The Companies (Amendment) Act, 2017

The Companies (Amendment) Bill, 2017 received the assent of the President of India on January 3, 2018 to become the Companies (Amendment) Act, 2017 (Amendment Act).

The Companies (Amendment) Bill, 2017 was introduced in Lok Sabha on March 16, 2016 to make amendments to the Companies Act, 2013. It was referred to the Standing Committee on Finance on April 12, 2016. The committee, after hearing the views of different representatives and professionals, gave its report on November 30, 2016. After taking into consideration the recommendations of the panel, the Cabinet cleared a revised bill in March 2017. Thereafter the Companies (Amendment) Bill, 2017 was passed by the Lok Sabha on July 27, 2017 and the Rajya Sabha on December 19, 2017.

This is the second round of amendments made to the Companies Act, 2013, with the first round of amendments having been made in 2015. The Act has now over 40 revisions.

Aim of the Amendments

The Amendment Act

*seeks to strengthen corporate governance standards

*has initiated strict action against defaulting companies

*seeks to help improve ease of doing business in the country

*has addressed difficulties in implementation that existed owing to stringent compliance requirements

*has rectified omissions and inconsistencies in the Act and sought harmonisation with accounting standards (AS, the Securities and Exchange Board of India Act, 1992 and the regulations made thereunder, and the Reserve Bank of India Act, 1934 and the regulations made thereunder.

Highlights and Comments

The amendments to the Company Act, 2013 have been largely welcomed as steps to facilitate ease of business and remove unnecessary formalities or even sections that are redundant. There are minor amendments such as to correct anomalies such as that arising under section 2 (46), where the term ‘company’ now  includes any ‘body corporate’. There are major changes as well such as the detailed revision of section 185 on loans to directors of companies. Many aspects have been clarified such as Section 186 (2) of the 2013 Act covering loans etc. to persons, where the word ‘person’ seemed to cover an employee; the amendment has clarified that ‘person’ does not include individuals employed by the company.

 

The attempt to remove duplication of rules and align the Act with various rules and regulations of the SEBI and the RBI have been appreciated. Importantly, Sections 194 and 195 of the Act, which dealt with insider trading and forward dealing, have now been omitted since the SEBI regulations are wide enough to cover all instances of such frauds. Further, disclosures to be made in the prospectus have also been aligned with the SEBI’s power to regulate IPOs.

The amendments have sought to rationalise the penalties on companies as a step to encourage corporate growth. The quantum of penalty will now be levied taking into consideration the size of company, nature of business, injury to public interest, nature and gravity of default, repetition of default, etc. Two new sections with respect to factors for determining the level of punishment and for lesser penalties for one person companies and small companies are inserted. Penal provisions for small companies and one person companies are reduced.

Another positive step is that the private placement process has been simplified by discarding separate offer letter details to be kept by company and by reducing number of filings to Registrar. Further, the company has been restricted from utilising  the money raised through private placement unless allotment has been made and return of allotment has been filed with the Registrar.

To ensure the investor gets adequate information about the company, the disclosures are made under Explanatory Statement referred to in Rule 13(2)(d) of Companies (Share Capital and Debenture) Rules, 2014, embodied in the Private Placement Application Form.

The definition of ‘private placement’ itself has been amended to cover all securities offer and invitations other than rights. The companies would be allowed to make offer of multiple security instruments simultaneously.

The Amendment Act further bifurcates the regulatory framework into two categories: the first contemplating certain transactions which are prohibited and another consisting of transactions which may be permitted, subject to approval of the shareholders by way of a special resolution passed at a general meeting.

Though the actual impact of the amendments can be gauged only once they are actually put into practice, there are a couple of points that have been highlighted in this regard. Though  section 149(6) has been amended, there is no change with regard to the highly onerous obligations on independent directors. They are required to take several executive responsibilities:  approve RPTs, hold one separate meeting without non-IDs attending the meeting, protect whistle blowers, safeguard the interest of all stakeholders, etc. This may pose difficulties unless addressed.

There are conflicting aspects or duplication of some requirements when other Rules and Orders are taken into account. For example, the amendment introduces a requirement for auditor’s reporting on the managerial remuneration. But the Companies (Auditor’s Report) Order 2015 already requires that an auditor report on whether managerial remuneration has been paid or provided. So there is duplication of reporting with the auditor’s report already required under the Order.

(For details on the amendments made, see section ‘Amendments to the Companies Act, 2013’)

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