COMPANY LAW UPDATE

The Companies Amendment Bill, 2014

The Companies Act, 2013 (“Act”) was passed by both the Houses of the Parliament and was notified on 29^th August 2013 to replace the 57 year old Companies Act, 1956 with the vision and mission to increase transparency, corporate accountability, enhanced responsibilities of the professionals like Company Secretaries, Chartered Accountants and other professionals and to contribute towards society at large. The Act was passed with 470 sections in totality, out of which 283 sections and 22 rules corresponding with such sections have so far been notified. The new Act has proved to be a welcoming step in the history of India wherein India has become one of the country in the world wherein the corporate social responsibility has been made mandatory to be followed by specified companies.  Albeit, there have been pitfalls in the said new Act which must be ratified in the interests of all the stakeholders.

The Union Cabinet approved the introduction of the Companies Amendment Bill, 2014 on December 2, 2014. The amendment bill has been passed after extensive consultations to address the issues raised by the professionals and stakeholders. The amendments in the Bill have been in the form of omission, additional requirement, optional requirement, rectification requirement, exemption and amendment. The important sections, which have been amended under the bill, are briefed as under:

Amendment No.1: Section 2(68) of the Act: Omitting the requirement for the minimum share capital[1] for the incorporation of the company.

Impact – This will facilitate ease of doing business. A company can now be incorporated with any capital similar to LLPs and registration cost shall be lower.

 Amendment No.2: Section 9 of the Act: Optional requirement to keep common seal of the company and consequential changes for authorization for execution of documents.

Impact – This will reduce procedural issues in relation to common seal.

Amendment No. 3: Section 22 (2) of the Act: Omitting the requirement to have facsimile common  Seal to be used generally or at specified places to  nominate an attorney for places in and not situated in India.

Impact – This will reduce procedural issues.

Amendment No.4: Section 76A: Specifying punishment for default in acceptance of deposits or refund of deposits.

Impact – This will facilitate more stringent punishment, which will deter companies from making willful default in repayment of deposits.

Amendment No.5: Section 117 of the Act: Prohibiting public inspection of Board resolution filed with MCA.

Impact – This will maintain the confidentiality of the Board directors.

 Amendment No.6: Section 123 (1) of the Act: Inclusion of the provision for writing off past losses/depreciation before declaring dividend for the year.

Impact – The provision will become part of the Act as was missed out in the Act but included in the Rules.

Amendment No.7: Section 124(1) of the Act: Rectifying the requirement of transferring the equity shares for which unclaimed/unpaid dividend has been transferred to Investor Education Protection Fund (IEPF) even though subsequent dividends have been claimed.

Impact – This will remove the dilemma of transferring the equity shares to IEPF.

Amendment No.8: Section 134(3) and 143 (12) of the Act: Prescribing threshold limits beyond which fraud shall be reported to the Central Government.

Impact – This will reduce some responsibility on the statutory auditors/cost auditors/secretarial auditor to report fraud even for small amount in big multi-national companies. Also, it will enable Central Government to concentrate on important cased, below which will be taken care by the Audit Committee.

Amendment No. 9: Section 185 of the Act: Exemption under Section 185 (Loans to Directors) provided for loans to wholly owned subsidiaries and guarantees/securities on loans taken from banks by subsidiaries.

Impact – The exemption was included in the Rules but was inadvertently missed from the Act.

Amendment No.10: Section 177(4) of the Act: Empowering Audit Committee to give omnibus approval for related party transactions on annual basis.

Impact – The omnibus approval will lead to ease of doing business and shall also be in consonance with Clause 49 of revised SEBI guidelines.

Amendment No.11: Section 188(1) of the Act: Replacing ‘special resolution’ with ‘ordinary resolution’ for approval of related party transactions by non-related shareholders.

Impact – This will facilitate passing resolution by simple majority to meet problems faced by large stakeholders who are related parties.

Amendment No.12: Section 188(proviso) of the Act: Exemption under Section 188, related party transactions between holding companies and wholly owned subsidiaries from the requirement of approval of non-related shareholders. 

Impact – The provision is passed to meet corporate demand.

Amendment No.13: Section 212(6) of the Act: Bail restrictions to be applied only for the offences relating to fraud under Section 447.

Impact – This will provide more clarity for the bail restrictions in the case of offences related to fraud.

Amendment No.14: Section 419 of the Act: To remove inadvertent error, winding up cases to be heard by 2-member bench instead of 3-member bench.

Impact – It will result in reducing practical difficulties.

Amendment No.15: Section 435 and 436 of the Act: Special courts to try only offences carrying imprisonment of two years or more.

Impact – This will reduce the burden on special courts.

To conclude, Companies Amendment Bill, 2014 has been passed to remove the anomalies from the new Companies Act, 2013 and to facilitate ease of doing business considering the practicalities of business transactions. The initiative taken by the government is one step ahead to improve its global ranking for ease of doing business, wherein India has been ranked very low at the 142^nd position in the latest World Bank report.

                                                           

[This article is contributed by Dimpy Gulati, Financial Advisor and Partner and Head Chicago office.]

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[1] Paid-up capital is money that a company has received from the sale of its shares, and represents money that is not borrowed. A company that is fully paid-up has sold all available shares, and thus cannot increase its capital unless it borrows money through debt or is authorized to sell more shares.