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Highlights and Analysis on Companies (Amendment) Bill 2016

Bhavik Gala , Last updated: 16 May 2016  
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BACKGROUND

The Companies Act, 1956 was the principal legislation governing the company law in India for more than six decades. It was then replaced by a new legislation, Companies Act, 2013 (hereinafter referred to as “Act’”) in the month of September, 2013 and consequently amended from time to time till date.

Out of total 470 sections of the Act, a total of 284 sections of the Act have been notified till date.

Every type of Company whether large or small size have been facing variety of difficulties ever since the enactment of the said Act. While more than 180 clarifications, circulars and notifications have already been issued and one comprehensive round of amendment was also done in 2015 by the Ministry of Corporate Affairs for clarity and smooth operations of the business of the Company and also several so-called “removal of difficulties” orders have been passed, yet the miseries under the law continue to haunt the corporate world and also it has been an arduous task for corporate professionals to tackle with the complexities and to withstand the burden  of  the additional compliances bundled by it.

Accordingly, a Company Law Committee consisting of representatives from the industry, professional institutes and legal luminaries was set up by Government to recommend to it, the issues which were arising from implementation of Act. Accordingly, the Report of the Company Law Committee, chaired by Shri Tapan Ray, to suggest changes in the Act was submitted to the Ministry on February 01, 2016. The said Report suggested nearly 100 changes in the Act as amended from to time.

Therefore taking into consideration issues faced from implementation of the  Act and also the intention of the present government with respect to  enhancing environment of 'ease of doing business’ in India,  it accepted most of the recommendations of the Company Law Committee Report and introduced the Companies (Amendment) Bill, 2016 in the Lok Sabha on March 16, 2016.

Given the enormity of the changes about, it is well neigh impossible to capture the nuances of all the proposed changes, considering the limitations of the article. In this article, we will therefore discuss the major changes and have strived to provide the ramifications of the proposed changes of the said introduced Bill.

MAJOR CHANGES OF THE COMPANIES (AMENDMENT) BILL, 2016  

1.  DEFINITIONS

Section 2(6)- Definition of ‘associate company’

Change in explanation of the term ‘significant influence’ under the definition of Associate Company has been proposed. Significant influence is proposed to mean control of atleast 20% of the voting power or control or participation in business decision under an agreement. Currently the Act provides for control of atleast 20% of the “total share capital”.

The proposed amendment is in congruence with the criteria mentioned in the Accounting Standards which mentions ‘voting power’ as a criteria to determine significant influence.

Although the term  ”joint venture” has been used in the definition of “Associate Company” in the Act,   but  meaning of the expression “joint venture” was not explicitly provided in the existing Act.

According to the proposed amendment, the expression "joint venture" means a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement.

The above amendment in the explanation of the ‘significant influence’ and also the meaning of ‘joint venture’ is considered to a welcome amendment as it provides explicit clarity to the stakeholders. 

Section 2(28)- Definition of ‘Cost Accountant’

As per the proposed amendment, "Cost Accountant" means a cost accountant as defined in clause (b) of sub-section (1) of section 2 of the Cost and Works Accountants Act, 1959 and who holds a valid certificate of practice under sub-section (1) of section 6 of that Act;

If the aforesaid proposed amendment becomes effective, the cost accountant who hold a valid certificate of practice under sub-section (1) of section 6 of Cost and Works Accountants Act, 1959 will only be considered “Cost Accountant” for the purposes of the Act i.e. Companies Act, 2013.

The said proposed definition is in in line with the existing definition of chartered accountants as provided under Section 2 (17) of the Act.

Section 2(30)-  Definition of “Debenture” clarified

The term has been currently defined inclusively as “Debenture” includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not.

Accordingly, it could even cover other debt instruments such as commercial paper which evidence a debt.

By introducing the proposed amendment by way of proviso the said existing definition of “Debenture”, the said 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 Government in consultation with RBI, issued by the company.

The said proposed amendment is much appreciated by the stakeholders since it provides much more clarity and would help in adhering to comply with respective provisions with respect to debentures to stakeholders.  

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

The existing Section 2(41) 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 existing 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) - Modified

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. It means that can also include functional department heads if they have been so designated by the Board.

This is a significant change, as the penal provisions casting penalty on the KMPs will cover each of them within the ambit.

Section 2(57) –Net Worth – Anomalies Cleared

There exists an anomaly in the existing definition by which aggregate value of the accumulated losses had to be deducted from the net worth.

With the proposed amendment, the aforesaid portion of the definition is being  expanded by inclusion of 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.

The amendment incorporates the much needed insertion that corporate have been representing for a long time. The surplus in profit and loss account not transferred to reserves, did not qualify to be included while computing net worth. Till the company continues to have accumulated losses the same will be deducted while computing net worth.

This will accordingly impact the computation of net worth made for the purpose of sections 76, 135, 148, 180 etc of the Act.

Section 2(76) - “Related Party”

The existing definition had created ambiguity that companies incorporated outside India were excluded from the purview of related party of an Indian company and it was seriously affecting the compliance requirement of related parties under the Act.

Accordingly, the said ambiguity has been cleared off and accordingly pursuant to the proposed amendment, the 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 venture  of a company would also be a related party.

The substitution of the word ‘company’ with ‘body corporate’ would remove any ambiguity or interpretational difficulties that may arise in determining the status of a foreign company as a related party to a Company.

The effect of this amendment would be to extend the contours of the definition of a Related Party.

Section 2(85)-Small company-Increase in Thresholds to provide ease to do business

By way of proposed amendment to the existing definition of “Small Company”, the maximum threshold  relating to the paid up share capital of  a small company has been increased to Rupees Ten crore from the existing Rupees Five Crore. Threshold for maximum turnover is proposed to increase to Rupees one hundred crore from existing Rupees Twenty Crore. This would mean that many more companies particularly start-ups can come within the purview of a “small company” and accordingly could be kept away from the various rigorous compliance requirements of the Act wherever exempted.

2. FORMATION OF COMPANY - INSERTION OF NEW SECTION 3A

Section 3 of the Act provides for formation of the Company under the Act.

It is proposed to insert a new provision Section 3A after the existing Section 3 to provide for provide for liability of members when the minimum number of members falls below the statutory minimum (seven or two in case of public or private company respectively) and such a situation continues for a period exceeding 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 and they shall also be liable to be sued severally for such debts.

The said proposed amendment is in line with the erstwhile provisions of the Companies Act, 1956 which provided consequences in case of reduction of members which is missing the Act currently.

Also, with the aim to provide ease in the process of formation of companies in India, at the time of incorporation of the company, declaration by each subscriber to be attached instead of an affidavit, as currently proposed by amendment to Section 7 of the Act. Such a amendment is also considered as a welcome change.

3. MEMORANDUM OF ASSOCIATION

Pursuant to the proposed amendments in Section 4(1)(c) relating to object clause of the Memorandum of Association, it would no longer be required to have a specific object clause and it proposed that that the company may engage in any lawful act or activity or business, or any act or activity or business to pursue any specific object or objects, as per the law for the time being in force:

Further it is also provided in the proposed amendment by way of proviso to Section 4(1)(c) that in case a company proposes to pursue any specific object or objects or restrict its objects, the Memorandum shall state the said object or objects for which the company is incorporated and any matter considered necessary in furtherance thereof and in such case the company shall not pursue any act or activity or business, other than specific objects stated in the Memorandum.

The aforesaid proposed amendment has been critically acclaimed and it is considered that it will provide the much needed flexibility for companies to operate without any specific object and is considered to be a step towards the government vision to provide ‘ease of doing business’ environment in India to various stakeholders.  

With the aim to provide the fast track formation of companies in India, the time limit for reservation of name of the Company by the Registrar has been proposed to be reduced to twenty days from the existing period of sixty days. The said proposed reduction could create turmoil for the Companies as  the existing procedure for formation of companies needs to be eased out extensively by Ministry including ROC. Further, in the case of an existing company, wherein there would be an activity relating to name change of the Company, it would be herculean task and infeasible to obtain the approval of its members for the said change in its name within the period of twenty days and also in case of scenario of sector specific companies such as NBFC, etc. it would be altogether impossible since ROC also require NOC/approval to be attached in the Forms which is next to impossible.

It would be therefore interesting to wait and watch whether the House of Parliament would maintain status-quo ante and continue by allowing to retain the existing time limits of sixty days.

It is also proposed to include new sub-section 6A and 6B, where a company may adopt the model memorandum applicable to such a company.

In case of any company, which is registered after the commencement of the Companies (Amendment) Act, 2016, if the memorandum of such company does not exclude or modify the contents in the model memorandum applicable to such company, those contents shall, so far as applicable, be the contents of the Memorandum of that company in the same manner and to the extent as if that was contents of the duly registered memorandum of the company

4. REGISTERED OFFICE OF COMPANY

It is proposed that the company shall within 30 of its incorporation shall have registered office instead of current requirement of 15 days which would inturn ease out and operational convenience the process of formation of companies and the stakeholders. Accordingly, any change in registered office will also reportable to Registrar of Companies within 30 days as against existing requirement of 15 days.

5. PROSPECTUS AND ALLOTMENT OF SECURITIES

Instead of adhering to existing requirements of providing detailed disclosure in the Prospectus, it is proposed that information and reports in financial statement as specified by SEBI in consultation with the Central Government may prescribe, shall be provided.

Till the time SEBI specifies the information and reports on financial information, the regulations made by it under the SEBI Act, 1992, in respect of such financial information or reports on      financial information shall apply.

  • Return of allotment has to be filed within 15 days instead of 30 days.
  • Money received under the private placement shall not be utilized unless the return of allotment is filed with the ROC.
  • Private Placement offer letter shall not contain any right of renunciation.

The proposed restriction on the use of money is until filing of return of allotment with the Registrar of Companies would require the Companies has been again a matter of concern which would for all practical purposes mean that the filing would be required to be done once the allotment is made to use the money which is not the current compliance requirement and it would only add to the compliance burden of professionals as company’s would not like to keep their money unused because of permissible maximum  filing time limits of 15 days. On the other hand, the amount of restricted limit of penalty for contravention to Rs 2 crores, which was earlier seemingly extending to the entire amount of private placement, is considered to be a relief to stakeholders. 

It is also proposed to allow issue of Sweat equity shares at any time after registration of the Company. Currently such shares can be issued only after the expiry of one year from the date of commencement of business.

It is also proposed that Right issue offer letter can be sent through courier or any other mode having proof of delivery to all the existing shareholders at least three days before the opening of the issue and the said proposed amendment is in line with the recommendations of Company Law Committee Report.

6.  PUBLIC DEPOSITS 

In case of deposits, it is proposed that an amount not less than 20% of the amount of depositing, on or before the 30th day of April each year, such sum which shall not be less than twenty per cent. of the amount of its deposits maturing during the following financial year and kept in a scheduled bank in a separate bank account to be called deposit repayment reserve account. Currently atleast 15% of such amount is required to be deposited and that is also of amount of deposits maturing during a financial year and the financial year next following.

It is also proposed to companies which had defaulted in repayment of deposits, can also accept deposits after a period of 5 years from the date of making the default good.

Also, the requirement of providing deposit Insurance has been proposed to dispensed with.

Where any amount of such deposit or part thereof or interest thereof remains unpaid on the commencement of the Companies Act 2013, it is proposed that such amount shall be repaid within 3 years from the date of commencement or before the expiry of the period for which the deposit was accepted, whichever is earlier. Currently the amount has to be repaid within 1 year or before the expiry of the period for which the deposit was accepted, whichever is earlier.

The amount of fine for default under section 76A have been altered which was earlier minimum of one crore but now as per the proposed amendment it can also be twice the amount of deposit accepted by the company, if it is lower than one crore.

7.  REGISTRATION OF CHARGES

It is proposed that Section 77 of the Act relating to Registration of Charges shall not apply to certain charges, as may be prescribed by Central Government in consultant with the Reserve Bank of India.

The proposed amendment in section 78 specifically provides that in case the Company fails to register the charge within the period of thirty days, the person in whose favour the charge is created may apply to the Registrar for registration of the charge.  There is currently an ambiguity with the time when the charge holder may file for registration.

It is also proposed to increase the timeline for filing of satisfaction of charge to 300 days with additional fees.

8. DECLARATION OF BENEFICIAL INTEREST IN RESPECT OF SHARES

With respect to declaration of Beneficial Interest in respect of shares, key changes have been proposed and the same are proposed with a view to restrain dreadful practices   such as, money laundering, benami holdings, exercising control over companies  through a network of complex structures which cover for natural persons who are actually behind such structures .

“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.

Existing Section 90  of the Act has been proposed to be substituted and according to said proposed Section, 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.

Also, it is proposed that shall be necessary for the Company to maintain a Register to incorporate therein the details to be prescribed and the said Register shall be open for inspection by the members.

Accordingly, the Company shall also be required to file a Return of significant beneficial owners.

Also, pursuant to the proposed amendment, Company would be in obligation to give notice, in the prescribed manner, to any person whom the company knows or has reasonable cause to believe to be a significant beneficial owner of the company who is not registered as a significant beneficial owner with the company as required under this section.

The above proposals are welcome and will lead to more and more transparent dealings and clear out the menace of opaqueness in picture that exists currently through surreptitious holdings.

The proposed amendment also provided for stringent penalties for default of the aforesaid proposed section 90 including liability for fraud u/s 447

9. ANNUAL RETURN

Several amendments have been proposed with respect to Annual Return in the Bill and an endeavour has been made to loosened the provisions relating to Annual Return and also simplify the format of the Annual Return.

Pursuant to the aforesaid proposed amendment, It will not be any longer necessary to state the amount of indebtedness of the company, the details of shares held by FIIs.

As per the proposed amendment, an abridged form of Annual Return shall be prescribed for OPCs (One Person Companies) and small companies.

Extract of the Annual Return as part of the Directors’ Report has been proposed to be omitted  thereby removing the duplication associated with the furnishing of the same and a copy of the Annual Return shall be placed on the Company’s web site and a web link to be provided thereto with the Directors’ Report.

10. RETURN OF CHANGES IN PROMOTERS’ STAKE

The existing requirement under Section 93 of the Act that every listed company shall file 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 omitted.

With the above proposed amendment, the difficulties and hardship that created confusion to the stakeholders would rest. 

11.  GENERAL MEETINGS & POSTAL BALLOT

It is proposed that Annual General Meeting (‘AGM’) of unlisted company may be held at anyplace in India if consent is given is writing or by electronic mode by all the members in advance.

It is pertinent to note here, despite such proposed provision, private companies or unlisted public companies which have its securities other than equity (preference shares or debentures) listed, will not be able to avail the benefit of provision since it would be also come under ambit of listed entities.

Also, it has been proposed that It is proposed that Extraordinary General Meeting (‘EGM’) of wholly owned subsidiary of a company incorporated outside India can be held outside India.

With respect to notice of General Meeting, t is proposed that general meeting may be held at a shorter notice if in case of an Annual General Meeting consent is given by not less than 95%. of the members entitled to vote and in case of other general meetings consent is given by members holding not less than 95% of paid-up share capital (in case co. have share capital) or total voting power exercisable at the meeting (in case co. doesn’t have share capital)

Where any member of a company is entitled to vote only on some resolution or resolutions to be moved at a meeting and not on the others, than his vote with respect to shorter notice shall only counted for the purpose of the resolution on which he can vote.

As per existing provisions of the Act for calling both AGM and EGM at shorter notice, consent of 95% of members entitled to vote at the meeting is required.

It is also proposed that the company may transact an item, which is mandatorily required to be transacted through postal ballot, at a general meeting also where the facility of electronic voting under section 108 is provided.

It has also been proposed to provide exemption to banking companies from filing resolutions with respect to grant of loans, giving of guarantee or providing of security in respect of loans in the ordinary course of its business and it is also proposed to omit clause (e) of sub-section (3) of the section as the requirement under the clause is already covered in clause (a).

Further the minimum fine for non-filing under this section for company and officer in default is proposed to be reduced from rupees five lakh to one lakh and rupees one lakh to rupees fifty thousand.

12. DECLARATION OF INTERIM DIVIDEND

It is proposed that the Board of Directors of a company may declare interim dividend during any financial year or at any time during the period from closure of financial year till holding of the annual general meeting out of the surplus in the profit and loss account or out of profits of the financial year for which such interim dividend is sought to be declared or out of profits generated in the financial year till the quarter preceding the date of declaration of the interim dividend

Also it proposed by way of proviso that in case the company has incurred loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not be declared at a rate higher than the average dividends declared by the company during immediately preceding three financial years.

13. CONSOLIDATION OF FINANCIAL STATEMENTS

As per the existing provisions of Section 129 of the Act with respect to consolidation of financial statements,  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.

By way of proposed amendment now, the aforeasaid requirement is also extended to cover Accounts of the Associate companies as defined under Section 2(6) of the company also and exclude effect to exclude joint venture.

It is also proposed that in addition to authorities already specified, any other person concerned shall be given notice before passing an order for re-opening of accounts. It also proposed that order for reopening of accounts can be made upto eight financial years preceding the current financial year unless there is a specific direction under section 128(5) from the Central Government for longer period.

14. FINANCIAL STATEMENTS, BOARD REPORT, ETC.

In case of existing provision of the Act, CEO is required to sign financial statements, only if he is also acting as a director. It is now proposed by amendment in the Act that CEO whether appointed as a Director or not, shall sign the financial statements.

In case of Board report, it is proposed that disclosures which has been provided in the financial statement shall not be required to be reproduced in the report again.

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.

It is proposed that instead of exact text of the policies, key feature of policies along with its web link shall be disclosed in Board report

In respect to performance evaluation, it is proposed to omit the responsibility of the Board for carrying the performance evaluation of Board, Directors and committee.

The above proposed amendments are very would reduce the and will, avoid duplication and reduce the unnecessary volume of the Board’s Report.

15. CORPORATE SOCIAL RESPONSIBILITY

Eligibility criteria for the purpose of constituting the corporate social responsibility committee and incurring expenditure towards CSR is proposed to be calculated based on immediately preceding financial year. As per the existing provisions of the Act, this eligibility is decided based on preceding three financial years.

It also proposed to empower the Central Government to prescribe sums which shall not be included for calculating 'net profit' of a company under section 135.

The amendment of section 135 of the Act shall allow composition of CSR committee with two or more directors in case the company is not required to appoint independent director under section 149.

16. AUDITORS

As per the existing provisions of Section 139(2) listed companies and companies belonging to the prescribed criteria 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.

For the purposes of ascertaining the eligibility of a person for appointed as an auditor in a company, it is proposed to define the term "relative" and which shall mean the spouse of a person; and includes a parent, sibling or child of such person or of the spouse, financially dependent on such person, or who consults such person in taking decisions in relation to his investments

It is proposed that a person who, directly or indirectly, renders any service referred to in section 144 to the company or its holding company or its subsidiary company will not be eligible for appointment as Auditor. Currently the restriction is only on the person , his subsidiary, associate company or any other form of entity.

It is proposed to cover associate companies along with subsidiary companies with respect to right of auditors to have access to accounts and records and proposed to replace cost accountant in practice with cost accountant.

The maximum fine which can be imposed on an auditor has been revised from rupees five lakh to rupees five lakh or four times the remuneration of the auditor, whichever is less.

It is proposed to restrict the liability of auditor who is convicted of any default, to pay the damages to any person for loss arising out of incorrect or misleading statements made in the audit report, to only members and creditors of the company. Currently the Auditor are liable to pay damages to any person concerned.

It is proposed that criminal liability of an audit firm, in respect of liability other than fine, the concerned partner or partners, who acted in a fraudulent manner or abetted or, as the case may be, colluded in any fraud shall only be liable. Currently the criminal liability is of the partner and the firm, jointly and severally.

17. DIRECTORS

It is proposed that 182 days for determining whether a director is resident in India shall be computed with reference to the financial year. Currently it is calculated in reference to previous calendar year.

Further it is proposed that in case of new companies, the requirement of period of 182 days shall apply proportionately.

In the definition of Independent Director, the words ‘pecuniary interest’ is proposed to be substituted by "pecuniary relationship, other than remuneration as such director or having transaction not exceeding ten per cent, of his total income or such amount as may be prescribed.

It is proposed to allow the appointment of person as an independent director, whose relative is an employee during the three financial years immediately preceding the financial year, in which the person is proposed to be appointed as Independent Director

It is proposed to empower the Central Government to recognize any other identification number to be treated as director identification number.

It is proposed that the requirement of deposit of rupees one lakh with respect to nomination of directors shall not be applicable in case of appointment of independent directors or directors nominated by nomination and remuneration committee. 

It is proposed that the directorship in a dormant company shall not be included in the limit of directorships of 20 companies.

It is proposed that in case a director incurs any of disqualifications under section 164 (2) due to default of filing of financial statements or annual return or repayment of deposits or pay interest or redemption of debentures or payment of interest thereon or payment of dividend, then he shall vacate office in companies other than the company which is in default.

It is also proposed that the director will not vacate office in certain cases where an appeal is preferred.

It is proposed to allow participation of directors on restricted items at Board meetings through video conferencing or other audio visual means if there is quorum through physical presence of directors

18. AUDIT COMMITTEE

It is proposed that instead of listed company, listed public company shall constitute an audit committee.

It is proposed that related party transactions other than those prescribed under section 188, if not approved by Audit committee, will require the approval of Board of Directors.

In case any transaction involving any amount not exceeding one crore rupees is entered into by a director or officer of the company without obtaining the approval of the Audit Committee and it is not ratified by the Audit Committee within three months from the date of the transaction, such transaction shall be voidable at the option of the Audit Committee and if the transaction is with the related party to any director or is authorised by any other director, the director concerned shall indemnify the company against any loss incurred by it

It is also proposed that approval of audit committee with respect to transactions between a holding company and its wholly owned subsidiary company will only be required, if the transactions falls under section 188.

19. LOAN TO DIRECTORS, ETC. 

A completely new section 185 of Act is proposed. Some of the key changes are :

- Complete restriction on providing loan , guarantee or security in connection with loan to any director, director of the holding company or any partner or relative of any such director or any firm in which any such director or relative in a partner

- Loan to following parties is allowed subject to special resolution of shareholders and certain other prescribed conditions

(i) any private company of which any such director is a director or member;

(ii) any body corporate at a general meeting of which not less than twenty- five per cent. of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or

(iii) any body corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company

Currently transactions with aforesaid categories is prohibited

- Current exemption provided under section 185(1) continues to remain except that when company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the rate of prevailing yield of one year, three year, five year or ten year Government security closest to the tenor of the loan

20.  RELATED PARTY TRANSACTIONS

It is proposed that the requirement related to restriction on voting by relatives in the general meeting shall not apply to a company in which ninety per cent or more members in numbers are relatives of promoters or related parties.

It is also proposed to provide that non-ratification of transaction shall be voidable at the option of the Board or shareholders, as the case may be. This amendment aims at bringing clarity since currently though ratification is allowed both by Board or Shareholders but transaction was only voidable at the option of the Board.

21.MANAGERIAL REMUNERATION

It is proposed the approval of the Central Government shall not be required at the time of the payment of remuneration exceeding 11% of the net profits of the company.

It is proposed that company with the approval of shareholders by way of special resolution can pay the remuneration in excess of individual limits provided for payment of remuneration to executive or non-executive directors. Further where any term loan of any bank or public financial institution is subsisting or the company has defaulted in payment of dues to non-convertible debenture holders or any other secured creditor, the prior approval of the bank or public financial institution concerned or the non-convertible debenture holders or other secured creditor, as the case may be, shall be obtained by the company before obtaining the approval in the general meeting. Currently requirement is of ordinary resolution and no provision is there for approval of financial institutions etc.

It is also proposed that in case of loss or inadequacy of profits , remuneration can only be paid in accordance with Schedule V. This is very important amendment because currently in case where remuneration is not paid in accordance with Schedule V, then approval of Central Government can be obtained but by way of amendment, the provision of approval is proposed to be omitted.

It is also proposed to provide relief to director to refund the excess remuneration received by providing a timeline of two years of or such lesser period as may be allowed by the company. further until such is refunded, the director shall hold it in trust. Consequently, it is proposed to delete the provisions related to waiver of excess remuneration paid to directors with the approval of Central Government

It is also proposed to provide a provision which empowers the Company to waive the recovery of excess remuneration paid to directors provided approval of company by special resolution within two years from the date the sum becomes refundable is obtained. It is also proposed to provide relief to director to refund the excess remuneration received by providing a timeline of two years of or such lesser period as may be allowed by the company. Further where any term loan of any bank or public financial institution is subsisting or the company has defaulted in payment of dues to non-convertible debenture holders or any other secured creditor, the prior approval of the bank or public financial institution concerned or the non- convertible debenture holders or other secured creditor, as the case may be, shall be obtained by the company before obtaining the approval in the general meeting. Further until such is refunded, the director shall hold it in trust. Consequently, it is proposed to delete the provisions related to waiver of excess remuneration paid to directors with the approval of Central Government

It is also proposed that the auditor of the company shall, in his report under section 143, make a statement as to whether the remuneration paid by the company to its directors is in accordance with the provisions of this section, whether remuneration paid to any director is in excess of the limit laid down under this section and give such other details as may be prescribed.

It is also proposed to provide relief to Company whose application is pending for approval before the Central Government under section 197 by providing a provision under which on and from the commencement of the Companies (Amendment) Act, 2016, any application made to the Central Government under the provisions of this section as it stood before such commencement, which is pending with that Government shall abate, and the company shall, within one year of such commencement, obtain the approval in accordance with the provisions of this section, as so amended

It is proposed that credit for profit arising by way of premium on shares or debentures of the company which are issued or sold by an investment company provided in explanation to section 186 shall be allowed as credit to the profit and loss account. Currently such credit is not allowed.

It is further proposed that sums related to excess of expenditure over income, which had arisen in computing the net profits in accordance with this section in any year, in so far as such excess has not been deducted in any subsequent year preceding the year in respect of which the net profits have to be ascertained, shall be allowed as a deduction.

22. PUNISHMENT FOR FRAUDS

It is proposed instead of any fraud, only fraud involving an amount of at least ten lakh rupees or one percent. of the turnover of the company, whichever is lower shall be punishable with imprisonment for a term which shall not be less than 6 months but which may extend to ten years and shall also be liable to a fine which shall not less than the amount involved in the fraud but which may extend to three times the amount involved in the fraud.

CONCLUSION

The Companies (Amendment) Bill, 2016, if positively, gets transformed into the 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.

In this article, it was an endeavour to focus on the implications of the major changes proposed by the Bill. The Govt. has been undoubtedly expressing its desire to ease the procedure for doing business and this Bill is also in the said direction. It is positively hoped that the Bill will soon be transformed into the law and the stakeholders including the Corporate, professionals, etc. will be able to adhere to the operational and compliance requirements and “ease of doing business” in India vision of Government would reach to heights as it is envisaged by it.

The author is Bhavik G is a Company Secretary.


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Bhavik Gala
(Finance Professional)
Category Corporate Law   Report

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