularly start-ups can come within the purview of a “small company” and be spared from the rigmarole of procedure in many aspects of the Statute.

Insertion of new Section 3A

New provision is proposed to be inserted after the existing Section 3 to provide that where the minimum number of members in a private and public company respectively falls below the statutory minimum of two and seven members and the persons involved  are aware of the  above fact and  despite that, the company is continuing to carry on business for six months or more ,  the persons continuing to be involved with the company as members shall be severally liable for the  payment of the debts contracted during the above period .They shall also be  liable to be sued severally for such debts.

Provisions relating to Memorandum of Association(MoA)

Changes proposed in Section 4 indicate that it would not be any longer necessary for a company to have a  descriptive  objects clause identifying the activities with which  it is proposed to be associated.

The Company may be allowed to engage itself in any lawful act or activity or business or to pursue any specific object or objects permitted under law.

In case the company proposes to pursue any specific object (s) or restricts its objects , the  MoA will state such specific activities and any matter which is considered necessary in furtherance thereto. In such a case the company will not be allowed to pursue activities other than the specific objects as stated.

The proposed change will provide the much needed flexibility in that the company need not commit itself to specific objects as long as they are lawful.

b) The time limit for preservation by the Registrar of the approved name of the proposed company is to be reduced to twenty days from the existing period of sixty days. This reduction may prove to be counter-productive unless the procedure for incorporation is also expedited at the office of the ROC. Further, in the case of an existing company, for the company to be able to obtain the approval of its members for the change in its name within the period of twenty days would be an  impossibility.

There is therefore a strong case for a review of the above time line and for restoration of the status-quo ante.

Address of Registered office

Section 12  is to be amended in terms of which time line for having a Registered office is being extended to thirty days from the date of incorporation as opposed to the existing period of 15 days.

Changes in provisions relating to Public  Deposits

The following changes are proposed under Section 73:

The quantum of amounts to be maintained in liquid deposits  against the amount of deposits  that fall due for payment in the next twelve months , to ensure that the company has some funds to meet repayment obligations is proposed to be increased to 20% of the value of deposits falling due for maturity as against 15% at present.

The requirement of providing deposit Insurance shall be dispensed with.

A company seeking to raise public deposits has to certify at present that it has not defaulted in the matter of repayment of interest on deposits raised either before or after the commencement of the Act. This provision is proposed to be eased by which even in cases where a default has occurred , the company will be allowed to raise deposits subject to the condition that the company has made good the default and a period of five years has elapsed since the date of making good the default.

Under Section 74 deposits accepted prior to the commencement of the Act were expected to be repaid within one year from the commencement of the Act. This period shall be extended to three years .In addition, the company will also be allowed to renew such deposits subject to ensuring compliance of the procedure for raising  deposits.

Registration of charges-Section 77

Under this provision, charges which were not subject to registration under Section 125 of the erstwhile Act, such as pledge of shares  , have now become liable for registration.

The above section is being amended in terms of which it  shall not be applicable to such charges as may be prescribed in consultation with the RBI. It is expected that pledges, encumbrances over securities   of the same genre  will be taken out of the requirement of registration and this will come as a major reprieve in particular for companies in the financial services sector.

Provisions relating to declaration of beneficial interest in respect of shares Major changes are proposed in this area with a view to impose greater fetters over despicable practices   such as benami  holdings, money laundering , exercising control over companies  through a maze of complex structures which front for natural persons acting behind the scene.

“Beneficial interest” in a share shall now include holding directly or indirectly, through any contract, arrangement or otherwise , the right or entitlement of a person alone or together with another person to either exercise the rights attached to the shares or to receive or participate in respect of the dividend on the said shares.

Under Section 90 , any person holding either alone or through other persons or Trusts and through persons resident outside India ,the beneficial interest over 25% or more in the shares of a company or the right to exercise significant influence or control over the company as envisaged under Section 2(27) will be considered as a “ significant beneficial owner” and he shall make a declaration to the company of his beneficial interest thereto along with such particulars to be prescribed in the Rules to be brought out subsequently.

It will also be necessary for the company to maintain a Register to incorporate therein the details to be prescribed. The Register shall be open for inspection by the members.

The company will also be required to file a Return of significant beneficial owners .

It is also significant to note that in case the company has reasonable cause to believe that any person is a significant beneficial owner, it can send a notice to the concerned person seeking the required information. In case of failure of the person to be forthcoming with the disclosure, the company shall also be empowered to make an application to the Tribunal  seeking issuance of orders to the effect that the shares in question be subject to restrictions as to transferability , suspension of all rights thereto.

The above proposals are welcome and will  usher in transparency and weed out the scourge of opacity  that exists currently through clandestine holdings.

Proposals relating to Annual Return  (Section 92)

The format of the Annual Return is being simplified in terms of which it will not be any longer necessary to state the amount of  indebtedness of the company, the details of shares held by FIIs.

In addition, an abridged form of Annual Report shall be prescribed for OPCs (One Person Companies) and small companies.

The duplication associated with the furnishing of  the extract of the Annual Return as part of the Directors’ Report is proposed to be omitted and it would be necessary to only place a copy of the Annual Return on the company’s web site and provide a web link thereto with the Directors’ Report.

Return of promoters’ stake changes-Section 93

The requirement under Section 93   that every listed company shall provide a Return in MGT-10 with the ROC in regard to changes in the number of shares held by promoters and top ten shareholders is proposed to be withdrawn.

This is a most welcome development  and will put an end to the needless procedure involved in filing the Return with the ROC, given the fact that listed companies have to ensure compliances on the above both under the SEBI(Insider Trading) and (Takeover )Regulations. The requirement of filing MGT-10 was mired in controversy from the beginning, given the confusion caused by the prescribed form as well.

Flexibility as to the venue of AGM  for unlisted companies

Section 96 is proposed to be amended to make it possible for unlisted companies to hold their   Annual General Meetings at any place in India as against the existing requirement of holding it at the place of the registered office.

This proposal will be welcomed by most unlisted companies.

Length of Notice for convening General Meeting at shorter Notice

Section 101 in its existing form, provides for the holding of a general Meeting at shorter notice upon receipt of the consent thereto of members holding 95% of the share capital of the company. As regards holding an AGM at a shorter notice. Section 96 does not provide for a similar dispensation .It was therefore inferred that  consent  of all the members shall be required for holding the AGM at shorter notice.

The confusion caused by the above shall stand resolved by the proposal that an AGM can also be held at shorter notice with 95% of the members providing their consent thereto.

Resolutions requiring postal ballot can be approved through electronic voting-Section 110

Matters in respect of which voting by members through postal ballot has been mandated  can also be put to vote through electronic voting process in terms of which members can vote through remote e-voting as also at the venue of the Meeting through poll process.

Declaration  of Interim Dividend –provision clarified- Section 123

Section 123(3) is being amended to provide that the Board can declare interim dividend during the financial year as also any time during the period from the close of the financial year till   the holding of the AGM. The declaration can be out of the surplus in the profit and loss Account or out of the profits of the financial year   for which it is sought to be declared or out of profits generated in the financial year till the quarter preceding the date of such declaration.

It follows from the above that interim dividend can also be declared out of the surplus of the Profit and loss Account for past years as also out of profits for the year for which declaration is being made.

However, in case the company has made losses during the current year up to the end of the quarter immediately preceding the  date of declaration, the amount of interim dividend shall not exceed the average dividend in the preceding three years.

Need for consolidating Accounts of Associate Companies-Section 129

At present, a company which has one or   more subsidiaries shall submit to the members for their approval  at its Annual General Meeting, in addition to its financial statements on a standalone basis, the consolidated Accounts including those of its Subsidiaries. This requirement is being extended to cover Accounts of the Associate companies as defined under Section 2(6) of the company also.

Financial Statement, Board’s Report-Section 134

The following changes are proposed to this provision.

a) At present the financial statements including the consolidated statements are required to be signed by, in addition to the other persons authorised by the Section,  the chief Executive officer only if he is also a Director. It is proposed to allow the CEO to authenticate the Accounts even if he is not a Director on the Board.

b) The extract of the Annual Return under Section 92 need not be appended o the Board’s Report. Only the particulars of the web address   where the Return can be accessed needs to be furnished.

c) The Annual evaluation of the Board’s performance and that of the individual directors can now be carried out through the deployment of an outside Agency. As per the existing requirement, the Board is required to make an evaluation of its own performance and that of the Directors.

This proposal will lead to greater transparency and an unbiased evaluation by an External Agency.

d) If disclosures called for under this Section have been provided already in the financial statements, there would be no need to repeat them all over again in the Board’s Report.

e) Policies concerning appointment and remuneration of Directors pursuant to the provisions of section 178 and the policy under Section 135 on CSR need to be only hosted on the web site .The policy need not be reproduced in the Board’s Report and it would be adequate if the salient features of the above policies are only included in the Board’s Report. The details of the web site where the policies have been displayed should be provided in the Report.

The above proposals are very salutary and  will , avoid duplication and reduce the unnecessary volume of the Board’s Report.

Right of members to receive Audited financial statements(Section 136)

The following changes are noteworthy:

At present, it is necessary for every company to provide to all its members  its Audited financial statements both stand alone and consolidated and the Board’s Report etc twenty one days prior to the date of the AGM. This requirement is being relaxed to the effect that even if the said documents have not been sent 21 days before the meeting, it shall be deemed that these have been duly sent if it is so agreed by 95% of the members entitled to vote at the Meeting.

The Accounts of the Subsidiary companies   of the listed company shall be placed   separately on the company’s website.

If the listed company has a foreign subsidiary and the said subsidiary is required statutorily to prepare consolidated Accounts under the law of the country in which it is incorporated, it will be adequate compliance if the consolidated Accounts of the foreign subsidiary are hosted on the company’s (Listed Company’s )website.

If the foreign subsidiary is not under   statutory compulsion to have its Accounts audited it would be good enough if the unaudited results are provided by the listed holding company on its website.

Every member of the company which has subsidiaries is entitled to seek a copy of the Subsidiary’s audited/unaudited financial statements ..

No Need for ratification of Auditors’ Appointment-Section 139

Under Section 139(2) listed companies and companies belonging to the prescribed genre are required to appoint Auditors for periods not exceeding, at a time ,a period of five consecutive years. Despite the above, there exists a requirement that at every Annual General Meeting the appointment has to be ratified by the members. The requirement of ratification shall not be necessary any more. This is a logical step, given the fact that where members have approved already the appointment of the Auditors for a specific time frame  ,it would be incongruous if members are called upon every year to ratify an action already approved by them.

Changes in provisions relating to Directors-Section 149

The following changes are proposed:

Section 149(3) at present provides that every company should have at least one Director who stays in   India  for at least 182 days or more in a calendar year. The reference to calendar year will be substituted by the financial year.

Further in the case of a newly incorporated company, this requirement shall apply proportionately at the end of the financial year in which it is incorporated .It is expected that how this proportion will be determined would be clarified later.

The concept of “pecuniary relationship” in the case of an Independent Director is being eased. For the sake of brevity, we are not elaborating on the said concept.

Provision of uniform Identification number for Directors in place of DIN(Section 153)

The Central Govt proposes to introduce   an Identification number which will serve as the Director Identification Number(DIN).By this process, the requirement of a DIN may be dispensed with.

No financial Deposit for appointment of Independent Director-Section 160

At present, the regularization of an appointment  of Directors made at the behest of the Board, necessitate  the placement of a cash deposit  of Rupees one lac  in addition to the submission of the notice for the candidature. The provision of cash deposit shall no longer apply for the appointment of an Independent director or to a Director based on the recommendation of the nomination and Remuneration Committee.

Private companies can fill up casual vacancies on the Board without shareholders’ approval (Section 161)

On account of a drafting anomaly in Section 161 private companies can  fill up a casual vacancy caused on their  Board only with the approval of the members. This aberration in drafting is being plugged making it possible for such companies to make appointments   at a meeting of the Board itself.

Relaxation of provisions relating to disqualification of directors-Section 164

Where disqualification of a Director is brought about under  Section164(2) due to the failure of the company to file its financial statements or annual returns as also due to failure to make payments against deposits, dividends or failure to redeem debentures etc , such disqualifications shall not apply to a Director for a period of six months from the date of his appointment. .

Further disqualification arising due to conviction for moral turpitude,  or through an order passed by a court /Tribunal, conviction for any offence relating to related party transactions shall apply notwithstanding that an appeal has been preferred against such conviction and the same is pending.

Vacation of office by Directors (Section 167)

A  proviso is being inserted under clause (a) of this Section to state that where a director incurs any disqualifications under section 164(2) of the Act, he shall vacate office in all the companies other than the company which is in default under Section 164(2).

Further, a Director shall not vacate office   in cases of conviction for moral turpitude or due to disqualification by an order of the court , where an appeal has been preferred and the same is pending. The pendency will continue until such time a further appeal against such conviction is also  adjudicated.

Relaxation  of limits on  exercise of borrowing powers-Section 180(1)( c )

At present any borrowing other than temporary borrowings as defined ,which is in excess of the company’s paid up share capital and free Reserves has to be approved by the members by special resolution. In computing the above ceiling, the amount standing to the credit   of the securities premium shall also be now considered in addition to the paid up capital and free reserves. The ceiling will now  re-coil back to the limit stipulated under section 293(1)(d) of the erstwhile Act..

Loans to Directors –Section 185

If there was a poll in corporate Inc as to which provision in the Act posed the maximum challenge, without question Section 185 in the Act would win the contest in a canter.

With a view to ameliorate the hardship caused by the provision, the existing Section is proposed to be substituted in entirety by a new incarnation .

The new provision will significantly ease the rigors of the existing law and is summarized as under:

a) No loan, either direct or indirect can be given or no guarantee or security shall be given in respect of any loan  taken by a Director of the company or to a company which is its holding company or to  any Partner or relative of a director or to any firm in which any such director  or relative is a partner.  

b) Loan can be provided or security given for a loan taken by any person in whom the Director is interested with the approval of members by special resolution and the loan is utilized by the borrower company for the purpose of its principal business.

c) The expression  ”any person in whom any of the Director  of the company is interested “ has been  defined in the Explanation provided to the Section.

d) The Section shall not apply in respect of a loan given to the MD or whole-time Director if it is given as part of their  terms of service or approved under a scheme sanctioned by the members.

e) The Section will not come in the way of any loan granted in the ordinary course of its business to provide loans provided that interest is charged at rates which correspond to rates charged on Govt. security for different time periods.

f) The Section will not  apply for loans given by the holding company to its wholly owned subsidiary or for any guarantee provided by the holding company for loans of the subsidiary provided such loans are used by the subsidiary for its principal business.

Anomaly in section 186 removed

Due to a  drafting error in the existing provision , even loans provided to an individual come within the purview of the regulation. The Section is being amended to clarify that it will not apply to a loan given to an employee of the company.

Provision of any loan / guarantee or investment made by a company to its wholly owned subsidiary or to a joint venture company shall not call for approval by special resolution.

Section 194 and Section 195 which respectively impose  prohibition on forward dealing in securities and on insider trading on securities are proposed to be withdrawn. This is logical considering the fact that such activities are already subject to scrutiny under Regulations introduced by SEBI. Hence  duplication  in procedure would be avoided .

No Central Govt. nod for payment of managerial remuneration in excess of limits-Section 197

Payment of remuneration to Managerial personnel in excess of 11% of net profits subject to the provisions of Schedule V of the Act shall not   need approval of the Central Govt.

Conclusion

In our above discussion we have tried to focus on the implications of the major changes proposed by the Bill. The Govt. has been unequivocal in expressing its desire to ease the procedure for doing business and if anything   this bill is an indication of the Govt.’s desire to   “walk the talk”. Our fervent hope is that the Bill is soon transformed into a law such that Corporate India will soon have the advantage of having a  legislation which encourages, rather than, hinders  doing business.

Ramaswami Kalidas