This article on the analysis of the Companies Amendment Bill, 2016 is written by Prakrati Agarwal.
The Companies Act was enacted and enforced on 12th September 2013 which replaced the old Companies Act of 1956. The act was bought in to address the loopholes and discrepancies that were present in the old act. Since then, the act has been amended vide the Companies (Amendment) Act, 2014 and the Companies (Amendment) Act, 2015. The Companies (Amendment) Bill,2016 introduced in the Lok Sabha on March 16 2016, to further amend the act. It was referred to the Standing Committee of Finance on April 12, 2016 and the committee submitted its 37th report on December 6, 2016. The bill is still pending with the Lok Sabha.
The Companies (Amendment) Bill, 2016 has been framed with a view to amend the Companies Act, 2013 in accordance with the recommendations made in the Companies Law Committee report. The changes incorporated in the bill aim to address difficulties in implementing the stringent compliance requirements, easing the manner of doing business, and removing any loopholes in the act. The bill further attempts to harmonise the Accounting Standards, rules and regulations made by SEBI and the rules and regulations made by the RBI with the Companies Act, 2013.
This paper aims to provide an overview of the important aspects and changes incorporated in the bill in light of the CLC report and the Standing Committee report. It also attempts to analyse whether the changes incorporated in the bill are in the best interest of the companies and whether these changes will really help in achieving the objectives envisaged by the Ministry of Corporate Affairs.
KEY HIGHLIGHTS: EASE IN DOING BUSINESS:
The primary objective of the amendment seems to be the simplification of conducting businesses and doing away with several redundant compliance requirements. The bill suggests the removal of several legislative requirements such as the filing of an extract of the annual returns along with the report of the board of directors and repetition of disclosures already made by the board in the said report. The provision of abridged reports for smaller concerns is also an important step suggested by the bill in order to facilitate ease in carrying on business. The Standing Committee on Finance strongly urged for the need of reformatting annual returns thereby eliminating superfluous information. The committee was also in full agreement with the ministry’s move to introduce abridged annual returns and reports for one person companies. However, the committee was also of the view that the legal viability of these one person companies must be looked into, owing to the benefits and concessions being given to them. The act itself has discrepancies with provisions contradicting each other. The bill seeks to align these provisions. The manner in which the performance of directors must be evaluated differs in different provisions of the statute. The bill empowers the nomination and remuneration committee to determine the manner by which the director performance is evaluated. It has allowed for companies to set out a general objects clause in its memorandum of association as opposed to the earlier requirement of listing down specific objectives. Furthermore, the rules governing the carrying out of Annual General Meetings and Extra-ordinary General Meetings are also relaxed.
The bill certainly seems to ease out the onerous task of documentation and disclosures. It also removes ambiguities and clears out contradictory provisions. By simplifying complex legal requirements such as those mentioned above, the bill definitely facilitates effortless conduction of business. It is apparent that a reduction in the complexities of statutory requirements will allow a person to focus largely on the economic aspects of his business, allowing him to generate greater profits which would obviously be beneficial and be a motivating factor in carrying on business.
DUALITY OF LAWS:
SEBI regulations require certain disclosures to be made in the prospectus which overlap with prescriptions made in the Companies Act. The bill proposes to delete these prescriptions and allow SEBI to lay down such requirements as it deems fit in consultation with the Central Government. Furthermore, the provisions related to forward dealing and insider trading, it is suggested, should be removed as SEBI rules and regulations deal with these issues comprehensively.
While on one hand, it appears to be a positive move by the Ministry of Corporate Affairs by reducing the multitude of statutory provisions, it is likely to lead to chaos and confusion, because in the absence of a thorough study of the bill, one may be confused about the provisions that have been retained by SEBI and the provisions that have been omitted completely. This may result in an increase in the workload for companies or increased expenditure in appointing legal and accounting professionals to fully understand these changes. SEBI releases several notifications on a monthly basis, and for a businessman to keep track of each notification introduced is unreasonable. Therefore, it would be more desirable for the act to consolidate the provisions that the ministry would like to retain in one place, and for SEBI to drop such provisions from its regulations.
It seems that even the Standing Committee shares the same view as I do as it has suggested that the duplication of laws must be rectified by harmonizing the Companies Act in accordance with SEBI provisions and any repetition in SEBI regulations must be removed.
INVESTMENT PATTERN AND CAPITAL STRUCTURING:
Another drastic change incorporated in the bill is the removal of the restriction on the layers of investment and creation of subsidiary companies. The act disallows any investments in a company through more than two layers of investment companies. It also empowers the central government to place a cap on the layers of subsidiaries that a company can have. The bill seeks to remove these restrictions and allow free-flowing investments and the unrestricted creation of subsidiaries.
This is a welcome move by the Ministry because this restriction was widely viewed as a restraint on doing business. It also hampered with the company’s ability to raise funds by regulating the structuring of the company. Of course, this regulation existed to ensure that it would prevent the laundering of money and keep a track of the source of funds for investments made , but as it has been rightly pointed out by the CLC that several provisions of the act i.e. the consolidation of financial statements of a holding company and its subsidiaries and the disclosure of beneficial ownership of the shareholders will achieve the same objectives and therefore the cap on the layers of investment is unnecessary.
As mentioned above, the act requires shareholders having a beneficial interest in a company to disclose the same. However, the biggest drawback in this provision was that the definition of “beneficial interest” was not provided for, and was left open for interpretation. The bill seeks to remove this drawback as defining “beneficial interest” in a share to mean the right to exercise all rights with respect to the shares or the right to receive dividends. This amendment would remove the ambiguity and bring in more clarity and certainty. The bill in fact goes one step further and requires that any significant beneficial interest must be declared separately. Significant beneficial interest would mean holding more than 25% beneficial interest in the company’s shareholding. This disclosure would bring in transparency in the company’s structuring and curb any fraudulent activities.
DEFINITION OF “ASSOCIATE COMPANIES”:
The act defines an associate company to mean a company which has significant influence in another company. The bill seeks to amend the definition of significant influence by widening its scope. It is proposed that the definition of associate companies must also include participation in or control of business decisions in the other company. This definition is going to affect the manner in which a company can transact with other companies. The act requires a board resolution for a company to engage in any related party transaction, which includes associate companies.
While I am of the opinion that widening the ambit of associate companies is a risky move as it will also make those transactions related party transactions which would not ordinarily be thus. This will not only increase the complexity in conducting the business but may also be detrimental to the interests of the company, the Standing Committee was in favour of the new amendment as it believed that these words would provide for various scenarios in which a company exercises significant control over another.
LOANS TO SUBSIDIARIES:
The Act disallowed the granting of loans to subsidiary companies. The ministry sought to relax this restriction and thus the bill proposes to allow the granting of loans to subsidiaries or to any person that a director “is interested in” subject to the passing of a special resolution by the board and on the condition that the funds are used by the subsidiary to carry out its principal business activity . The rationale behind this amendment was to allow genuine transactions wherein the holding company was really interested in providing loans to its subsidiaries.
However, the bill overlooks a scenario where a subsidiary may require borrowing funds for legitimate business activities that do not form part of the principal business activity. This was noted by the Standing Committee also which suggested that these prohibitions laid down must be nullified as it inhibited the growth of companies . In view of the above, I feel that this amendment seems to bring very little change since the act anyway allows holding companies to lend money to its wholly owned subsidiaries for its principal business activities.
The bill seeks to change the meaning of independent directors. The act recognises directors as independent directors only if they have no pecuniary relationship with the company except the remuneration they receive as being independent directors. The bill proposes to allow independent directors to have a pecuniary relationship with the company to the extent of 10% of his total income. The reasoning given by the CLC is that such a small amount of income will have no bearing on the independence of the director.
This assumption, in my view, is flawed. A threshold limit of the pecuniary relationship affecting the independence of a director cannot be objectively set, as the concept of independence is more subjective in nature. Objectively, the only manner in ensuring independence is adhering to the provision in the act i.e. absolutely no monetary relationship aside from the director’s remuneration. Concerns about the ambiguity in the provisions of appointment of the independent directors were also raised in the discussions of the Standing Committee.
Section 42 of the Companies Act, 2013 was introduced to cover the lacuna in the old act with relation to private placements which was being misused by several companies, most notably, the Sahara Group. The act provided for a water-tight provision with respect to private placement which was well structured and ensured transparency in every stage. Any offer made to more than 200 people in aggregate in a financial year would be deemed to be a public offer. The Ministry would ensure that no offers are made in excess of this number by requiring the filing of every offer made to each individual with the registrar.
However, the bill seeks to omit this requirement and only mandates the filing of allotment of shares, once it is done.This change, in my opinion, should not be bought in. This will disable the ministry to keep a track of the number of offers made in one year, and only have a track of the allotments finally made. This will result in further misuse of the law and more litigation. Despite this, even the committee believed that the provision imposing a monetary penalty on promoters for violation of the said section would be sufficient in ensuring that public issues will not be conducted in the guise of private placements.
MINIMUM NUMBER OF PEOPLE:
The act specifies the number of people required for the creation of a company. However, it is silent on the minimum requirement of people for continuing the business. The bill proposes that where the number of people in the company falls below seven in case of a public limited company or two in a private limited company and the company carries on its activities for more than 6 months, the members who continue to be a part of the company after those six months will be severally liable for any debts that the company may incur provided that they were aware of the minimum number of members falling below the aforementioned limits . This provision will ensure that there is compliance of the requirement of the minimum number of members not only during the formation of the business but also through its lifespan.
REOPENING OF ACCOUNTS:
The bill also seeks to set a limit on the reopening of accounts of a company. The bill suggests that the accounts of a company must not be reopened prior to eight years from the date of examination. This will be a great relief to the companies as they will not have to carry on the cumbersome task of maintaining books of accounts for several years, as they currently are required to.
Moreover, realising the difficulty in adhering to the stringent compliance requirements and the probability of oversight, the ministry has proposed a reduction in the penalties and hence, sought to amend provisions in the act that attract high penalties.
The bill also formulates a fee structure in case of delayed filings. The ministry believes that this would serve as an incentive towards filing documents on time. On the contrary, I believe that this is incorporated by them as a mechanism to generate revenue and not to ensure compliance. The committee seems to have the same opinion and suggests that rather than an enhanced fee structure, the compliance mechanism should be made less tedious providing sufficient time for the same, consequently securing timely filings.
The vision behind the bill i.e. the simplification of the procedures of and the laws governing the carrying on business is the need of the hour. A clear and comprehensive mechanism to conduct business would only motivate the inception and growth of businesses, which will create more employment opportunities and will ultimately benefit the nation as a whole. On a macro level, the bill, it seems has achieved its aims. A large portion of the bill provides for clarity, unambiguity, transparency and certainty. But what happens to those provisions which are clearly contrary to the objectives of the bill?
The changes suggested by the Company Law Committee have been by and large accepted by the ministry and incorporated within the bill barring out some minor exceptions. However, as stated in earlier sections, some of these amendments may turn out to be prejudicial to the interests of the companies. Should these amendments be reviewed?
Another question we must ponder over is whether the amendments have been taken too far? Has the ministry, in order to reduce the complications and hassles of compliance, paved the way for rampant misuse of these provisions e.g. the provisions with respect to private placements?
As seen above, the bill also seems to bring about certain changes which prima-facie seem to be a vehicle to attract revenue for the department, rather than a manner of ensuring compliance. In such a scenario, will this not give rise to abuse of power and provide opportunity to officials to extort money from the companies?
While these are questions open for debate, the success of the bill will be effectively assessed only if it comes into force as an act, and it does, in fact reduce the burden of compliance on the businessmen bringing about growth in the business sector.
It will be interesting to see how the changes suggested by the Standing Committee are received by the Lok Sabha and whether it would be incorporated in the bill in the next session. If the bill retains the positive provisions and addresses the concerns raised, I believe it would bring about sweeping changes in the industry and result in a more flourishing economy.
- Highlights of Companies Amendment Bill, icsi.in, 2016 available at http://www.icsi.in/student/Portals/0/StudentMonthNew/images/pdfs/STUDENTSUPDATE_01072016.pdf
- The Companies (Amendment) Bill, 2016
- Standing Committee On Finance, Report on The Companies (Amendment) Bill,2016 available at https://www.icsi.edu/Webmodules/Departmentally_standing_comitee_on_finance_companies_amendment_bill_2016.pdf
- The Companies Act, 2013
- Legislative Brief – Companies (Amendment) Bill, 2016, prsindia.org, available at http://www.prsindia.org/uploads/media/Companies,%202016/Legislative%20Brief-%20Companies%20Bill%202016.pdf
- Ministry of Corporate Affairs, Government of India, Report of the Companies Law Committee. Available at http://www.mca.gov.in/Ministry/pdf/Report_Companies_Law_Committee_01022016.pdf.