Companies Act

This article is written by S A Rishikesh, from the Institute of Legal Studies, Shri Ramswaroop Memorial University, Lucknow. This article looks into how the Companies Act 2013 came into existence and the criticism it faced. Also, seeing some of the major changes that were introduced in the new Act while replacing the earlier six-decade-old Act.

Introduction 

With the end of World War II in 1945 and newly gained independence in 1947, the young nation India felt the need for a Companies Act of its own. To formulate this Act, a new committee was set up in 1950. The Committee is comprised of twelve members headed by H. C. Bhabha. The committee was also known as Bhabha Committee. The committee submitted its reports in 1952. The work of the committee became known as the Indian Companies Act, 1956. But as it is said, no Act is free of flaws and as a result, after going through many amendments it was finally replaced by the Companies Act,  2013.

An overview of amendments in the Companies Act from 1956-2013

Companies Act, 1956

Companies have a huge role in any developing economy. The Companies Act 1956, was not enacted only from a legalistic, calculative, and scientific point of view, rather it was based more on the social and economic needs of the young nation, to provide economic growth. It was primarily brought to regulate the formation, functioning, financing, and dissolving of companies. The Act came into effect on April 1, 1956. The original Act contained around 658 Sections. The Act prescribed various regulatory mechanisms regarding all the aspects of a company such as organisational, financial, and managerial. The Act vested the winding-up jurisdiction in the High Courts. In the working of the corporate sector, freedom to the companies is as important as protecting the rights of shareholders and investors. The Companies Act tried to play a balancing role between these two competing forces, i.e., the autonomy of the management and investor protection. 

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The main objectives of the Act were as follows:

  1. To safeguard the dividends of the shareholders, from the management. As there is a separation between the management and the ownership of a company. 
  2. To protect the interest of the creditors at the same time. 
  3. To help develop companies in a healthy and competitive environment in India. Because the corporate sector always has a huge role in the development of a nation. 
  4. To equip the government with ample power to protect the public interest by intervening in the company affairs; as per the procedure prescribed by law. 

In this rapidly changing world of technology and industries, many times law is not able to keep up with the pace. The story of the Companies Act is no different, the Act went through twenty-four amendments, to keep pace with the rapidly growing corporate sector with the Indian economy.  

1990s : The major economic policy shift

After independence, it was the desire of the policymakers to develop the economy of India in a socialist environment. Though some MNCs (like Coca-Cola, IBM, Bio Merieux) were launched during this time but did not receive much help from the government or the people of India. The major focus of the government was to eradicate poverty, promote small, local, and indigenous industries, and develop a small local private sector in order to achieve self-reliance.

Things began to change from the 1980s when some policy changes were seen but the government was still hesitant. The dramatic change of events took place in the 1990s when India was opened to the world through Liberalization, Globalization, and Privatization. This led to the rapid changes in the corporate sector in India that the Companies Act could not keep up. There were some amendments made but were not of much help. 

Companies Act, 2013

Companies Act 2013 finally replaced the Act of 1956. The new Act had fewer Sections (470) but many sections were new and the outdated sections of the Companies Act 1956 were eradicated. The Act gave more powers to the shareholders, it also aimed at women empowerment by prescribing mandatory inclusion of at least one woman director to the Board of every prescribed class of companies in India. A new concept of Corporate Social Responsibility was introduced, it also established a new body National Company Law Tribunal (NCLT) to lessen the burden of the High Courts and simultaneously provide specialized justice. 

Major notable changes introduced with the Companies Act, 2013

Financial year

Section 2(41) of the Act required the financial year of every Indian company in India to end on March 31, every year. It is the same date that the Government of India uses for tax reporting purposes. Companies that were foreign subsidiaries were given relaxation and they had the option to apply to NCLAT for a different date than March 31.

One-person company and small company

A new idea that the Act introduced was absent in its predecessor Act. Companies Act 2013 defined one-person companies under Section 2(62) of the Act and small companies and gave them various relaxations for doing business in India.

Corporate Social Responsibility

Corporate Social Responsibility (CSR) under Section 135 was made mandatory for all the Indian companies having a net worth of INR 500 crores (c.US$80m) or more, or a turnover of INR 1,000 crores (c. US$160m) or more, or net profits of INR 5 crores (c. US$800k) or more during any financial year. They immediately had to form a CSR committee and spend at least 2 percent of the company’s profits as CSR.

Any company not complying with the CSR rule had to give the reasons for the same in their annual financial statement. 

Auditor rotation

Under the previous Act, the auditors of a company were appointed for a period of one year but under the new Act Section 139, the auditors had to be appointed for six Annual General Meetings (AGM) i.e., 5 years. A person could not be appointed as an auditor for more than five years and in case the auditor is a firm it could not be appointed for more than two consecutive terms. To maintain transparency the auditors were prevented from performing non-audit work in the company.

Directors

Under the previous Act, the maximum number of directors was twelve. The new Act increased this number to fifteen under Section 149 which can further be increased by a special resolution. For certain companies, it was made mandatory to have a female director on board and a director who shall stay in India for not less than 182 days in a calendar year. The duties and liabilities of the director were codified. One-third of the total directors of every public company needed to be independent. No independent director can hold their post for more than two consecutive terms of five years.

National Company Law Tribunal (NCLT)

The introduction of the National Company Law Tribunal was to replace the existing Company Law Board and Board for Industrial and Financial Reconstruction. It was also to reduce the burden of the High Courts and a way for companies to seek justice easily and expediently.

Fast track mergers

The process of merging companies was simplified by the new Companies Act. Even the cross-border mergers were permitted with the prior permission of the Reserve Bank of India (RBI).

Prohibition on forward dealing and insider trading

Section 194 of the 2013 Act prohibits directors and key persons holding managerial positions from buying the shares in their company, or in its holding, subsidiary, or associate company because such a person is expected to have all the access to the price-sensitive information and can easily do insider trading. 

Electronic mode

The new Act aimed at promoting E-Governance. For various processes like maintenance and inspection of documents in electronic form, an option of keeping of books of accounts in electronic form, financial statements to be placed on the company’s website was granted, etc.

Key issues with the Companies Act, 2013 

No law is perfect in itself. Whenever a new Act is introduced it draws criticism from different sections of the society. The same is the case with this new Companies Act 2013. Critics often say it is the same old Act of 1956 just given a new packing and presented as the new Companies Act. It failed to overcome the deficiencies the old Act had. Still, a lot of power was in the hands of lawmakers with regard to rulemaking. 

The second point of criticism was numerous drafting errors, vague and unclear language used in the Act. One such example was Section 185 of the Act which forced the Ministry of Corporate Affairs (MCA) to issue a clarification of the same. There is also at times, the lapse of departments of government to issue rules and clarification which creates controversies and confusion among the decision-making persons of the companies. An example of it is the bond market for which the rules are given by both the Ministry of Corporate Affairs and the Ministry of Finance. All this defeats the purpose for which the new Act was introduced.

Addressing the issues

The corporate sector of India is an ever-changing one and that can be understood from the fact that four amendments have been made already in the new Companies Act 2013. The first amendment being in 2015, followed by amendments in the year 2017 and 2019 with the latest one being in the year 2020. These amendments have been made to solve the issues highlighted by the critics and bring in some new changes to the corporate sector in India.


The Companies (Amendments) Act 2015

Ease of doing business was promoted by the 2013 Companies Act which was further seen in the new amendments. The 2015 Amendment Act was introduced with the following intentions:

  1. Ease of doing business;
  2. Removal of drafting errors;
  3. Clarify some vague provisions of the 2013 Act;
  4. Remove the clauses that slowed down the business processes. 

The major changes that were brought by the 2015 Amendment Act were as follows:

  • No minimum paid-up capital, this was good for the startups where they do not have to invest INR one lacks in the very starting of their business;
  • Common seal became optional, agreements may now be signed between the two directors directly;
  • Board resolutions are no longer public; they became confidential;
  • Companies could provide loans to their subsidiary companies;
  • The penalties were stringent on failure to pay deposits.  

The Companies (Amendments) Act 2017

The  2017 Amendment Act was aimed at:

  1. Rectifying inconsistencies in the 2013 Act.
  2. Harmonizing the Act with the accounting standards.
  3. Facilitating ease of doing business to promote growth with generating more employment.
  4. Address the difficulties in implementation of the Act because of these strict compliance requirements. 

The key highlights of the 2017 Amendment Act were as follows:

  • For the very first time, the Act was amended to get it to line up with the various rules and regulations of the SEBI and RBI; 
  • Definition of associate holding and subsidiary companies were amended;
  • Penalties were rationalised i.e the penalty will now be levied taking into consideration the size of the company, nature of the business, injury to the public interest, nature and gravity of the default, reputation of default, etc.;
  • More clarification was given on the disqualification of the independent director;
  • Companies could provide loans to the director but this can only be made if a resolution is passed and 75% of the company’s shareholders approve it. While the prohibition on loans to the family members of the director of a company was still in place.

The introduction of a new independent regulator National Financial Reporting Authority (NFRA). It came into existence in October 2018 intending to oversee the auditing profession and accounting standards in India. According to Section 132 of Companies Act 2013, “NFRA is responsible for recommending accounting and auditing policies and standards in the country, undertaking investigations, and imposing sanctions against defaulting auditors and audit firms in the form of monetary penalties and debarment from practice for up to 10 years.” The NFRA had a positive impact on India. It has made India eligible for the membership of the International Forum of Independent Audit Regulators (IFIAR). However, the Institute of Chartered Accountants of India (ICAI) fears that the establishment of such authority in India will curb its powers. 

The Companies (Amendments) Act 2019

This amendment was mostly based on the recommendations made by the committees set up by the Ministry of Corporate Affairs to decriminalize some of the offences under the 2013 Act for better compliance purposes and to liberalise the existing regulatory framework for ease of doing business.

Key changes brought by this amendment were as follows:

  • The amendment reintroduced the declaration of commencement of Business and set the time limit for filing charge documents.
  • A new point was added in the disqualification of a director, a person can not be a director of more than 20 companies out of which more than 10 companies cannot be public companies. 
  • Corporate social responsibility was made mandatory by this new amendment. and if the companies were not able to spend the said amount into CSR, then they had to contribute it into the Funds mentioned in Schedule VII, for example, PM’s national relief fund. 
  • Dematerialisation of securities.
  • Penalties for repeated defaulters were made more strict. 
  • The focus was also laid on de-clogging the National Company Law Tribunal (NCLT). In order to do so, two powers were vested in the Central government:

(i) Decide in case a company wants to adapt to a different financial year. 

(ii) In matters of a public company converting into a private company. 

The Companies (Amendments) Act 2020

The Company Law Committee (CLC) was constituted by the Ministry of Corporate Affairs (MCA) to further review the sections on offences under the Companies Act 2013 based on the recommendations of the CLC in its report the new amendment 2020 was introduced. 

The major takeaways from this amendment were as follows:

  • Decriminalization of minor offences.
  • The definition of listed companies was changed.
  • The framework of CSR was eased. The Amendment Act 2020 exempted companies with the CSR liability of up to INR 50 lakh a year from setting up a CSR committee.
  • The new amendment paved the way to set up more benches of the National Company Law Appellate Tribunal (NCLAT).
  • Amendment also empowered the Central government to require the classes of unlisted companies to prepare and file periodic financial results. 
  • It added a new chapter in the Act specially dedicated to the producer companies. 

Conclusion 

It is good to keep up with the modernization in the field of law also else the purpose of the law is defeated. The new Companies Act 2013 is an attempt for the same, a positive step making the company law modern and equivalent to the global standards. Making an addition to the decision-making capacity and power of the company. Giving more rights and protection to the minority shareholders at the same time. The introduction of the one-person company, the small company will play a key role in reducing the administrative burden that the small companies had to bear,  but the large companies have to buckle up for the new changes from the appointment of auditors and directors to returning a small portion of what they earned from the society back to the people in form of Corporate Social Responsibility. 

References

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