In this blogpost, Shivam Anand, Student, DSNLU, Vizag, writes about the amendments in the companies Act in 2015.

Benchmarked to 2014, World Bank released a ranking of the countries with reference to “Ease of doing business” based on 10 parameters such as conducive environment for starting of a business, enforcing contracts, resolving insolvency and dealing with construction permits. Being one of the top notch contributors to the world economies India was ranked 142^nd out of 189 countries in the list.[1] Taking note of the same Ministry of Corporate affairs in order to remove the impediment and to make the regulatory environment feasible and conducive to the starting and operation of firms introduced the Company Amendment Act 2015 which received the assent of the president of India on 25^th May 2015.

Major amendments brought about through the Companies amendment act 2015:-

Amendment of Provision related to common seal:-

Prior to the amendment:

With reference to Section 9 of the Companies Act

“From the date of incorporation mentioned in the certificate of incorporation, such subscribers to the memorandum and all other persons, as may, from time to time, become members of the company, shall be a body corporate by the name contained in the memorandum, capable of exercising all the functions of an incorporated company under this Act and having perpetual succession and a common seal with power to acquire, hold and dispose of property, both movable and immovable, tangible and intangible, to contract and to sue and be sued, by the said name.”

According to Standard-8 (SS-8) issued by the Council of Institute of Company Secretaries of India common seal means “the metallic seal of a company which can be affixed only with the approval of the Board of directors of the company. It is the signature of the company to any document on which it is affixed and binds the company with all obligations undertaken in the document”.[2]

The new amendment act omitted the phrase “and a common seal” from section 9 of the companies act and thus made the very requirement of a common seal as optional. Initially, a common seal over the documents of a company made it legally binding, and it was a sine qua non requisite to make a company bound by any agreement. With the introduction of the new amendment, the mandate of having a common seal of the company has been done away with and made optional for the convenience of the company. Thus, signature by the concerned authorities now would suffice to give legal effect to the agreement documents of the company. In the modern era when technological development has reached an unassailable height and protecting the document in the form electronic data along with recognized digital signatures is the present scenario, the presence of provision mandating the requirement of the common seal is in itself an obsolete provision.

Omission of “Minimum paid up capital” under Section 2 (71) (b) and 2 (68):-

One of the important changes brought in the act is with respect to the relaxation brought for the establishment of business by bringing a change in the definition of a public and private company. The omission of the requirement of minimum paid up capital of Rs. 500000 or higher and Rs. 100000 or higher for the establishment of the public and private company respectively is a big step towards changing the environment for the new start-ups. Under section 2 (71) (b) a public company means a company which has a minimum paid-up capital of five lakh rupees or higher and under 2(68) similar provision for private companies made it mandatory to have a minimum paid-up capital of one lakh rupees for private companies. With the new amendment act on the table the term “minimum paid-up capital” has been done with though the Ministry of Corporate Affairs reserves the right to specify about the same through the channel of its rule making authority.

Impact of the above amendment:

• Formation of Special Purpose Entity with lower paid up capital. After Enron case, Special Purpose Entity gained fame in the corporate world. Also known as Bankruptcy-remote entity, it’s a kind of subsidiary company with an asset/liability structure and legal status that makes its obligations secure even if the parent company goes bankrupt.[3] A company can use such an entity to finance a large project without putting the entire firm at risk. Thus, the omission of minimum paid up capital will be motivating for the companies to form such special purpose vehicles.
• Encourage formation of Bogus Shell companies. These are companies formed for business transactions without itself having any significantassets or operations. These bogus shell companies act as a channel for underground economies like tax evasions and disguising true profits of a company, often leading to corporate frauds. Thus bringing about this major change in the company act, it is also a huge responsibility of the government to take necessary steps to curb down such activities in order to keep up the essence of this very amendment that is “ease of doing business.”

Indispensable Changes with respect to Related Party Transaction;-

Any kind of transactions/contracts which specifically interests the related parties as defined under the section 2 (76) are referred as “related party transaction”. Prior to amendment act 2015, a company in order to enter any contract or arrangement with Related Party must comply with three basic necessities which were

1. The requirement of a special resolution after prescribed paid of capital or turnover which is also a prescribed already.
2. Holding a Board meeting
3. No member related to the transaction can vote for the special resolution.

After the amendment, the major change brought in relation to section 188(1) of companies act is the omission of the word “special” articulating in a precise manner that after the amendment no special resolution is required for the approval of related party transaction. Thus, related party transaction after the amendment can be passed by simple majority of the board members. The relaxation has also been extended to the provision regarding the related party transaction between the holding company and wholly owned subsidiary company which required the approval of the shareholder.

Omnibus approval by the Audit committee for related party transaction:-

Prior to the amendment Section 177(4)(iv) read as  “approval or any subsequent modification of transactions of the company with related parties”. In addition to this provision for omnibus approval related party transaction has been added which reads as “Provided that the Audit Committee may make omnibus approval for related party transactions proposed to be entered into by the company subject to such conditions as may be prescribed.”

.This new provision may be said to be in consonance to Clause 49 of the Listing Agreement, which has been formulated for the improvement of corporate governance in all listed companies. It took into consideration the roles responsibilities and liabilities of the audit committee in all matters relating to internal controls and financial reporting and also the accountability of management was enhanced. But it may defeat the practice followed by companies whereby they are required to inform the shareholder of all indispensable details with respect to a related party transaction.

Introduction of threshold limits for fraud reporting:-

Clause 143(12) of the companies act which conferred powers and duties to auditors has been substituted by a new provision. According to the old provision “if an auditor of a company, in the course of the performance of his duties as auditor, has reason to believe that an offence involving fraud is being or has been committed against the company by officers or employees of the company, he shall immediately report the matter to the Central Government within such time and in such manner as may be prescribed”. According to the new provision a threshold limit would be decided by the central government. In accordance with the provision “if an auditor of a company in the course of the performance of his duties as auditor, has reason to believe that an offence of fraud involving such amount or amounts as may be prescribed, is being or has been committed in the company by its officers or employees, the auditor shall report the matter to the Central Government within such time and in such manner as may be prescribed.” But in the case of an offence of fraud involving amount less than the threshold limit the auditor has to inform the same to the auditing committee made under section 177 of the act or to the board. This amendment may be considered to be the most important and major change in the amendment act 2015.

With respect to declaration of dividend

Section 123(1) was a new insertion in the companies act amendment bill 2015 which made it mandatory on the part of the company not to declare dividend until and unless previous losses and depreciation which has been carried over has been set off against profit of the company of the current year. This provision was already available under Companies (Declaration and Payment of Dividend) Rules 2014 which is in effect from 12^th June 2014, so it was just a simple way of incorporating the rules in the companies act.

New Insertion of Section 76A in the Companies Act:-

This section has been inserted for punishment in case of contravention to the provision of section 73 and 76 of the companies act which deals with acceptance of deposit from public. Any company that accepts or invites deposits from the public in contravention to the provision of section 73 or 76 or fails to repay the deposits or any interest thereon within the prescribed time limit, the company in such a condition shall other than the repayment of deposits and any sort of interest thereon shall be punishable with a fine of one crore rupees which may extend up to ten crores and every officer who is in default as provided in this section shall be punishable with imprisonment which may extend to seven years or fine which is not less than twenty five lakh rupees but may extend up to two crores rupees or with both.

CONCLUSION

Thus, the above amendment bill can be said to be a major initiative of the present government to set a structure for the future of the corporate world with respect to “ease of doing business”. With the perspective of making it to the upper echelons of World Bank list of countries, only time will reveal the favourable outcome of these changes.

[1] www.doingbusiness.org/rankings

[2] Secretarial standard of affixing of common seal by the Council of the Institute of Company Secretaries of India

[3] http://www.investopedia.com/terms/s/spv.asp