Proposed Amendments to the Companies Act, 2013

It has been just a year since certain
provisions of the Companies Act, 2013 (the 2013 Act) were brought into force, and
the Government has already yielded to pressure from industry to address some
concerns within the legislation. The Union Cabinet has approved the
introduction of the Companies (Amendment) Bill, 2014 in Parliament. At the time
of this writing, only a press release
of the Government highlighting the amendments is available, and not the actual
text thereof.
The amendments proposed can be
categorised broadly into two types. The first relates to ironing out drafting
deficiencies and inadvertent errors in the 2013 Act. I do not propose to deal
with those in this post. The second, and more important, amendments are
intended essentially “for the ease of doing business”. Some of the changes
suggested on this count are substantive and could have a wider impact. It is on
these changes that I propose to focus in this post.
In order to “meet corporate
demand”, the Government proposes to prohibit the public inspection of board
resolutions filed with the Registrar of Companies. This is understandable as
board resolutions may contain commercially sensitive information, which need
not be disseminated widely. Another amendment relates to the relaxation of
restrictions in section 185 of the 2013 Act, which will now exempt loans to
wholly owned subsidiaries and guarantees/securities on loans taken by banks
from subsidiaries. Section 185 came under heavy criticism due to its
excessively onerous nature, as it did away with exemptions previously available
under the Companies Act, 1956. The amendments propose to substantially revert
to the previous position.
One of the significant areas
affected by the amendments is related party transactions (RPTs). Three
principal changes are suggested. First, the audit committee will be empowered
to give omnibus approvals for RPTs on an annual basis. Presumably this is to
avoid consideration of RPTs on a case-by-case basis. Second, the current
requirement of obtaining a special resolution (75% majority) of disinterested
shareholders for material RPTs is to be altered to that of an ordinary
resolution (simple majority). Third, RPTs between holding companies and wholly
owned subsidiaries are to be exempt from the requirement of disinterested shareholder
approval. While these changes may seem miniscule at the outset, they could have
a significant effect of diluting the regulation of RPTs, particularly the
relaxation of the approval requirements relating to disinterested shareholders.
As we have previously discussed on this Blog, the regulation of RPTs forms the bulwark
of corporate governance efforts in India where shareholding tends to be
concentrated added with the significant presence of corporate group structures.
The focus of the 2013 Act has been to address the agency problems between the
controlling shareholders (promoters) and minority shareholders. Any dilution to
these basic principles would compromise the protection to be conferred upon minority
shareholders. To that extent, some of the relaxations on RPT regulation must be
viewed with circumspection.
Also, while one cannot quarrel with
the need for the Companies Act and the SEBI norms on corporate governance (currently
represented by clause 49 of the listing agreement) to operate in tandem, the
need for harmonization ought not to drive the standards down. For instance, SEBI
amended clause 49 of the listing agreement with effect from October 1, 2014 to
bring it in line with the 2013. Now, the justification for altering the audit
committee approval mechanism for RPTs in the 2013 Act is to “[a]lign with SEBI
plicy and increase the ease of doing business”. It is unclear whether SEBI
norms are to be aligned with the legislation or vice versa. The iterative
exercise of streamlining the legislative provisions (i.e. 2013 Act) and the
SEBI norms (i.e. clause 49) should not unwittingly result in a drop in the
standards of governance.
Finally, something must be said
about the justification for the “ease of doing business”. No one can argue with
the assertion that regulation should not stifle innovation and entrepreneurialism.
All factors must be carefully balanced in the legislation and rulemaking
process. They must provide the requisite comfort to investor as well as other
stakeholders that are affected by business activity. However, some of these
efforts also appear to be operating in the shadow of doing business rankings
(principally those put out by the World Bank group) and the need to demonstrate
better environment in India for foreign investors. While these indicators are
representative of the relative ease of doing business among various countries,
they must be considered only as a means and not the end.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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