Summary: Recommendations of the Companies Law Committee

[The
following post is contributed by Bhushan
Shah 
and Labdhi Shah from
Mansukhlal Hiralal & Company]
The Companies Act, 2013 (2013 Act) was enacted with a view to bring Indian company law in tune
with global standards. However, as is the case with every new legislation, the enactment
of this Act also led to ambiguity and confusion within the industry. The
Government continued to receive representations from the industry and stakeholders
that the 2013 Act needed further review. Thus, a Companies Law Committee (CLC or Committee) was constituted with a mandate to make recommendations
on issues arising from the implementation of the 2013 Act and examining
recommendations received from other agencies such as the Law Commission of India.
The CLC submitted its report on 1 February 2016 (Report)
and recommended several changes to the 2013 Act with a view to ensure its
effective implementation. The Ministry of Corporate Affairs (MCA) has invited comments on this
Report by 15 February 2016.
It is pertinent to mention that as per the Report,
the Committee’s recommendations will result in changes to about 78 sections of
the 2013 Act and more than 100 changes in those provisions.  This update summarizes the important recommendations
made by the Committee in the Report:
1.                
Definitions:
·                  
Associate Company [Section
2(6)]
: CLC recommends amending this definition in
order to make it consistent with the term associate company as defined under
the Accounting Standards. Associate Company as defined under Accounting
Standard-28 excludes joint ventures. Thus, CLC recommends that joint ventures,
as defined in the Accounting Standard 28, be included in the explanation clause
to Section 2(6) of the 2013 Act and the term ‘significant influence’ should be
amended to mean 20% of the total voting power and not total share capital,
since total share capital also includes preference share capital.
·                  
Subsidiary Company [Section
2(87)]
: CLC recommends that since equity share capital
forms the basis for determining the holding-subsidiary status of companies by
virtue of it conferring voting power on the holder of the shares, the term
total share capital should be replaced with total voting power. Further, CLC
also recommends that the restrictions on layering of subsidiaries as contained
in the proviso of the said section be omitted in order to enable companies to
raise funds more effectively, which in turn will help smooth functioning of companies
and also for structuring purposes.
2.                
Private
Placement [Section 42]:
·                  
PAS-4:
Given that the nature of information, which is to be disclosed in the Form is
extensive, CLC recommends discontinuing the preparation, filing and circulation
of PAS-4. Further, in order to protect the interest of the investors, CLC recommends
that the disclosures which are made under Explanatory Statement referred to in
Rule 13(2)(d) of Companies (Share Capital and Debenture) Rules, 2014, should be
embodied in the Private Placement Application Form.
·                  
Making simultaneous offer of
securities
: CLC acknowledged that there may be instances
wherein companies may be required to make simultaneous issue of different forms
of instruments namely, preference shares or non-convertible debentures and the
current prohibition on making a fresh offer of securities, if allotments to be
made under the prior offer are pending, has hampered the ability of companies
to meet their financial requirements. Thus, CLC recommends that subject to the
offer being made to a maximum of 50 persons or such higher number as may be
prescribed, a company can simultaneously keep more than one issue of securities
open in a year, while ensuring that the regulatory concerns are not
compromised.
·                  
PAS-5:
CLC recommends that the requirement of filing Form PAS-5 should be discontinued.
Also, Section 42 (7) of the Act should be amended to state that offers under
Section 42 shall be made only to such persons whose details as prescribed under
the rules have been recorded by the company prior to making an offer. Such
details should not be filed with the Registry. In order to ensure
accountability and transparency during the private placement process, CLC
recommends that the relevant special/board resolution authorising the company
to circulate the application form and collect monies should be filed with the
Registry.
·                  
Valuation of convertible
securities
: CLC recommends that the valuation report, as
required to be obtained by companies, need not be filed with the Registry or
circulated, however, the same is required to be made available to the
investors. The Committee further recommends that the current provisions under the
2013 Act requiring price of securities to be decided in advance should be
modified and provisions allowing pricing to be done on the basis of a formula
(on the lines of RBI Regulation/FDI Policy) should be considered.
3.                
General
Meetings:
·                  
Annual General Meeting (AGM) [Section 96(2)]:
On the basis of suggestions received from the industry, CLC has agreed to amend
the relevant provisions of the 2013 Act to state that private companies and
wholly owned subsidiaries of unlisted companies can convene AGM at any place in
India, provided that 100% shareholder approval is obtained in advance by the
company.
·                  
Extra-Ordinary General Meeting
(“EGM”) [Section 100]
:
CLC recommends that wholly owned subsidiaries of companies incorporated outside India should be given relaxation to convene EGM
outside India. Thus, CLC recommends deleting the explanation to Rule 18 (3) and
inserting explanation to Section 100 granting exemption to wholly owned
subsidiaries of companies incorporated outside India to convene EGM outside
India.
·                  
Postal Ballot [Section 110]:
Section 110 prescribes list of items, which are mandatorily required to be
transacted by way of postal ballot. This mandatory list becomes redundant for
companies, which are required to conduct voting using electronic means. Thus,
CLC recommends amending the relevant provisions of 2013 Act and the rules to
provide that if a company is required to provide for electronic voting, then
the same items could be covered in its General Meetings also.
4.                
Independent
Directors [Section 149(6)]
: The criteria for appointment
of independent director as mentioned in 2013 Act states that an independent
director must not have any pecuniary relationship with the company, holding
company, associate company, etc. Thus implying that even minor pecuniary
relationships would be covered within the captioned section, even though such
transactions do not compromise the independence of the director. In light of
the above, and in order to bring it in harmony with the SEBI listing agreement,
the Committee recommends that the test of materiality be introduced in determining
the pecuniary relationship.
5.                
Loans
to Directors [Section 185]
: CLC recommends that companies
should be allowed to advance loans to other person, including subsidiaries in
which the director is interested, subject to the company obtaining prior
approval of the shareholders by way of special resolution. Further, loans
extended to persons, including subsidiaries, falling within the restrictive
purview of Section 185 should be used by the subsidiary company for its
principal business activity only, and not for further investment or grant of
loans.
6.                
Loans
and Investment by companies [Section 186]:
CLC
recommends that layering restrictions on investment companies should be
removed. Further, CLC also suggests that an explanation should be provided to
clarify that use of the word person in sub-section 2 of Section 186 does not
include employees of the company who have been given loans as a part of
conditions of service or pursuant to any approved scheme for all employees by
the company.
7.                
Related
Party Transactions [Section 188]
: The Committee
recommends withdrawal of the MCA Circular No 30/2014, which clarified the requirements
of second proviso to Section 188 (1) of the Act. The Committee recommends that
all related parties cannot vote on related party transaction.
8.                
Prohibition
on forward dealing and insider trading of securities [Section 194 and 195]
:
CLC recommends that both the Sections should be omitted, in view of the
practical difficulties expressed by the stakeholders.
9.                
Managerial
Remuneration
: (i) CLC recommends that the requirement
of obtaining government approval for authorising payment of managerial remuneration
in excess of the prescribed limits should be done away with. (ii) CLC also
recommends that Schedule V be amended such that remuneration payable to
managerial personnel who is not related to any director or promoter of a
company or who is not a promoter of the company, and is a professional with
relevant knowledge and domain experience; and does not hold more than 2% of the
paid up equity share capital of the company or its holding company, should be
approved by way of ordinary resolution and not by way of special resolution. In
other cases, however, the requirement for special resolution of the
shareholders should be retained. (iii) The Committee further recommends that
the limits of yearly remuneration prescribed in the Schedule be enhanced.
10.             
Charge
[Section 77
]: Given that the 2013 Act does not set out
the specific list of charges which are required to be filed with the Registry,
pledges and liens created were also required to be filed with the Registry.
Such filings of pledges and liens created various practical difficulties,
relating to the quantum and frequency of registrations required, especially for
NBFCs and Clearing Corporations. Thus, the Committee recommends that
prescriptive powers should be provided under Section 77 (3) to allow certain
liens or securities or pledges to be exempted from filing.
11.             
Board
Meetings
·                  
Video Conference:
The rules framed under 2013 Act specify a list of items which cannot be dealt
with via video conferencing or any
other audio visual means. CLC observed that this requirement completely bars
the participation in the board meeting via
video conferencing even if the requisite quorum as prescribed under the 2013 Act
is physically present. CLC therefore recommends flexibility be provided to
allow participation of directors through video conferencing, subject to such
participation not being counted for the purpose of quorum. However, such directors,
though not counted for the purposes of quorum, may be entitled to sitting fees.
·                  
Interested Director:
Given that private companies have been exempted from the provisions of Section
184 (2), which prohibits interested directors from participating in the board
meetings, CLC recommends that since Section 184(2) and Section 174(3) are
related sections with respect to interested directors, related exemption under
Section 174(3) to enable such participating interested Directors for the
purposes of quorum, should be given to private companies using the power of
exemption available to the Government under Section 462 of 2013Act.
12.             
Companies
(Share Capital and Debentures) Rules, 2014:
·                  
Issue of Sweat Equity Shares
[Rules 8(4) and 12]
: CLC recommends that start-up
companies can issue sweat equity shares in excess of the 25% ceiling and up to
50% of their paid up equity share capital. Further, CLC has also recommended
that in order to encourage start-up companies, ESOPs can be issued to the
promoters, who work as employees or employee directors or whole time directors,
which will help them gain when the valuation of the company goes up in the future,
without in any way impacting finances of the company in the initial years.
·                  
Preferential Allotment of
partly paid up shares [Rule 13(2)(c)]
:
Currently, the captioned rule does not allow preferential allotment of partly
paid up shares. However, given that the Department of Industrial Policy and
Promotion vide its Press Note No 9 (2015 Series) dated 15 September 2015
allowed partly paid shares and warrants as eligible capital instruments for the
purposes of FDI policy. The Committee also recommends amending this Rule in
order to allow preferential allotment of partly paid-up shares.
Comment:
A majority of the amendments that have been recommended and discussed above,
are to the Sections under the 2013 Act which can only be amended by the
legislature and thus will require approval of both the Houses of Parliament.  Also, it can be argued that these recommendations
made by the Committee will drive the ease of doing business but it may dilute
some of the governance provisions introduced in the 2013 Act.

– Bhushan Shah and Labdhi Shah

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.

1 comment

  • “….will result in changes to about 78 sections of the 2013 Act and more than 100 changes in those provisions.”

    "This update summarizes the important recommendations made by the Committee in the Report:…"

    Of course, an attempt is seen to have been made , besides highlighting, drawing pointed attention to the inescapable fact of enormity of the changes recommended.

    As shared / stressed in an earlier response elsewhere, what might be of the most concern to one and all, including the corporate managements and its statutory and internal audit parties, could be this one aspect: That is, how many of such changes are in respect of provisions already made effective and expected to have been followed and complied with in the interim; and what are the measures /mechanism suggested or to be suggested for squarely taking on and tackling effectively the quite inevitable ‘fall out’ problems foreseen or otherwise.

    Now, that the deadline is about to expire, no knowing whether at all the foregoing line of thinking has been considered to be of every relevance, and if so, chosen to be adopted and further serious thoughts given , so as to take care of the likely but obvious problems as are to be envisaged !

Subscribe to Blog via Email

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Recent Posts

Topics

Recent Comments

Archives

web analytics