Wednesday, December 3, 2014

Proposed Amendments to the Companies Act, 2013

It has been just a year since certain provisions of the Companies Act, 2013 (the 2013 Act) were brought into force, and the Government has already yielded to pressure from industry to address some concerns within the legislation. The Union Cabinet has approved the introduction of the Companies (Amendment) Bill, 2014 in Parliament. At the time of this writing, only a press release of the Government highlighting the amendments is available, and not the actual text thereof.

The amendments proposed can be categorised broadly into two types. The first relates to ironing out drafting deficiencies and inadvertent errors in the 2013 Act. I do not propose to deal with those in this post. The second, and more important, amendments are intended essentially “for the ease of doing business”. Some of the changes suggested on this count are substantive and could have a wider impact. It is on these changes that I propose to focus in this post.

In order to “meet corporate demand”, the Government proposes to prohibit the public inspection of board resolutions filed with the Registrar of Companies. This is understandable as board resolutions may contain commercially sensitive information, which need not be disseminated widely. Another amendment relates to the relaxation of restrictions in section 185 of the 2013 Act, which will now exempt loans to wholly owned subsidiaries and guarantees/securities on loans taken by banks from subsidiaries. Section 185 came under heavy criticism due to its excessively onerous nature, as it did away with exemptions previously available under the Companies Act, 1956. The amendments propose to substantially revert to the previous position.

One of the significant areas affected by the amendments is related party transactions (RPTs). Three principal changes are suggested. First, the audit committee will be empowered to give omnibus approvals for RPTs on an annual basis. Presumably this is to avoid consideration of RPTs on a case-by-case basis. Second, the current requirement of obtaining a special resolution (75% majority) of disinterested shareholders for material RPTs is to be altered to that of an ordinary resolution (simple majority). Third, RPTs between holding companies and wholly owned subsidiaries are to be exempt from the requirement of disinterested shareholder approval. While these changes may seem miniscule at the outset, they could have a significant effect of diluting the regulation of RPTs, particularly the relaxation of the approval requirements relating to disinterested shareholders. As we have previously discussed on this Blog, the regulation of RPTs forms the bulwark of corporate governance efforts in India where shareholding tends to be concentrated added with the significant presence of corporate group structures. The focus of the 2013 Act has been to address the agency problems between the controlling shareholders (promoters) and minority shareholders. Any dilution to these basic principles would compromise the protection to be conferred upon minority shareholders. To that extent, some of the relaxations on RPT regulation must be viewed with circumspection.

Also, while one cannot quarrel with the need for the Companies Act and the SEBI norms on corporate governance (currently represented by clause 49 of the listing agreement) to operate in tandem, the need for harmonization ought not to drive the standards down. For instance, SEBI amended clause 49 of the listing agreement with effect from October 1, 2014 to bring it in line with the 2013. Now, the justification for altering the audit committee approval mechanism for RPTs in the 2013 Act is to “[a]lign with SEBI plicy and increase the ease of doing business”. It is unclear whether SEBI norms are to be aligned with the legislation or vice versa. The iterative exercise of streamlining the legislative provisions (i.e. 2013 Act) and the SEBI norms (i.e. clause 49) should not unwittingly result in a drop in the standards of governance.

Finally, something must be said about the justification for the “ease of doing business”. No one can argue with the assertion that regulation should not stifle innovation and entrepreneurialism. All factors must be carefully balanced in the legislation and rulemaking process. They must provide the requisite comfort to investor as well as other stakeholders that are affected by business activity. However, some of these efforts also appear to be operating in the shadow of doing business rankings (principally those put out by the World Bank group) and the need to demonstrate better environment in India for foreign investors. While these indicators are representative of the relative ease of doing business among various countries, they must be considered only as a means and not the end.

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