Sunday, February 14, 2016

Summary: Recommendations of the Companies Law Committee

[The following post is contributed by Bhushan Shah and Labdhi Shah from Mansukhlal Hiralal & Company]

The Companies Act, 2013 (2013 Act) was enacted with a view to bring Indian company law in tune with global standards. However, as is the case with every new legislation, the enactment of this Act also led to ambiguity and confusion within the industry. The Government continued to receive representations from the industry and stakeholders that the 2013 Act needed further review. Thus, a Companies Law Committee (CLC or Committee) was constituted with a mandate to make recommendations on issues arising from the implementation of the 2013 Act and examining recommendations received from other agencies such as the Law Commission of India. The CLC submitted its report on 1 February 2016 (Report) and recommended several changes to the 2013 Act with a view to ensure its effective implementation. The Ministry of Corporate Affairs (MCA) has invited comments on this Report by 15 February 2016.

It is pertinent to mention that as per the Report, the Committee’s recommendations will result in changes to about 78 sections of the 2013 Act and more than 100 changes in those provisions.  This update summarizes the important recommendations made by the Committee in the Report:

1.                 Definitions:

·                   Associate Company [Section 2(6)]: CLC recommends amending this definition in order to make it consistent with the term associate company as defined under the Accounting Standards. Associate Company as defined under Accounting Standard-28 excludes joint ventures. Thus, CLC recommends that joint ventures, as defined in the Accounting Standard 28, be included in the explanation clause to Section 2(6) of the 2013 Act and the term ‘significant influence’ should be amended to mean 20% of the total voting power and not total share capital, since total share capital also includes preference share capital.

·                   Subsidiary Company [Section 2(87)]: CLC recommends that since equity share capital forms the basis for determining the holding-subsidiary status of companies by virtue of it conferring voting power on the holder of the shares, the term total share capital should be replaced with total voting power. Further, CLC also recommends that the restrictions on layering of subsidiaries as contained in the proviso of the said section be omitted in order to enable companies to raise funds more effectively, which in turn will help smooth functioning of companies and also for structuring purposes.

2.                 Private Placement [Section 42]:

·                   PAS-4: Given that the nature of information, which is to be disclosed in the Form is extensive, CLC recommends discontinuing the preparation, filing and circulation of PAS-4. Further, in order to protect the interest of the investors, CLC recommends that the disclosures which are made under Explanatory Statement referred to in Rule 13(2)(d) of Companies (Share Capital and Debenture) Rules, 2014, should be embodied in the Private Placement Application Form.

·                   Making simultaneous offer of securities: CLC acknowledged that there may be instances wherein companies may be required to make simultaneous issue of different forms of instruments namely, preference shares or non-convertible debentures and the current prohibition on making a fresh offer of securities, if allotments to be made under the prior offer are pending, has hampered the ability of companies to meet their financial requirements. Thus, CLC recommends that subject to the offer being made to a maximum of 50 persons or such higher number as may be prescribed, a company can simultaneously keep more than one issue of securities open in a year, while ensuring that the regulatory concerns are not compromised.

·                   PAS-5: CLC recommends that the requirement of filing Form PAS-5 should be discontinued. Also, Section 42 (7) of the Act should be amended to state that offers under Section 42 shall be made only to such persons whose details as prescribed under the rules have been recorded by the company prior to making an offer. Such details should not be filed with the Registry. In order to ensure accountability and transparency during the private placement process, CLC recommends that the relevant special/board resolution authorising the company to circulate the application form and collect monies should be filed with the Registry.

·                   Valuation of convertible securities: CLC recommends that the valuation report, as required to be obtained by companies, need not be filed with the Registry or circulated, however, the same is required to be made available to the investors. The Committee further recommends that the current provisions under the 2013 Act requiring price of securities to be decided in advance should be modified and provisions allowing pricing to be done on the basis of a formula (on the lines of RBI Regulation/FDI Policy) should be considered.

3.                 General Meetings:

·                   Annual General Meeting (AGM) [Section 96(2)]: On the basis of suggestions received from the industry, CLC has agreed to amend the relevant provisions of the 2013 Act to state that private companies and wholly owned subsidiaries of unlisted companies can convene AGM at any place in India, provided that 100% shareholder approval is obtained in advance by the company.

·                   Extra-Ordinary General Meeting (“EGM”) [Section 100]: CLC recommends that wholly owned subsidiaries of companies incorporated outside India should be given relaxation to convene EGM outside India. Thus, CLC recommends deleting the explanation to Rule 18 (3) and inserting explanation to Section 100 granting exemption to wholly owned subsidiaries of companies incorporated outside India to convene EGM outside India.

·                   Postal Ballot [Section 110]: Section 110 prescribes list of items, which are mandatorily required to be transacted by way of postal ballot. This mandatory list becomes redundant for companies, which are required to conduct voting using electronic means. Thus, CLC recommends amending the relevant provisions of 2013 Act and the rules to provide that if a company is required to provide for electronic voting, then the same items could be covered in its General Meetings also.

4.                 Independent Directors [Section 149(6)]: The criteria for appointment of independent director as mentioned in 2013 Act states that an independent director must not have any pecuniary relationship with the company, holding company, associate company, etc. Thus implying that even minor pecuniary relationships would be covered within the captioned section, even though such transactions do not compromise the independence of the director. In light of the above, and in order to bring it in harmony with the SEBI listing agreement, the Committee recommends that the test of materiality be introduced in determining the pecuniary relationship.

5.                 Loans to Directors [Section 185]: CLC recommends that companies should be allowed to advance loans to other person, including subsidiaries in which the director is interested, subject to the company obtaining prior approval of the shareholders by way of special resolution. Further, loans extended to persons, including subsidiaries, falling within the restrictive purview of Section 185 should be used by the subsidiary company for its principal business activity only, and not for further investment or grant of loans.

6.                 Loans and Investment by companies [Section 186]: CLC recommends that layering restrictions on investment companies should be removed. Further, CLC also suggests that an explanation should be provided to clarify that use of the word person in sub-section 2 of Section 186 does not include employees of the company who have been given loans as a part of conditions of service or pursuant to any approved scheme for all employees by the company.

7.                 Related Party Transactions [Section 188]: The Committee recommends withdrawal of the MCA Circular No 30/2014, which clarified the requirements of second proviso to Section 188 (1) of the Act. The Committee recommends that all related parties cannot vote on related party transaction.

8.                 Prohibition on forward dealing and insider trading of securities [Section 194 and 195]: CLC recommends that both the Sections should be omitted, in view of the practical difficulties expressed by the stakeholders.

9.                 Managerial Remuneration: (i) CLC recommends that the requirement of obtaining government approval for authorising payment of managerial remuneration in excess of the prescribed limits should be done away with. (ii) CLC also recommends that Schedule V be amended such that remuneration payable to managerial personnel who is not related to any director or promoter of a company or who is not a promoter of the company, and is a professional with relevant knowledge and domain experience; and does not hold more than 2% of the paid up equity share capital of the company or its holding company, should be approved by way of ordinary resolution and not by way of special resolution. In other cases, however, the requirement for special resolution of the shareholders should be retained. (iii) The Committee further recommends that the limits of yearly remuneration prescribed in the Schedule be enhanced.

10.              Charge [Section 77]: Given that the 2013 Act does not set out the specific list of charges which are required to be filed with the Registry, pledges and liens created were also required to be filed with the Registry. Such filings of pledges and liens created various practical difficulties, relating to the quantum and frequency of registrations required, especially for NBFCs and Clearing Corporations. Thus, the Committee recommends that prescriptive powers should be provided under Section 77 (3) to allow certain liens or securities or pledges to be exempted from filing.

11.              Board Meetings

·                   Video Conference: The rules framed under 2013 Act specify a list of items which cannot be dealt with via video conferencing or any other audio visual means. CLC observed that this requirement completely bars the participation in the board meeting via video conferencing even if the requisite quorum as prescribed under the 2013 Act is physically present. CLC therefore recommends flexibility be provided to allow participation of directors through video conferencing, subject to such participation not being counted for the purpose of quorum. However, such directors, though not counted for the purposes of quorum, may be entitled to sitting fees.

·                   Interested Director: Given that private companies have been exempted from the provisions of Section 184 (2), which prohibits interested directors from participating in the board meetings, CLC recommends that since Section 184(2) and Section 174(3) are related sections with respect to interested directors, related exemption under Section 174(3) to enable such participating interested Directors for the purposes of quorum, should be given to private companies using the power of exemption available to the Government under Section 462 of 2013Act.

12.              Companies (Share Capital and Debentures) Rules, 2014:

·                   Issue of Sweat Equity Shares [Rules 8(4) and 12]: CLC recommends that start-up companies can issue sweat equity shares in excess of the 25% ceiling and up to 50% of their paid up equity share capital. Further, CLC has also recommended that in order to encourage start-up companies, ESOPs can be issued to the promoters, who work as employees or employee directors or whole time directors, which will help them gain when the valuation of the company goes up in the future, without in any way impacting finances of the company in the initial years.

·                   Preferential Allotment of partly paid up shares [Rule 13(2)(c)]: Currently, the captioned rule does not allow preferential allotment of partly paid up shares. However, given that the Department of Industrial Policy and Promotion vide its Press Note No 9 (2015 Series) dated 15 September 2015 allowed partly paid shares and warrants as eligible capital instruments for the purposes of FDI policy. The Committee also recommends amending this Rule in order to allow preferential allotment of partly paid-up shares.

Comment: A majority of the amendments that have been recommended and discussed above, are to the Sections under the 2013 Act which can only be amended by the legislature and thus will require approval of both the Houses of Parliament.  Also, it can be argued that these recommendations made by the Committee will drive the ease of doing business but it may dilute some of the governance provisions introduced in the 2013 Act.

- Bhushan Shah and Labdhi Shah

1 comment:

vswami said...

“....will result in changes to about 78 sections of the 2013 Act and more than 100 changes in those provisions.”

"This update summarizes the important recommendations made by the Committee in the Report:..."

Of course, an attempt is seen to have been made , besides highlighting, drawing pointed attention to the inescapable fact of enormity of the changes recommended.

As shared / stressed in an earlier response elsewhere, what might be of the most concern to one and all, including the corporate managements and its statutory and internal audit parties, could be this one aspect: That is, how many of such changes are in respect of provisions already made effective and expected to have been followed and complied with in the interim; and what are the measures /mechanism suggested or to be suggested for squarely taking on and tackling effectively the quite inevitable ‘fall out’ problems foreseen or otherwise.

Now, that the deadline is about to expire, no knowing whether at all the foregoing line of thinking has been considered to be of every relevance, and if so, chosen to be adopted and further serious thoughts given , so as to take care of the likely but obvious problems as are to be envisaged !