Top 5 changes in the Companies (Amendment) Act, 2017

After having cleared both houses of the Parliament, the Companies (Amendment) Bill, 2017 has now received the assent of the President to become the Companies (Amendment) Act, 2017 (Amendment Act).

This is the second round of amendments made to the Companies Act, 2013, with the first one being made in 2015.

The Amendment Act, now with over 40 revisions, was first introduced in 2016 and was then referred to the Standing Committee on Finance. After taking into consideration the recommendations of the panel, the Cabinet had cleared a revised bill in March this year.

The Amendment Act broadly seeks to strengthen corporate governance standards, initiate strict action against defaulting companies and help improve ease of doing business in the country

Here are the top five changes:

Harmonisation with SEBI and RBI

Perhaps for the first time, several provisions have been amended to align the Act with various rules and regulations of the SEBI and the RBI.

For instance, Sections 194 and 195 of the Act, which dealt with insider trading and forward dealing, have now been omitted since the SEBI regulations are wide enough to cover all instances of such frauds. Further disclosures to be made in the prospectus have also been aligned with the SEBI’s power to regulate IPOs.

The definition of ‘debenture’ has also been amended to allow RBI to disqualify certain instruments as debentures.

Rationalisation of penalties

One of the most applauded amendments made in the Amendment Act – the quantum of penalty will now be levied taking into consideration the size of company, nature of business, injury to public interest, nature and gravity of default, repetition of default, etc

Two new sections with respect to factors for determining the level of punishment and for lesser penalties for one person companies and small companies are inserted.

Penal provisions for small companies and one person companies are reduced.

Private placement process made easier

The private placement process is simplified by doing away with separate offer letter details to be kept by company and reducing number of filings to Registrar.

Further, the company has been restricted from utilising  the money raised through private placement unless allotment has been made and return of allotment has been filed with the Registrar.

In order to ensure that investor gets adequate information about the company, the disclosures are made under Explanatory Statement referred to in Rule 13(2)(d) of Companies (Share Capital and Debenture) Rules, 2014, embodied in the Private Placement Application Form.

Change in definition of private placement is proposed to cover all securities offer and invitations other than rights. The Companies would be allowed to make offer of multiple security instruments simultaneously.

Loans to directors

This was done to address the difficulties being faced in genuine transactions due to the complete embargo on providing loans to subsidiaries with common director.

Now the companies are permitted to give loans to entities in which directors are interested after passing special resolution and adhering to disclosure requirements. This would give big relief to the companies.

Section 185, however, has had quite a journey for it to reach here (which is explained here)

Section 185 of the 2013 Act, was more restrictive than its parallel provision, Section 295 of the 1956 Act. Not only did it omit the exemption which was granted to private companies under the 1956 law but also removed the option of obtaining government approval.

However, an exemption for granting loans and providing guarantees and security on behalf of wholly owned subsidiaries was inserted by way of the Meeting of Boards and its Powers, Rules in 2014. These rules, however, granted exemptions only for “wholly owned subsidiaries”

Later, however, the 2013 Act did add two separate new exemptions: one for loans granted to a managing or whole-time director (subject to certain conditions) and to “a company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan.”

The Amendment Act further bifurcates the regulatory framework into two categories: the first contemplating certain transactions which are prohibited and another consisting of transactions which may be permitted, subject to approval of the shareholders by way of a special resolution passed at a general meeting.

Disqualification for Independent Director further clarified

Section 149 of the Act deals with the qualifications and disqualifications of independent directors. Sub-Section (6) provides for various disqualifications for becoming an independent director, one of which is, such person having  “pecuniary relationship” with “the company, its holding, subsidiary or associate company, or their promoters, or directors”.

The amendment clarifies that this pecuniary relationship excludes the remuneration to such director or having transaction not exceeding 10% of his total income or such amount as may be prescribed.

(Read the Amendment Act)