Thursday, May 14, 2015

Companies (Amendment) Bill, 2014 Passed by Rajya Sabha

The freshly minted Companies Act, 2013 (the “2013 Act”), which is yet to take effect in full, is already in the process of undergoing change. Late last year, the NDA Government introduced amendments to the legislation in the form of the Companies (Amendment) Bill, 2014 (the “Bill”). A copy of the Bill as introduced in Parliament is available here, although the Government has moved further amendments as set out here. The Bill had already been approved by the Lok Sabha on December 17, 2014 and was approved by the Rajya Sabha yesterday.

The changes were occasioned on account of at least three stated reasons: (i) for the ease of doing business; (ii) to meet corporate demand and address problems faced by stakeholders; and (iii) removal of inadvertent errors or discrepancies. The nature of the changes proposed in the Bill has already been discussed extensively here and here.

At an overall level, the Bill seeks to undo some of the rigidities of the 2013 Act. It has been found that while the 2013 Act enhances corporate governance and compliance requirements in the interests of the investors, it also imposes onerous obligations on companies thereby increasing the costs of doing business. This apparently does not augur well with the Government’s move towards enhancing the ease of doing business with a view to attracting higher levels of foreign investment especially given the express thrust of the “Make in India” policy. Moreover, in order to improve India’s ranking in the World Bank Doing Business report, measures must be seen to be taken. These drivers seem to be behind the Bill.

While the Bill does address several aspects (as detailed in the links above), they are arguably not all that material. It does help that requirements such as minimum paid-up capital are being done away with and those such as common seal are being made optional. However, there are other somewhat archaic concepts that remain untouched, including the requirement of object clause (leading to the ultra vires doctrine), authorised capital and par value of shares. Many countries have progressively done away with these requirements as they no longer serve the intended purpose, but the 2013 Act remains wedded to them. It is perhaps time to reconsider some of these as well.

The most significant change, in my view, if the softening of the rules pertaining to related party transactions. Of course, while businesses may heave a sigh of relief, those arguing for greater minority protection may resent the move. Most other changes are rather procedural, although some of them may be material.

In all, once the President provides his assent, the amendment will become law, but it is unlikely to make any significant impact on the ground, except on some specific matters such as related party transactions.

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