Companies (Amendment) Bill 2016: An Analysis

[The
following post is contributed by Vinod
Kothari
of Vinod Kothari & Co.]
The
Government placed
a Bill
to amend the Companies Act, 2013 (the “2013 Act”), passed less than 3 years ago, proposing nearly 100
amendments, purported to be for the ease of doing business. Most of the
amendments proposed in the Bill are to implement the recommendations of the
Company Law Committee, which was appointed in response to thousands of
complaints that the 2013 Act was unduly restrictive and counter-productive.
The
major amendments mooted in the Bill are:
– Section
185 of the 2013 Act, one of the most unproductive sections prohibiting loans
and guarantees by companies to entities in which directors are interested, will
be narrowed down, to permit companies to given loans and provide guarantees on
the basis of a shareholders’ resolution.
– Universal
object companies will be permitted.
– Wholly-owned
subsidiaries of foreign companies will be permitted to call their extra
ordinary meetings outside India.
– Central
Government control on managerial remuneration is proposed to be completely
omitted. Section 197, which places limits on managerial remuneration, will now
require special resolution only, if the limits placed under the law are
exceeded.

Easing unwarranted compliances

Registration of charges – permitting charges that do not require registration:
The
Bill seeks to enable the Central Government to notify such charges for which
registration of charges will not be required. In the Companies Act, 1956 (the “1956 Act”), pledges did not require
registration. Following the 2013 Act there has been a flip-flop on this – the
Act requires registration of all charges, the draft Rules sometime in early
2014 excluded pledges, and the final rules once again included pledges in the
list of registrable charges. It seems that the sentiment is once again to
exclude pledges, hypothecation of vehicles, etc.

Changes in shareholding of promoters and top 10 shareholders omitted:
Section
93, which required the company to file changes in shareholding of its promoters
and top 10 shareholders, is proposed to be omitted.

Permitting flexibility in place of calling company meetings:
Section
96 is proposed to be amended to permit unlisted companies to hold their annual
general meetings (“AGMs”) anywhere
in India, if permitted in advance by all members. This will enable subsidiary
companies and closely held companies to better manage their AGMs. Regrettably,
India has still not learnt from the UK law, which does away with the formality
of AGM for small companies completely. Also, there are no permissive provisions
enabling companies to hold the AGMs also in the electronic mode. Similarly,
section 100 is proposed to be amended to permit the calling of extraordinary
general meetings (“EGMs”) at any
place anywhere in the world, in case of subsidiaries of foreign companies.
Notably, the restriction on place of calling the EGM was never there in
corporate laws, and was strangely inserted in the Rules made under the 2013
Act.  

Pecuniary interest in case of independent directors:
As
condition of director independence, the existing language of section 149(6) seemed
to disqualify a director based on any pecuniary interest. It is notable that
SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
continue to use the words “material pecuniary interest”. The clause is now
sought to be amended to provide that an independent director will not lose independence
if such director has transactions amounting up to 10% of total income.

Pre-deposit of money in case of appointment of independent directors:
Section
160 of the Act requires a pre-deposit of money in case of appointment of any
director, other than a retiring director. While the author of this post has
consistently been holding the view that this requirement has no place in case
of independent directors, who are proposed by the company itself rather than by
the members or the director himself, an amendment is now sought to be inserted
waiving the deposit requirement in case of independent directors.  

Enabling board meetings by video conferencing:
Once
law recognizes technology (video conferencing (“VC”) or other audio visual means), it is curious to expect that
there are certain matters that cannot be transacted by VC. Section 173(2) restricts
the use of VC for certain restricted matters. This entire provision should have
actually been deleted, as it was not serving any useful purpose. Instead, the
Bill seeks to provide that if there is a physical quorum present at the venue
of the meeting, then the remaining directors may participate by VC. In fact,
there may be no particular place of the meeting at all, as all directors may be
actually wired by technology. Quite anachronistically, section 173 is proposed
to be amended to provide that there must be a minimum number of directors
present at the venue of the meeting, for the other directors to participate by
VC, in case of such restricted matters.
Intercorporate loans, investments,
guarantees and securities
Sec
185 was apparently one of the most unproductive provisions of the 2013 Act,
affecting companies and bankers alike. Unlike its equivalent in the 1956 Act,
section 185 prohibited the giving of loans, enabling loans by guarantees or
securities in case of entities where the directors are interested. We have
earlier written that similar provisions are there in laws of many other
countries, but no other country creates a total prohibition.
The
law is now sought to be amended to provide that it shall be open for the
company to pass a special resolution approving the giving of loans, guarantees
or securities. Such resolution must provide the requisite particulars.
Likewise,
section 186 is proposed to be amended to permit making of investments in
subsidiary companies or joint venture companies.
Shortcomings of the Bill

Requiring KMPs in companies a certain size:
Among the problematic
provisions of the 2013 which have not been redressed by the Amendment Bill are
the  provisions of section 203, which
requires every company of a certain size to have at least three classes of key
managerial personnel. This has been one of the most impractical provisions of
the 2013 Act, requiring companies to perfunctorily designate Chief Financial
Officers and Company Secretaries in companies which have significant capital,
but do not have day-to-day business. There was a widespread demand that either
such companies may designate the same person to look after several positions,
or the same person to look after several companies. However, nothing has been
done to introduced amendments in this section, although the definition of “key
managerial personnel” in section 2(51) has been widened.

Difficulties in private placements:
Another significant difficulty created
by the 2013 Act was the unduly restrictive set of provisions pertaining to
private placements. This over-ambitious scheme of regulation was a direct
result of some incidents in the past. One such provision requires every private
placement to be routed through a separate bank account opened for this purpose,
and a bar on utilization of the money until allotment. While the Bill rewrites
the entire section 42, it in fact bars the use of money until the return of
allotment has been filed with the Registrar of Companies. It is curious to
notice that the use of the money has been linked with filing of a document, for
which the time allowed is as much as 60 days for allotment, and 15 days for
filing the return. More often than not, the amount received in private
placement is large, and companies cannot afford to keep the amount idle even
for a day. The only relief in the private placement provisions seems to be that
the amount of penalty for contravention has been limited to Rs 2 crores, which
was earlier seemingly extending to the entire amount raised by private
placement.
Ironing out the creases left by
the 2013 Act:
Several
of the proposed amendments fill the gaps left, or incongruences of the 2013
Act. These include:
– Definition
of “net worth” in sec. 2 (57) will include the credit balance in profit and
loss account, whereas the language as it currently stands seems to suggest,
rather very illogically, that the accumulated surplus and profit and loss
account is not to be taken as a part of the net worth.
– The
definition of holding and subsidiary companies was highly confusing in the 2013
Act, using “total share capital”  (later
defined as including equity and convertible shares) as the basis for
consolidation. Accounting standards have consistently used voting power as the
basis for identifying “control” and “significant influence”. The proposed
amendments align the provisions of the Act with the accounting standards.
– Additionally,
a provision enabling the Government to control the number of layers of
subsidiaries has been completely dropped, both from section 2(87) as also in
section 186(1) of the Act.
– The
definition of “turnover” as presently existing is quite confusing and may be
interpreted to mean gross receipts. The definition has now been aligned with
financial reporting.
– The
provisions pertaining to registration of modification and satisfaction of
charges erroneously omitted the power of the Registrar to grant extension of
time up to 300 days. The Bill seeks to amend section 82 to correct this
anomaly.

The advent of universal objects
companies:
As
a landmark move, the Bill enables the formation of universal object companies.
The concept of universal object companies, present in several countries,
envisages a company that can carry out any business that a natural person may
do. The company is free to carve a negative list of businesses that the company
may not want to do.  Thereby, the
doctrine of ultra vires gets a decent
burial, and the constitutional documents of companies become small and
meaningful, instead of containing a big heap of unwarranted “objects” which the
company may not even want to engage in in foreseeable future.
Enabling provisions for small
companies:
Small
companies is a concept widely used in global corporate legislation to include
such companies for which most of the corporate law compliances are completely
exempted, in view of the small size and limited public interest in such
companies. The existing definition of the law limits the scope of “small
companies” to only companies having a turnover of Rs. 2 crores. The amount is
being increased to Rs. 5 crores, although the limit of paid up capital still
remains Rs. 50 lacs. The government is being given a power to notify a higher
amount of turnover, going up to Rs. 100 crores, within which a company may
still be treated as a small company.
Currently,
the law does not confer much statutory liberty to a small company. Hopefully,
the government may use its power of notifying exemptions to give more space
under the law for small companies, much in line with the government’s policy to
encourage start-ups to incorporate as companies and to stem the exodus from the
corporate form to the limited liability partnership form of business.
An
abridged form of annual return is expected to be announced in case of small
companies. Likewise, section 134 is sought to be amended to provide for an
abridged form of financial statements in case of small companies.

Provisions at the instance of
banking companies
– Banks
making use of corporate debt restructuring (CDR) and strategic debt
restructuring (SDR) schemes often convert their loans into equity, and one
common problem being faced was that the fair value of the equity share was less
than its par value. However, the bar in the Act against issuing shares at a
discount would force a banker to convert the loans at least at par value of the
equity. The provisions of section 53 are proposed to be amended to permit
conversion of loans into equity at less than the par value.
– Banks
were facing restraints while extending loans based on guarantees and securities
provided by associated companies. Section 185 is proposed to be amended to ease
the provision.

Provisions easing business by
overseas entities
In
support of the “Make in India” policy, it is quite appropriate that the Bill
must have enabled foreign owned businesses to form companies in India.
Accordingly, there are several provisions to facilitate foreign-owned
businesses:
– EGM of
a wholly-owned subsidiary of a foreign company may be called anywhere  in the world.
– The
requirement for a resident director provided in section 149 is sought to be
amended to provide that in case of newly incorporated companies the condition
may be satisfied subsequent to incorporation, rather than before incorporation.
Adding new compliance
requirements
Sections
89 and 90 are proposed to be amended to introduce new requirements in respect
of beneficial interest in shares. While section 89, pertaining to filing of
beneficial interest in shares, is being widened to include a new, broad
definition of “beneficial interest” (including either voting rights, or
dividend rights, or any other right), a new section 90 is proposed to
substitute the existing section, to require declaration of ultimate beneficial
ownership by an individual, who, singularly or through one or more entities,
holds 25% or more the share capital of a company. Arguably, the section deals
with “beneficial interests”, which apparently relates only to an interest other
than as a registered shareholder, as there should be no need to disclose legal
registered ownership of shares by an individual, which is already borne out by
the register of members.


Vinod Kothari

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

  • 1)Provisioning relating to forward dealing and insider trading to be omitted from The Companies Act 2013, the bill proposed… is it because such provisions already exist in SEBI Act? hence, insider trading will be dealt with according to SEBI Act provisions? Is it OK (given the corporate governance issue) that is omits insider trading from the Co Act? What's the rationale?
    2)Restrictions on layers of subsidiaries is removed….will there be any potential problem of round tripping/ structured transactions that violate rules(again, corporate governance issue).
    3) Kindly clarify test of materialty for pecuniary interest for testing independence for directors. Kindly clarify so that a layperson can understand.

    many thanks for writing this article, very insightful and informative!

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