Jurisdiction - India
Reports and Analysis
India – Green Signal To The New Companies Bill By The Upper House.
22 August, 2013

The Rajya Sabha on August 8, 2013, passed the Companies Bill, 2012 (hereinafter referred to as the “Bill”). The Bill which seeks to consolidate and amend the law relating to companies in India, was earlier passed by the Lok Sabha on 18 December 2012. The Bill will come into effect after it is accorded presidential assent and is notified in the Official Gazette. Upon the Bill becoming effective and subject to the other provisions thereof, the Companies Act, 1956 shall stand repealed. 


While the Bill introduces some new concepts, it also seeks to amend certain old ideas with a view to strengthen their applications. The Bill focuses on measures towards corporate social responsibility and corporate governance, stricter enforcement of certain provisions, mergers and amalgamations, duties of auditors, role of directors, among other things.


Salient features of the Bill:


1. New concepts and provisions: 

 

  • ‘One person company’ has been recognized. 
  • The concept of ‘small companies’ has been introduced and various relaxations have been granted to such companies. A small company is a company other than a public company:

     

     

    • (i) with a paid up capital of not more than Rs. 5,000,000 (Rupees Five Million) (or such higher amount as the Government may notify being not more than Rupees Fifty Million), or 
    • (ii) the turnover of which as per the last profit and loss account does not exceed Rs. 20,000,000 (Rupees Twenty Million) (or such higher amount as the Government may notify being not more than Rupees Two Hundred Million). 
  • Key managerial personnel has been defined to mean and include the chief executive officer or the managing director or the manager, the company secretary, the whole-time director, the chief financial officer and such other officer as may be prescribed.
  • Associate Company has been defined to mean a company in which another company has control over at least 20 % of the total share capital, or of business decisions, but which is not a subsidiary company of the company having such influence and includes a joint venture company.
  • Restriction has been imposed upon related party transactions, not entered into in accordance with arm’s length principle, without a board resolution. 
  • Definition of Related Party has been inserted to mean a director or his relative, a key managerial personnel or his relative, a firm, in which a director, manager or his relative is a partner, a private company in which a director or manager is a member or director, a public company in which a director or manager is a director or holds along with his relatives, more than 2% of its paid-up share capital, any body corporate whose board of directors, managing director or manager is accustomed to act in accordance with the advice, directions or instructions of a director or manager, any person on whose advice, directions or instructions a director or manager is accustomed to act.
  • The Bill has introduced the concept of entrenchment in the articles of association of a company i.e., specified provisions of the articles of association may be altered only if the conditions and restrictions are more restrictive than those applicable in the case of a special resolution.
  • Class action suits have been permitted for inter alia restraining the company from breaching the 
    memorandum and articles of association, committing an ultra vires act, contravening the provisions of law.
  • Any board meeting will require a minimum 7 day’s notice. Such notice is to be given in writing to every director at his address registered with the company and is to be sent by post, hand delivery or electronic means. A shorter meeting may be called with a notice to transact urgent business, subject to the condition that such meeting shall be attended by at least 1 independent director, if any. In case no independent director is present in such a meeting, the decisions taken at such meetings shall be circulated to all directors and will become final only if the same is ratified by at least 1 independent director.
  • Appointment of at least one woman director has been made compulsory in classes of companies to be prescribed. 
  • The Bill makes it mandatory for 1/3rd of the board of a public listed company to comprise of independent directors. 
  • Inclusion of specific provision for participation of the directors in a board meeting through video 
    conferencing or other audio-visual means.
  • Recognition to books of accounts, registers, records etc in electronic form.
  • Bill requires every company to have at least one director who has stayed in India for a period of at least 182 calendar days in the previous year. 
  • The term ‘Promoter’ has been defined under the Bill as a person: 

     

     

    • (i) So named in a prospectus or is identified by the company in the annual return; or
      (ii) who has control over the affairs of the company, directly or indirectly whether as a shareholder, 
      director or otherwise; or
      (iii) under whose advice, directions or instructions the board of directors of the company is accustomed to act;
      and does not include a person acting merely in a professional capacity.
  • The annual return of every company has to list inter alia its promoters, along with any change in promoters in the previous financial year.
  • Observance of secretarial standards issued by the Institute of Company Secretaries of India is made compulsory for all companies, in respect of general and board meetings.
  • The Bill specifically provides for a director’s office to become vacant if he absents himself from all the meetings of the board of directors held during a period of 12 months, whether with or without leave of absence from the board.
  • Compulsory constitution of an Audit Committee, a Nomination and Remuneration Committee and a 
    Stakeholders Relationship Committee by all listed companies and certain other class of companies (to 
    be prescribed).
  • Investment by companies restricted to 2 layers of investment companies. 
  • Valuation of a company’s net worth, liabilities or assets etc is to be carried out by a registered valuer with such qualifications and experience, as may be prescribed by the audit committee or in its absence 
    by the board of directors of that company.
  • The Bill introduces the concept of ‘Dormant Company’ and permits a company formed and registered for a future project or to hold an asset or intellectual property with no significant accounting transaction, or an inactive company to make an application to the Registrar for obtaining the status of a dormant company.
  • The Bill provides for constitution of a Mediation and Conciliation Panel and permits any parties to a 
    proceeding before the Central Government or the Tribunal or the Appellate Tribunal may, upon payment of requisite fee, to apply to refer the proceeding to the Mediation and Conciliation Panel. The Bill also empowers the Central Government or the Tribunal or the Appellate Tribunal to suo motumake such references. 
  • The Bill provides for the setting up of a National Financial Reporting Authority to provide for matter relating to enhancement, enforcement, compliance and review of accounting and auditing standards.
  • The Bill envisages establishment of special courts, consisting of a single judge, for providing speedy
    trial for offences with appeals and revisions from the decision of a special court lying with High Courts.
  • The Bill has specifically defined ‘Financial Statement’ to include

     

     

    • (i) a balance sheet as at the end of the financial year;
      (ii) a profit and loss account, or in the case of a company carrying on any activity not for profit, an 
      income and expenditure account for the financial year;
      (iii) cash flow statement for the financial year, except in the case of a one person company, small 
      company and dormant company;
      (iv) a statement of changes in equity, if applicable; and
      (v) any explanatory note annexed to the above.

 

2. Revision of existing provisions:

 

  • While the requirement of obtaining a certificate for commencement of business has been done away with, filing requirements for incorporation have been increased.
  • The revised definition of subsidiary company includes any company in which the holding company exercises or controls more than 50% of the total share capital (as against equity share capital), either on its own or together with one or more of its subsidiary companies. 
  • The term ‘officer under default’ now also includes share transfer agents and merchant bankers. 
  • The maximum number of members in case of a private company have been increased to 200 from 50. 
  • The Bill permits a person to occupy the office of a director in 20 companies as against the earlier limit of 15, with not more than 10 such companies being public companies. 
  • Specific provision for issuance of bonus shares has been introduced. 
  • Quorum for shareholders’ meetings in public companies have been revised. Unlike the earlier law, where the quorum was 5 members irrespective of the total number of members in the company, the Bill provides for quorum based on number of members:

‚Äč

Total number of members Quorum
Up to 1000 5
1000-5000 15
More than 5000 30

 

  • Maximum number of directors in a private company increased to 15.
  • Foreign company now includes a company incorporated outside India, with an electronic place of business in India. It is unclear as to what is meant by the term “electronic”.
  • Threshold for reference as ‘sick industrial company’ has been revised to mean, failure of a company to pay debt, demanded by the secured creditors representing 50% or more of its outstanding debt within a period of 30 days of the service of demand notice, or failure to secure or compound it to the reasonable satisfaction of the creditors.
  • The exception granted to pledge of shares from being construed as a ‘charge’ no longer exists.
  • Financial year for all companies in India have been made uniform, i.e., the period ending on the 31st day of March every year. The Bill further provides that for companies incorporated on or after the 1st day of January of a year, the period ending on the 31st day of March of the following year, in respect whereof financial statement of the company or body corporate is made up shall be the financial year. It lso requires companies already in existence to align their financial year in this manner. However, a company, which is a holding company or a subsidiary of a company incorporated outside India and is required to follow a different financial year for consolidation of its accounts outside India is allowed to apply to the Tribunal to attain an exemption. 
  • Section 4(7) of the Indian Companies Act, 1956 deems private companies that are subsidiaries of foreign companies to be public companies under certain circumstances. An equivalent provision is not contained in the Bill. Therefore, on the Bill becoming law, the deeming fiction will cease to operate.
  • Provisions prohibiting partnership or association of persons carrying on business for profit are not to apply to professional services governed by special law. 
  • All listed companies and certain other class of companies (to be prescribed) will be required to annex a secretarial audit report prepared by a company secretary in practice, with their board’s report made under section 134(3). 

 

3. Good Corporate Governance and Corporate Social Responsibility:

 

  • Mandatory constitution of a Corporate Social Responsibility “CSR”) Committee by every company with a net worth of Rs. 500 Crore or more, or turnover of Rs. 1,000 Crore or more or a net profit of Rs. 5 Crore or more during any financial year.
  • Approval of CSR Policy by the board, appropriate notification of the policy and measures for enforcement. 
  • Such companies to contribute at least 2% of its average net profits for 3 immediately preceding financial years in furtherance of CSR policy.

 

4. Management accountability: 

 

  • While the Bill lists the following duties of a director, it also imposes a fine of Rs. 100,000 (Rupees One Hundred Thousand) extendable to Rs. 500,000 (Rupees Five Hundred Thousand) for breach of any duty:

     

    • (i) To act in accordance with articles of association of the company;
    • (ii) To promote the objects of the company in good faith for benefit of members and in the best interests of the company, its employees, the shareholders, the community and protection of environment;
    • (iii) To exercise his duties with due and reasonable care, skill and diligence; 
    • (iv) To exercise independent judgment;
    • (v) Not to involve in a situation in which he may have a direct or indirect interest that conflicts, or may conflict, with interests of the company;
    • (vi) not to achieve or attempt to achieve any undue gain or advantage either to himself or to his 
    • relatives, partners, or associates;
    • (vii) not to assign his office.
  • Prohibitions on non-cash transactions involving directors of the company, its holding, subsidiary or associate company or persons connected with the director. 
  • Prohibition on forward dealings in securities of company by directors and key managerial personnel.
  • Prohibition of insider trading by directors and key managerial personnel.

 

5. Stricter enforcement:

 

  • Enhancement in the quantum of penalties and term of punishments for various offences. 
  • Serious Fraud Investigation Office (“SFIO”) recognized under the Bill.
  • Bar on investigation by other agencies once a case is assigned to the SFIO. 
  • Provisions have been introduced, with respect to the process of invitation, acceptance and renewal of deposits from the public by companies, and repayment thereof, making it more procedural and consuming.


6. Arrangements, Compromises and Mergers:

 

  • Merger between two or more small companies or between holding and its wholly owned subsidiary company has been simplified without the need for Court intervention. Merger between Indian Companies and companies incorporated in other jurisdictions has been allowed, subject to the applicable law, rules and regulations and RBI guidelines. 
  • The transferee company empowered to acquire shares of shareholders dissenting from scheme or contract approved by 90% majority, at a price determined on the basis of valuation by a registered valuer in accordance with prescribed rules.
  • Provision for dispensation of member’s or creditor’s meeting upon submission of affidavit of consent to the scheme by atleast 90% of the relevant class of members or creditors respectively. 


7. Auditors and their accountability:

 

  • The Bill permits appointment of auditors (individual or firm) for 5 years from the first annual general meeting (“AGM”) till conclusion of 6th AGM, subject to ratification by members at every intervening AGM.
  • Restriction on appointment of individual auditors for a consecutive second term and of an audit firm for a consecutive third term by listed companies. 
  • No person or firm to act as auditor for more than 20 companies simultaneously. 
  • Auditors shall have to comply with auditing standards, as specified by the Central Government or the ICAI. 
  • Restriction on rendering of certain services by auditors.

 

This article was supplied by Clasis Law

 

For further information, please contact:

 

Sakate Khaitan, Partner, Clasis Law

sakate.khaitan@clasislaw.com

 

Corporate/M&A Law Firms in India

 

 

 

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