The Viewpoint – Companies (Amendment) Bill, 2014 – A much needed action, but is it enough?

The long awaited Companies Act, 2013 (Act) was notified by the Ministry of Corporate Affairs (MCA) on August 29, 2013 with certain sections coming into force from September 12, 2013 and majority of the sections coming into force from April 1, 2014. While the Act introduced significant changes in the provisions related to governance, disclosure norms, auditors and mergers & amalgamation and introduced new concepts, inter-alia, such as one person company, class action suits and corporate social responsibility, it also faced criticism from various stakeholders due to the lack of clarity in several sections of the Act and rules framed thereunder. Companies were left pondering as regards compliance with the Act in light of uncertainty, ambiguity and contradictions in various provisions of the Act and the rules therein. Various representations had been made by the corporate sector and other stakeholders to the MCA time and again to provide clarifications while expressing practical difficulties in implementation of some of the requirements of the Act.

Considering the same and much to the reprieve of the companies, the Companies (Amendment) Bill, 2014 (Bill) was introduced in the Parliament. The Bill has been approved by the Lok Sabha and is now pending approval of the Rajya Sabha. The proposed amendments primarily deal with related party transactions, fraud reporting by auditors, public inspection of Board resolutions, responsibilities of audit committee, restrictions on bail, making common seal optional, requirement for minimum paid-up share capital, strength of benches for hearing winding up cases, jurisdiction of special courts to try offences. Amendments are also being proposed in the Act to incorporate some of the provisions earlier left out.

Analysis of key amendments:

Minimum paid-up capital requirements done away with

The Bill proposes to amend Sections 2(68) and 2(70) of the Act which deal with the definition of ‘private company’ and ‘public company’, respectively. The definition of private company and public company currently specify the minimum paid-up capital which such private company/public company ought to have i.e. Rs.100,000/- and Rs.500,000/- respectively. The Bill proposes to delete the provisions relating to such minimum paid-up capital requirements. While the amendment may not have significant impact on corporates, it may lower cost of registration of companies, promoting formation of new companies. It may also provide flexibility in registration of companies with limited capital as in the case of LLPs. Consequent amendments have been proposed in Section 11 of the Act as well.

Common Seal to be optional

The Bill proposes to do away with the mandatory requirement to have a common seal and proposes to make it optional for companies to have a common seal. It is accordingly proposed to make necessary amendments in Sections 9, 12, 22, 46, 105 and 223 of the 2013 Act. The proposed amendment will reduce time in procedural issues.

Penal provisions for acceptance of deposits in contravention of the provisions of the Act

Another significant amendment, with a focus on investor protection, is the insertion of a new Section 76A which provides for punishment for accepting deposits in contravention of the provisions of the Act. The present provisions relating to acceptance of deposits by companies do not set out specific penalties for acceptance of deposits in contravention of the provisions of the Act. This scenario is now sought to be rectified by incorporating severe punishments for violation of the provisions of the Act for acceptance of deposits from public.

Restriction on right to inspect copies of Board resolutions filed with the RoC

Pursuant to Section 117(3) of the Act, companies are required to file, inter-alia, copy of every resolution passed by the Board of Directors under Section 179(3) of the Act with the Registrar of Companies (RoC). Section 399 of the Act further provides that such documents filed with the RoC shall be available for public inspection. Considering the request of the companies to amend such right of general public to inspect resolutions passed by its Board of Directors, for confidentiality reasons, the Bill proposes that documents filed with the RoC pursuant to Section 179(3) shall not be available for inspection by general public under Section 399 of the Act. However, companies might still have concerns over the requirement for filing such documents.

Declaration of dividend after setting off previous year losses and depreciation not provided for in previous years

The Bill proposes to insert a new proviso in Section 123(1) of the Act to provide that no company shall declare dividend unless carried over previous losses and depreciation not provided in previous year or years are set off against profit of the company for the current year. The proposed amendment may not have much impact as the proposed amendment is already included in the Companies (Declaration and Payment of Dividend) Rules, 2013.

Transfer of shares to IEPF

Section 124 of the Act, inter-alia, provides that where a dividend declared by a company has not been paid to or claimed by a shareholder, the company shall transfer such dividend, which remained unpaid or unclaimed for a period of 7 years, to the Investor Education and Protection Fund (IEPF). Section 124 also provides that all shares in respect of which unpaid or unclaimed dividend has been transferred to the IEPF shall also be transferred by the said company to IEPF. The existing provisions of Section 124 led to ambiguity as to whether shares in respect of which dividend has been claimed or paid for any 1 year out of the 7 years need to be transferred to IEPF.  To provide clarity with respect to same, it is proposed to amend sub-section (6) of Section 124 of the Act to provide that all shares in respect of which dividend has not been paid or claimed for 7 consecutive years or more shall be transferred to the IEPF. For abundant caution, an explanation is proposed to be inserted which states that in case any dividend is paid or claimed for any year during the said period of 7 consecutive years, the share shall not be transferred to IEPF.

Reporting of frauds to Central Government beyond certain thresholds

Both the Act as well as the related rules did not refer to materiality of the fraud involved while reporting of fraud by the auditor to the Central Government.  Even though materiality of fraud was considered while reporting to the Central Government in the draft rules, the rules that got notified were silent on the subject; thereby making it obligatory for auditor to report all frauds to the Central Government, irrespective of the amounts involved.  The amendment proposes to replace the provision thereby requiring the auditor to report to the Central Government instances of fraud committed of the prescribed amount. Further, in case of a fraud of lesser than the prescribed amount, the auditor shall report the matter to the audit committee or to the Board. In case the auditors have reported such frauds to the audit committee or Board, the Board would be required to disclose details about such frauds in the Board’s report. The proposed amendment of quantifying the amount of frauds to be reported by the auditors will enable the Central Government to concentrate on material issues and will put responsibility on the audit committee or the Board to take care of the other not-so-material cases.

Exemption under Section 185 for loans / guarantee / security to wholly owned subsidiaries

The Bill proposes to amend Section 185 of the Act by exempting (a) loans made by a holding company to its wholly owned subsidiary and (b) any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary / wholly owned subsidiary. The proposed amendment is to make the exemption provided in the Rules, a part of the Act and may not have any significant impact. However, it should be noted that loans by a holding company to its subsidiary are not exempted and such loans would still be governed by the provisions of Section 185 of the Act. Further, the requirement that the loans should be utilised by the subsidiaries for their principal business activities is continued.

Omnibus audit committee approval for related party transactions

The Bill proposes to amend Section 177(4) of the Act whereby the audit committee shall have power to give omnibus approvals for related party transactions on annual basis. Presently, any related party transaction and any subsequent modification to these transactions requires approval of the audit committee. The proposed amendment will reduce practical difficulties of obtaining approval from the audit committee time and again. The proposed changes also appear to be based on changes introduced by SEBI to Clause 49 of the Listing Agreement wherein the audit committee of listed companies are also authorised to grant omnibus approvals for related party transactions subject to the conditions set out therein.

No special resolution required to enter into related party transactions

To simplify the process of obtaining approval of shareholders for related party transactions, the Bill proposes to amend Section 188 of the Act by replacing the requirement to pass special resolution, by ordinary resolution. The proposed amendment will address the concerns of the industry and make the implementation of the provisions of the Act easier. However, there is a divergence between the SEBI requirements and the provisions of the Act, as Clause 49 of the listing agreement requires a special resolution for material transactions and the related parties shall abstain from voting on such transactions. Even though the proposed exemption in the Act provides relief to companies who may find it difficult to obtain minority shareholders’ approval on related party transactions; however, in the case of listed companies, in case of material related party transactions, the stricter of the two norms would apply.

Exemption to related party transactions with wholly owned subsidiaries

Further, considering the demands of corporates and with a view to align with the provisions of the listing agreement, the Bill proposes that the requirement of passing the ordinary resolution shall not be applicable for transactions entered into between a company and its wholly owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval.

Bail restrictions to apply only for offence relating to fraud

It is proposed to delete references to offences under the long list of sections mentioned in Section 212, which attract the punishment for fraud as provided in Section 447 of the Act and are recognized as cognizable offences; and replace the same with the term “offence under Section 447 of the Act”.

Special Courts to try offences punishable with imprisonment of two years or more

To reduce the burden on Special Courts to be established under Section 435 of the Act, it is proposed to amend Section 435 of the Act to provide that the Special Courts established under the Act shall be responsible for trial of offences punishable with imprisonment of two or more (as opposed to the existing provision which sets out that all offences under the Act may be tried by such courts.) Consequent changes are proposed in Section 436 of the Act as well.

Conclusion

While the Bill seems to be a step in the right direction by the MCA to address the key issues and challenges faced by the corporates, auditors as well as professionals, the important question which still needs to be answered is whether are the proposed amendments enough. It is beyond doubt that apart from the amendments proposed in the Bill, there are several other concerns / issues prevailing in the legislation that need to be addressed to make compliance with the Act a smooth and hassle-free process. Nonetheless the Government has shown its seriousness about the concerns raised by the stakeholders by laying the Bill and it now needs to be seen how soon the other issues are addressed by the Government.

 

Shriram.jpgShriram Shah is a Senior Associate at AZB & Partners.