SKP Business Alert
28 March 2016 | Volume 7 Issue 5
Key highlights of the Companies (Amendment) Bill, 2016

On 16 March 2016, a Bill to further amend the Companies Act, 2013 was introduced in the Lok Sabha (Upper House of the Parliament) to address the difficulties raised by various stakeholders and to improve the ease of doing business in India. The Bill, once passed, would become the second amendment to the Act within a period of two years. There have been a number of notifications, rules, orders, circulars, clarifications, etc. issued already.
 
The proposed changes are broadly aimed at addressing difficulties in implementation that exist on account of the stringent compliance requirements mentioned in the Statement of Objects and Reasons of the Bill.
 
This Bill proposes over 70 amendments. Some of the key amendments are listed below:
  • Hassle-free incorporation process;
  • Simplification of the private placement process;
  • Disclosures in the prospectus aligned by omitting prescriptions in the Companies Act and allowing these prescriptions to be made by the Securities and Exchange Board of India (SEBI) in consultation with the central government;
  • Allowing an unrestricted object clause in the Memorandum of Association;
  • Deletion of provisions relating to forward dealing and insider trading;
  • Managerial remuneration above the prescribed limits are to be replaced by approval through a special resolution by shareholders;
  • A company may give loans to entities in which directors are interested after passing a special resolution and adhering to the disclosure requirement;
  • Removal of restrictions on layers of subsidiaries and investment companies;
  • Exempt certain classes of foreign companies from the registration and compliance regime under the Act;
  • Align prescription for companies to have an Audit Committee and Nomination and Remuneration Committee with that of Independent Directors;
  • Test of materiality is to be introduced for pecuniary interest for independence of Independent Directors;
  • Removal of requirement for annual ratification of appointment or continuance of auditor;
  • Amend provisions relating to Corporate Social Responsibility (CSR) to bring greater clarity.
The Statement of Objects and Reasons also state that the process for the establishment of the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) is at its final stage.
 
The key highlights of the Bill have been listed below
 
Section of Companies Act, 2013 Highlight of proposed amendment
Section 2 - Definitions Proposes to modify definitions relating to associate company, key managerial person, debenture, small company, related party, subsidiary company, joint venture, holding company, turnover, net worth, small company and the deletion of the definition of interested director.
Section 3 - Formation of company Proposes to provide liability for members in case of business carried on while the number of members decreases below the prescribed minimum.
Section 4 - Memorandum Proposes to allow companies to have an unrestricted object clause to carry on any lawful activity.
Section 7 - Incorporation of company The Bill seeks to replace the affidavit by first subscribers with self-declaration.
Section 26 - Matters to be stated in prospectus Provides that contents of prospectus with respect to information and reports on financial information shall be specified by SEBI in consultation with the central government.
Section 42 - Offer or invitation for subscription of securities on private placement Proposes to simplify private placement procedures by doing away with separate offer letters, reduced number of filings, etc. and also provides a new section to put a restriction on the utilisation of money raised on a private placement basis.
Section 47 - Voting rights Provides that it shall be subject to provisions relating to related party transactions.
Section 62 - Further issue of share capital Proposes a wider mode of dispatch for the notice of offer to subscribe for rights shares.
Section 73 - Prohibition on
acceptance of deposits
from public
Omits deposit insurance and provides deposit repayment reserve which shall not be less than 20% of the deposit maturing in following financial year.
Section 74 - Repayment of deposits, etc., accepted before commencement of this Act Deposits accepted under the Companies Act, 1956 shall be repaid within 3 years (earlier 1 year) from the commencement of the original section 74 of the Companies Act, 2013.
Section 96 - Annual
general meeting (AGM)
Suggests amending section 96 to enable unlisted companies to convene an AGM at any place in India with the approval of all shareholders obtained in advance.
Section 110 - Postal ballot A company may transact an item which is mandatorily required to be transacted through postal ballot, at a general meeting where the facility of electronic voting is provided by the company.
Section 123 - Declaration of dividend Provide clarity by allowing declaration of interim dividend for the financial year from profits of the said year or from brought forward surplus in the profit and loss account.
 
Interim dividend can be declared during the period of closure of financial year till the date of the AGM and in such cases, in addition to the profits referred to above, profits generated up to the quarter prior to the declaration of dividend may be used.
Section 129 - Financial
Statement
Seeks to amend section 129(3). Provides that a company having subsidiary(ies) and associate companies shall prepare a consolidated financial statement in the same form/manner as that of its own in accordance with applicable Accounting Standard (AS). It infers that joint venture companies may not require consolidation.
Section 135 - Corporate Social Responsibility Provides clarity on the constitution of CSR on the basis of ‘previous financial year’ instead of ‘any financial year’. Allows composition of CSR committee with two or more directors in case the company is not required to appoint an independent director and also seeks to empower the government to prescribe sums which shall not be included for calculating ‘net profit’ of a company under section 135.
Section 139 - Appointment of auditors Proposes to do away with annual ratification with respect to the appointment of auditors.
Section 149 - Company to have Board of Directors Proposes to provide for easier requirements with respect to the appointment of a resident director. The proposed amendment seeks to specify limits with respect to the pecuniary relationships of directors with respect to the eligibility of the director to be appointed as an ‘independent director’ and also proposes to specify the scope of restriction on pecuniary relationships entered into by a relative.
Section 160 - Right of
persons other than
retiring directors to stand for directorship
Requirement of deposit of INR 100 thousand for the nomination of directors shall not be applicable in the case of Independent Directors’ appointment or directors nominated by the Nomination and Remuneration Committee.
Section 165 - Number of directorships Directorship in dormant companies shall be excluded from ceiling limit of directorships in 20 companies.
Section 177 - Audit
Committee
Substitutes words ‘listed companies’ with words ‘listed public companies’. It proposes to provide for ratification by the Audit Committee of transactions involving amount not exceeding INR 10 million within three months of the transaction, consequences of non-ratification, exemption from the approval of the Audit Committee to related party transactions between the holding company and its wholly owned subsidiary (other than those covered under section 188).
Section 178 - Nomination and Remuneration Committee and Stakeholders Relationship Committee Substitutes the words ‘listed companies’ with the words ‘listed public companies’. It proposes to provide that the Committee will specify the methodology for the effective evaluation of the performance of the Board, its committees and individual directors to be carried out either by the Board, the Nomination and Remuneration Committee or by an independent external agency, and for its review.
Section 180 - Restrictions on powers of Board Seeks to amend section 180 to include ‘securities premium’ along with paid-up share capital and free reserves for the calculation of upper limits on the borrowing powers of the Board of Directors.
Section 184 - Disclosure of interest by a director Proposes to amend section 184 to include body corporate under the ambit of sub-section (5) in certain cases.
Section 185 - Loan to
directors, etc.
Proposes to substitute section 185 to limit the prohibition on loans, advances, etc. to directors of the company or its holding company or any partner of such director or any firm in which such director or relative is a partner.
 
It also proposes to allow a company to give a loan or guarantee or provide security to any person in whom a director is interested in, subject to the passing of a special resolution by the company and the utilisation of loans by the borrowing company for its principal business activities.
Section 186 - Loan and
investment by company
Proposes the deletion of layering restrictions on investment companies. It also seeks to provide an aggregation of loans and investments made and guarantees provided for the purpose of calculating the limits of loans and investments.
Section 188 - Related
party transactions
It proposes to include a second proviso to section 188(1) (restriction on members’ voting where such member is a related party), which shall not apply to a company in which 90% or more members, in numbers, are relatives of promoters or related parties. It also seeks to provide that non-ratification of transactions shall be voidable at the option of the Board or shareholders as the case may be.
Section 194 - Forward Dealing and section 195 - Insider Trading Seeks to omit these sections.
Section 196 -
Appointment of managing director, whole-time director or manager
Recommends that government approval shall be required on matters in Part I of Schedule V of the Companies Act, 2013.
Section 197 - Overall
maximum managerial
remuneration and
managerial remuneration
in case of absence or
inadequacy of profits
The Amendment Bill proposes to do away with the requirement of obtaining approval of the central government and the requirement of a special resolution for the payment of managerial remuneration in excess of the prescribed limits.
 
It also seeks to provide that prior approval of banks/Public Financial Institutions (PFI)/non-convertible debenture holders/secured creditors shall be obtained where any term loan is subsisting, before approval of shareholders.
 
It also requires the auditor, in his report, under section 143, to make a statement as to whether the remuneration paid by the company is in accordance with section 197.
Section 447 - Punishment for fraud The Amendment Bill recommends the use of thresholds with respect to the compounding provisions relating to fraud without imprisonment.
SKP’s comments
The amendments proposed are aimed at resolving practical difficulties faced by various stakeholders since the implementation of some of the provisions of the Companies Act, 2013. In order to review those difficulties, the government constituted an expert committee in 2015 comprising of noted representatives from the industry, industrial chambers and government representatives which submitted its report on issues arising from the implementation of the Act. Several recommendations were made focusing on simplifying cumbersome compliance procedures, relaxations to small companies, and supporting the ease of doing business and the Make in India initiatives. A wide consultative process was followed.

The proposed amendments will address the difficulties faced currently; however, this is still far from becoming a legislation based on the concept of self-compliance. Our views on the proposed amendments are as follows:
  • The universal object clause is a welcome move;
  • Section 185 i.e. Loans to directors, etc. has been re-written and has narrowed down the prohibited cases. This is a more liberalised approach to the section.;
  • The central government intervention in managerial remuneration is done away with in cases where the remuneration is in excess of the limits placed under the law whilst such cases will require a special resolution by the shareholders;
  • Certain cumbersome compliances which were unwarranted have been modified. For example, the requirement of filing a return with respect to changes in the number of shares held by promoters, and top ten shareholders is omitted; the government may prescribe a list of charges that do not require registration; etc.;
  • Certain provisions have been proposed for small companies which, although not in parity with global legislations, is an improvement over the previous legislation;
  • It seems that the Bill has missed out on giving purposive reprieve in the case of private placements which is overregulated under the Act. The Bill only proposes reduced timelines for the allotment and return filing, whereas more could have been possible as the section is re-written; 
  • Some of the definitions are proposed to be streamlined to fill the gaps left in the Act;
  • Companies can issue shares at a discount to its creditors when debt is converted into shares in pursuance of any statutory resolution plan or debt restructuring scheme in accordance with guidelines or directions or regulations specified by the Reserve Bank of India. This is a provision at the insistence of banking companies and is seen as a welcome step.


19 Adi Marzban Path | Ballard Estate | Fort | Mumbai 400 001 | India   
+91 22 6730 9000 |
skpgrp.info@skpgroup.com | www.skpgroup.com

Mumbai | Pune | Hyderabad | New Delhi | Gurgaon | Chennai | Bengaluru

Nexia Member Firm logo
LinkedIn
Twitter
Facebook
Google+
DISCLAIMER
This alert contains general information which is provided on an “as is” basis without warranties of any kind, express or implied and is not intended to address any particular situation. The information contained herein may not be comprehensive and should not be construed as specific advice or opinion. This alert should not be substituted for any professional advice or service, and it should not be acted or relied upon or used as a basis for any decision or action that may affect you or your business. It is also expressly clarified that this alert is not intended to be a form of solicitation or invitation or advertisement to create any adviser-client relationship.

Whilst every effort has been made to ensure the accuracy of the information contained in this alert, the same cannot be guaranteed. We accept no liability or responsibility to any person for any loss or damage incurred by relying on the information contained in this alert. 

© 2016 SKP Business Consulting LLP. All rights reserved.