companies (amendment) bill, 2016 - vinod kothari

Companies (Amendment) Bill,

2016

Vinod Kothari

Vinod Kothari & Company

1006-1009 Krishna Building 224 AJC Bose Road Kolkata – 700017 Phone 033-22811276/ 22813742/7715

E-mail – [email protected]

601-C, Neelkanth 98 Marine Drive Mumbai 400002

Phone 022-22817427

E-mail: [email protected]

www.vinodkothari.com Email: [email protected]

B-49, Panchsheel Enclave New Delhi- 110017

Phone 011 41315340 E- mail- [email protected]

mailto:[email protected]

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• No part of it can be copied, reproduced or distributed in any manner, without explicit prior permission.

• In case of linking, please do give credit and full link

2

About Us • Vinod Kothari &

Company, ▫ Based in Kolkata, Mumbai,

Delhi

• We are a team of consultants, advisors & qualified professionals having over 25 years of practice.

3

Our Organization’s Credo:

Focus on capabilities; opportunities follow

Major areas of coverage • Curative changes to iron out

creases of existing law

• Related party transactions

• Loans and investments

• Managerial remuneration

• Private placement, public offers

• Objects of companies and short-form MoA

• Changes pertaining to subsidiaries, associates

• Changes pertaining to auditors

• Changes pertaining to accounts

• Declaration of dividend

• Small companies

• Enabling issue of shares at a discount to lenders

• Amendments pertaining to charges

• Declaration of beneficial interest

• General meetings of companies

• Facilitating foreign companies

• Registration of firms as companies

• NCLT changes

• Prosecutions, fines, and special courts

4

Highlights

• Most of the changes are to simplify, soften the provisions of the Act

• Most of the changes are based on recommendations of the CLC ▫ Several recommendations of CLC may be carried

out via Rules

• What will be the effective date ▫ For curative/declaratory amendments, the

amendments will date back to the date of the original law

▫ For substantive amendments, the date of the Amendment Act being made effective

5

Curative amendments

6

Amendments to iron out creases in

drafting or construction • Several of the proposed amendments are

corrective, curative

▫ To fill gaps left by earlier law

▫ To make changes made by RoD Orders a part of the law

▫ To bring some changes from the Rules to the statute

▫ To correct inept drafting

7

Corrective amendments • Sec. 2 (30) ▫ Debenture to exclude money market instruments, and such

other instruments as may be notified in consultation with the RBI Money market instruments are governed by Chapter III-D of

the RBI Act Tenure upto 12 months

Therefore, controversy about commercial paper not being debenture gets resolved.

Additionally, upto 12 month debentures are also excluded from the definition Therefore, no DRR, or any other compliance with sec. 71

required in such cases However, will sec. 42 apply to short-term debentures?

The word “security” in sec. 2 (81) refers to SCRA. SCRA definition includes any transferable securities. ▫ Distinction between transferable security, and negotiable security

8

Corrective amendments -2

• Sec. 2 (57)

▫ Definition of “net worth” to be amended to add credit balance in P/l account

The amendment should have actually been done in the definition of “free reserves”

That would automatically reflect in the net worth definition as well

▫ Unfortunately, definition of free reserves remains the same as before

Hence, doubts arise for the purpose of sec 180 (1) (c), sec 186 etc whether surplus in p/l account to be counted

9

Related party transactions

Several changes on related party

transactions • RPT continues to be the hotbed of legislative action

▫ Two RoD orders have amended definition in sec 2 (76) ▫ Amendment Act, 2015

replaced special resolution requirement by Ordinary resolution Provided for omnibus approvals by audit committee

▫ Several circulars of the MCA • Bill, 2016 proposes several changes

▫ Definition of “interested director” in sec. 2 (49) to be deleted ▫ Definition of “related party” becomes commutative in case of

investor and associate; joint venturer and joint venture ▫ Carve out in sec. 184 (5) to be extended to bodies corporate ▫ Process of ratification of contracts by audit committee under sec

177 (4) (iv); puts focus on contracts not covered by sec. 188 ▫ Purported carve out for voting by related parties on general

meeting resolution puts a unique stress on numerical minority At the same time, it becomes clear that the bar on voting will be for

every related party, and not just the party to the contract

11

Definition of “related party”

• Replacement of the word ‘company’ with the words ‘body corporate’ u/s 2(76)(viii)- ▫ the term ‘associate company’ cannot include associates

incorporated outside India since the company means a company incorporated under Act, 2013 or any previous company law.

• Inclusion of investor in respect of an associate company: ▫ Currently, in case of an investor-associate, the down-stream

entity is related party, but upstream entity is not. ▫ Proposed addition of “investing company”

Once again, the word “investing company” may be limited to Indian entities only

• Inclusion of ‘venturer of a company’ under the purview of related party- ▫ The manner in which the sub-clause (C) has been worded may

lead to confusion that the fellow-venturer is also a related party.

12

Ratification of transactions by audit

committee

• Current law does not explicitly require prior approval of audit committee for related party transactions ▫ However, with the insertion of omnibus approval, it was seeming as if

the approval was prior ▫ Now, Bill adds a provision for ratification; also providers for power of

audit committee to avoid transactions not pre-approved by it • Bill proposes to add 3 more provisos below sec. 177 (4) (iv)

▫ First one was added by Cos (Amendment) Act 2015 to provide for omnibus approval

▫ Proviso 2: in case of transactions not covered by sec 188, where audit committee does not approve transaction, it shall make recommendation to the Board

▫ Proviso 3: provides power of the audit committee to ratify transactions upto Rs 1 crore value, or else avoid them

▫ Proviso 4: provides for exemption for transactions with WOS, only for transactions not covered by sec. 188

• .

13

Second proviso to sec 177 (4) (iv) • Mandating Audit Committee to submit its recommendation to the

Board such transactions, other than transactions referred to in section 188, where Audit Committee does not approve the same: ▫ This creates a new board reference point altogether ▫ Existing law – transactions not covered by sec. 188 are not required to go

to the board at all ▫ They come to the audit committee

Audit committee may approve May disapprove

▫ There was no scope for the board to approve something not approved by the audit committee In matters of RPTs, for logical reasons, audit committee had the upper

hand

• The proposed amendment: ▫ Widens the scope for board review, including for transactions not

covered by sec. 188, if not approved by the Board ▫ Seems to suggest that the Board may even approve transactions not

approved by the audit committee

14

3rd proviso to sec. 177 (4) (iv) • Lays several things

▫ Seems limited to transactions upto Rs 1 crore only ▫ Transaction

Entered into without prior approval Which should include prior omnibus approval as well

Not ratified by the audit committee May be avoided by the audit committee at its option And

The transaction is with a related party (should actually read as relative) to a director, or is approved by any other director

Such director shall indemnify the company for a loss incurred by it

• Power to ratify transactions upto Rs 1 crore Provision has contradiction with Rule 6A which empowers audit

committee to grant omnibus approval for transactions upto Rs 1 crore

• Complete legislative gap for transactions exceeding Rs 1 crore ▫ These are the transactions not covered by omnibus approval ▫ If not ratified by the audit committee ▫ Even the compensatory obligation of the director not provided for.

15

4th provision to sec 177 (4) (iv) • Provides for exemption in case of transactions not covered by sec. 188, if entered into with

WOS • Interestingly:

▫ Listing Regulations completely exempt transactions with WOS ▫ Sec 188 provides exemption from seeking shareholders’ approval in case of transactions

between holding company and WOS ▫ Sec 177 (4) (iv) had no exemption whatsoever

Underlying rationale is that the concerns of base erosion and profit shifting do not become any less relevant in case of transactions with WOS.

Therefore, there is no case for not routing transactions through audit committee

• The scenario that now emerges for transactions with WOS: ▫ Transactions covered by sec. 188

Audit committee approval required u/s 177 (4) (iv); not required under Listing Regulations Board approval required if not in ordinary course of business or arms length Shareholders’ approval not required

▫ Transactions not covered by sec. 188 Audit Committee approval not required u/s 177 (4) (iv) Board approval not required, as not covered by sec. 188 Shareholders’ approval not required

• Transactions not covered by sec 188 are financial transactions; may involve substantial movement of resources. ▫ Exemption from audit committee approval may not be proper

16

Amendment in sec. 188

• Bill proposes to add a proviso below the second proviso to sec. 188 (1) ▫ Interestingly, there was a 4th proviso added by Amendment Act 2015 to provide

carve out for shareholders’ approval in case of transactions with WOS ▫ There is a proviso below the second proviso proposed to be added by the Bill

There will be total of 5 provisos post this insertion

• Makes shareholders’ approval inapplicable where 90% of members, in number, are relatives of promoters, or are related parties ▫ Bar on voting is applicable only to related parties ▫ By definition, relatives of promoters are not related parties at all. Hence, they are

not barred from voting anyway. ▫ Also, the proviso does not recognise promoters themselves:

If counts only relatives of promoters ▫ However, if together with related parties, promoters’ relatives, are numerically

90% or more of members, then bar on related parties voting does not apply

• This brings a very significant change ▫ MCA circular 30/2014 becomes meaningless

• So, as in case of the listing agreement, all related parties will refrain from voting ▫ Unless the case falls in the 90% numerical majority case

17

Numerical minority of shareholders gets the

power to block resolutions

• Bill proposes a carve out by exempting companies in which ninety percent or more members, in numbers, are relatives of promoters or are related parties, from seeking shareholders’ approval. ▫ If shareholding pattern of A Ltd comprises of B Ltd holding 91%

of paid up capital and 100 shareholders holding remaining 9% of paid up capital- In this case, since A Ltd does not hold majority of shares in

numbers, the ones holding 9% of paid up capital will decide the fate of the RPTs. If they choose to block the RPTs, there is no way to get the same approved unless the RPT is in ordinary course of business and on arm’s length basis

▫ If shareholding pattern of X Ltd comprises of Mr. Y (promoter) along with one of his relative holding 91% of paid up capital and Z Ltd (an unrelated entity) holding 9% of the paid up capital. In the instant case, Mr. Y and his relative need not abstain from

voting on the transaction as they hold majority of shares in numbers.

18

Position for different companies

• Private companies

▫ Bar on related party voting does not apply

• Government companies

▫ Transactions between 2 government companies exempted.

• Public, listed companies

▫ If going under sec. 188, related parties shall not vote, unless covered by the numerical majority threshold

▫ If going under Listing Regulations, all related parties shall not vote

19

Sec 188- in brief

• Definition is specific

▫ Includes family members of HUF

• Related party transactions under the law are subject to serious restraint

• Most transactions that a company may have with “related parties” require approval of Board ▫ Directors are required to observe compliance u/s 184(2) with regard to

disclosure of interest and non- participation in a particular discussion.

• In the general meeting the member who is a related party shall not vote if he is related party to the context of a particular transaction ▫ Bill, 2016 proposes a carve out by exempting companies in which 90% or

more members, in numbers, are relatives of promoters or are related parties, from complying with the said requirements.

20

Sec 177(iv)- in brief

• All transactions with related parties though not covered by section 188, shall require approval of Audit Committee in terms of sec 177.

▫ Bill, 2016 proposes mandating Audit Committees to submit its recommendation to the Board such transactions, other than transactions referred to in section 188, where Audit Committee does not approve the same.

▫ Seems to have a vertical distinction made in relation to transactions covered under section 188 and those not covered under the same.

• Bill, 2016 proposes power to ratify transactions by Audit Committee to be granted only for any transaction involving any amount not exceeding 1 crore rupees.

▫ This seems to be contradicting with the provisions relating to omnibus approvals, as provided under Rule 6A of MBP Rules which provided deemed omnibus approval to transactions of aforesaid amount.

▫ RPTs exceeding value of Rs. 1 crores, not placed before Audit Committee for prior/ omnibus approval remains unanswered

21

Scope of approval of Audit

Committee & shareholders after

Bill, 2016

23 Scope of Audit Committee (AC) approval under Act, 2013

Whether matter placed before AC for

prior approval?

Yes No Nature of

approval

granted

Value of

transaction

Prior approval

for specific

transaction

Omnibus

Approval

Disapproved

by AC

Not

exceeding

Rs. 1

crore

Exceeding

Rs. 1 crore

AC may ratify

within 3 months or

the transaction

shall be voidable

at the option of the

AC*

?? No

clarity on

the same

For

sec

188

transa

ction

For

transaction

between HC

& WOS

Recommend

to Board if

not in OC or

not on AL

basis

For other

than sec

188

transaction

Sec 188

transaction

Other than

Sec 188

transaction

For foreseen

transactions

meeting

criteria for

granting

Omnibus

Approval

Deemed

approval for

unforeseen

transaction not

exceeding 1

crore rupees

Board can

consider u/s

177 (8) AC will recommend to Board

pursuant to second proviso to

section 177 (4) (iv)

Other than

sec 188

transaction

Transaction

u/s 188

177 (4) N.A AC approval shall apply in

view of fourth proviso to

section 177 (4) (iv)

* May require director or employee to compensate if the contract or arrangement is with a related party to any director, or is authorised by any other director, the

directors concerned shall indemnify the company against any loss incurred by it.

24

Shareholder Approval under Act, 2013

Whether Shareholders approached for

prior approval by a resolution or

ratification within 3 months of entering in

the transaction?

Yes No

Whether 90% or more

members, in numbers are

held by relatives of promoters

or are related parties

Voidable at

the option of

shareholders

Yes No

Avoid the

transactions

May require director/employee to

compensate* May approve

the

transaction

May

disapprove

the

transaction

Whether the RPT is not in ordinary

course of business (OC) or not on arm’s

length basis (AL) exceeding the limits

specified under Rule 15?

Yes

No

Provisions not

applicable

Related parties need

not abstain from

voting on the

resolution

Related parties to

abstain from voting

on the resolution

*if the contract or arrangement is with a related party to any director, or is authorised by any other director, the directors concerned shall

indemnify the company against any loss incurred by it.

Shareholders may choose

to ratify & not avoid the

RPT

Loans to Directors and Directors’

entities

Quick snapshot

• Substitution of entire existing provisions

• Partly prohibitory and partly restrictive

• Aligning of interest rate with Section 186(7)

• Directors of subsidiary, JV, associate companies still excluded

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Prohibition u/s 185(1)

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• A company shall not-

▫ directly or indirectly

▫ advance any loan including any loan represented by book debt to; or

▫ give any guarantee or provide any security in connection with a loan availed by

any director of the company, its holding company

any partner or relative of above

firm in which the above director or relative is partner

Restriction u/s 185(2)

• A company may by passing a special resolution and on the condition of utilisation of money in principal business activities-

▫ directly or indirectly

▫ advance any loan including any loan represented by book debt to; or

▫ give any guarantee or provide any security in connection with a loan availed by

Any person in whom any of the director of the company is interested

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Person in whom director is interested

any private company of which any such director is a director or member

any body corporate at a general meeting of which not less than twenty five per cent. of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together

any body corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company

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Exemption provided

• Exemption to : ▫ Loan

to MD/WTD as part conditions of service to all employees or pursuant to a scheme approved by an SR

is in the ordinary course of business where interest charged not less than prevailing yield of G sec of 1 year, 3 year, 5 year or 10 year

made by holding company to WOS WOS to utilise money in its principal business activities

▫ Guarantee or security provided by holding company in respect of loan made to WOS or

loan made by bank or FIs to subsidiaries Subsidiary to utilise money in its principal business activities

30

Overview

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Loans to Directors

[Section 185]

Are you public company Are you private company

Are you govt. company

Are you advancing loan to director or giving guarantee or providing any security in connection with

any loan taken by -

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a) any director of company, or of a company which is its holding company or any partner or relative of any such director

b) any firm in which any such director or relative is a partner

Yes

Is that any of the following -

a) Loan to MD/WTD

i. as part of conditions of service extended by company to all employees

ii. pursuant to any scheme approved by the members by a special resolution

b) loan or guarantee given or securities given for due repayment of any loan by company in its ordinary course of business and interest is charged at a rate not less than the rate of prevailing yield of 1Year/3Year/5year/10Year Government security closest to the tenor of the loan

c) any loan made by holding company to its WOS company or an guarantee/security provided by holding in respect of any loan made to subsidiary company provided loan is used by subsidiary for principal business activity

d) any guarantee given or security provided by holding company in respect of any loan made by any Bank or FI to its subsidiary company provided loan is used by subsidiary for principal business activity

Yes

Allowed

No

Prohibited

No

Allowed

any person in whom any of the director of the company is interested

"any person in whom any of the director of the company is interested" means—

(a) any private company of which any such director is a director or member;

(b) any body corporate at a general meeting of which not less than twenty-five per cent. of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or

(c) any body corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.

Yes

Are the conditions being satisfied -

(a) a special resolution is passed by the company in general meeting : Provided that the explanatory statement to the notice for the relevant general meeting shall disclose the full particulars of the loans given, or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilised by the recipient of the loan or guarantee or security and any other relevant fact; and

(b) the loans are utilised by the borrowing company for its principal business activities.

Yes - Allowed No - Prohibited

No

Allowed

Loans and investments

by companies

Quick snapshot- 1/2

• Provisions of investment through layers of investment companies to be omitted.

• The insertion of an ‘explanation’ to clarify the exclusion of employees from the requirement of the section ▫ Same as provided in MCA circular dated 10th March, 2015

• The provisions with respect to aggregation of loans and investments for the purpose of calculating limit to be provided. ▫ As provided in Rules ▫ However, the aggregation only includes past loans etc. made

to body corporate ignoring other person. ▫ Combined reading leads to a confusion

34

Quick snapshot -2/2 • Exemption from shareholders resolution to loan, guarantee security

provided to WOS and JVs and acquisition of securities of WOS ▫ As provided in the Rules

• Substitution of sub- section (11) to provide exemption inter alia to ▫ Exemption to banking companies, lending companies, insurance

companies, housing finance companies: Giving of loans or providing guarantees or securities

▫ Exemption to investment companies Loans as well as investments?

Garbled language talks of “investment made in respect of investment or lending activities ▫ The implication seems to be that if investments are acquired in connection with lending

activities, they get exempted

▫ The word “financing of industrial enterprises” comes again in sec. 186 (11) Most lending NBFCs will need to pass special resolutions to avoid the sectoin

• Definition of investment companies ▫ Either of asset or income criteria

Note, RBI requires both income and asset criteria to be satisfied to be treated as an NBFC

35

Position in case of NBFCs • Lending companies ▫ Say, an NBFC has paid up capital Rs 40 crores, free reserves

Rs 60 crores, assets Rs 500 crores Has given loans worth Rs 300 crores. How much can the company invest?

• Investment companies ▫ Say, an NBFC has paid up capital Rs 40 crores, free reserves

Rs 60 crores, assets Rs 500 crores Has made investments worth Rs 300 crores. How much can the company lend?

• Any NBFC ▫ Say, an NBFC has paid up capital Rs 40 crores, free reserves

Rs 60 crores, assets Rs 500 crores Has given personal loans Rs 200 crores, and made investments

worth Rs 300 crores. How much can the company lend?

36

Exemptions provided

Loan, Guarantee, Security, investment made

Banking company

Insurance company

HFCs

a company which is established with the object of and engaged in the business of financing industrial enterprises

a company which is established with the object of and engaged in the business of providing infrastructure facility

Investment made

investment company

Rights issue u/s 62

Rights issue by any body corporate

NBFC whose principal business is acquisition of securities

Investment made in respect of lending or investment activities

37

Public offers and Private

Placement

Public offers

• The disclosures required in offer documents will be as per SEBI’s requirements ▫ SEBI is expected to freeze disclosure requirements and

reports in offer documents in consultation with the MCA

▫ Until that is done, the disclosures as per ICDR regulations shall apply

• Sec 35 amended to provide safe harbour to directors in case of statements purporting to be made by an expert ▫ Reasonable ground to believe that the expert had

competence on the matter ▫ Had not withdrawn his consent

39

Private placement: 1/2 Substitution of entire section To provide specifically that private placement offer and

application shall not carry rights of renunciation. Restriction on utilisation of application money till

allotment is made and return of allotment is filed with ROC.

To enable companies to make more than one issue of securities at any time to the identified persons under this section.

Filing of record of offers to be dispensed with.

40

Other changes in private

placement and rights shares • Sec 62 (1) (c ) to be amended to make it subject

to sec 42

• In case of rights shares, the rights offer permitted to be sent through any mode having proof of delivery

41

Quick Snapshot- 2/2

Time limit for filing return of allotment in PAS-3 to be reduced to 15 days from 30 days from the date

Failure to file the above form to make promoters and directors liable to a penalty for each default of 1000 rupees for each day subject to maximum 25 lakhs.

Penalty on promoters and directors for contravention of section 42 to be amended as amount raised through such offer or 2 crore, whichever is lower. (Earlier it was amount involved in the offer or 2 crore, higher)

42

Issue of shares at a discount

• Banks/lenders making use of SDR mechanism were facing difficulty in converting their loans into shares ▫ The company being losses, obviously the net value of

the share was lower than par ▫ However, Companies Act forced the lenders to convert

shares at par value

• Sec. 53 (2A) permits a company to issue shares at a discount ▫ On conversion of debt into equity ▫ Based on statutory resolution plan or debt

restructuring scheme as per guidelines of the RBI “statutory resolution plan” is misleading, as conversion of

of debt into equity happens not under statute

43

Issue of sweat equity shares

• Sec. 54 to be amended

• To permit issue of sweat equity shares within 1 year from the date of commencement of business

44

Managerial remuneration

Quick snapshot- 1/2

• Omission of the requirement of CG for remuneration exceeding 11%

• SR for remuneration more than 10%, 5% and 3% as provided under sub-section (2) of 196

• Consent of lenders or creditors for payment exceeding the limit as prescribed before general meeting

• Dispensing of the requirement of CG approval for payment in case of inadequate profit

46

Quick snapshot- 2/2 • Refund of excess payment or payment without

approval within 2 years or lesser period as decided by company

• Waiver of any sum refundable shall require SR within 2 years

• Such waiver shall require consent of lenders or secured creditors

• Auditors report to contain a statement wrt remuneration being paid in accordance with the provisions and other details as may be prescribed

47

Few concerns under proposed

amendments-1/5 • What all defaults are relevant for the purpose of the

3rd proviso to sec 197 (1)? ▫ Default in term loan from bank ▫ Default in term loan from FI ▫ Default in payment of any dues (the term may include

principal, interest or any other dues) in respect of any non convertible debentures

▫ Default in payment of any dues to any other secured creditor (the above 4 collectively referred to as “financial creditors”

• Is the proposed provision (seeking consent of lenders) applicable in case of private companies? ▫ No, Sec 197 requires the consent of shareholders only in case of

public companies. The proviso as proposed is linked with shareholders’ approval. Hence, there will be no need to seek lenders consent in case of private companies, even if such private company has a running default with lenders.

48


amendments-2/5 • The company has taken a loan from an NBFC on which

default is subsisting. Can the company pay minimum remuneration to its managerial personnel? ▫ No, if the financial facility from the NBFC is a secured loan.

• When do we say the loan is a secured loan? ▫ Where there is a security interest created to back up the

loan.

• The company contends that the company has paid all its dues to the lender; however the lender contends that there are unpaid dues. Will the company be eligible to appoint managerial personnel with minimum remuneration? ▫ Logically, a default should be recognised as default based

on the books of account of the company.

49


amendments-3/5

• What is the meaning of “prior approval” for the above purpose? How will such approval be sought? Is it from each of the 4 categories of financial creditors, or from a majority of them at a meeting? ▫ The approval is needed only from such financial

creditors, for whom a default is subsisting. Apparently has to be bought from each of the financial creditors.

• Is a default a pre condition for needing the consent of the financial creditors? ▫ Yes

50


amendments-4/5

• At what point of time should the default be subsisting? ▫ At the time of proposing the resolution in general

meeting

• If the company passes a resolution in year 1 inter alia for payment of minimum remuneration, for a period of 5 years, and in year 3, the company faces a bad year and is not able to pay the dues to its financial creditors. Can the company go ahead and pay the minimum remuneration? ▫ Yes. The approval requirement is linked with the

passing of the resolution and not with the payment of the remuneration

51


amendments-5/5

• If the company proposes to pay remuneration as per percentages of profits (11% overall, 10% to all WTDs, and 5% to each MD or WTD), is there a need to seek the approval of the financial creditors? ▫ No. the approval is required only where the limits

based on percentage of profits are exceeded.

• Is the payment of minimum remuneration possible in case of a CEO? ▫ Yes. Remuneration to the CEO is not governed by

sec. 197, unless the CEO can be regarded as the “manager”.

52

Approvals required for payment of

Managerial Remuneration

53

Company

Public Company

Total Managerial Remuneration

Up to 11% of Net Profits of the

company

Board Resolution

Exceeding 11% of Net Profits of the company

Ordinary Resolution, subject to the

provisions of Schedule V

+

Prior approval of Banks, Public

Financial Institutions, Non-convertible

Debenture holders or secured creditors

(applicable in case of defaulting companies)

Individual Limits

Company has any one of MD/WTD/Manager

Remuneration payable to MD/ WTD/ Manager

Up to 5% of the Net Profits

of the company

Exceeding 5% of Net profits

of the company

Remuneration payable to other

directors

Up to 1% of the Net Profits of the company


of the company

Company has more than one

MD/WTD/Manager

Remuneration payable to MD/ WTD/ Manager

Up to 10% of the Net Profits

of the company


of the company

Remuneration payable to other directors


of the company


of the company

Private Company

Provision of Section 197 not applicable

Board Resolution (if within the prescribed limits) i.e. up to 5%, 1%, 10%, 3% as the case may be; Special Resolution + Prior approval of Banks, Public Financial Institutions, Non-convertible Debenture holders or secured creditors (applicable in case of defaulting companies) (if exceeding the prescribed limits)

Board Resolution (if within the prescribed limits) i.e. up to 5%, 1%, 10%, 3% as the case may be; Special Resolution + Prior approval of Banks, Public Financial Institutions, Non-convertible Debenture holders or secured creditors (applicable in case of defaulting companies) (if exceeding the prescribed limits)

Deposits

Quick snapshot-1/2

• Deposit of amount to DRR on or before 30th day of April each year

• Amount to be deposited shall be equivalent to

20% of deposit maturing during the following financial year

• The prohibition on accepting further deposits to apply indefinitely only to a company that had not rectified/made good the defaults and to be allowed to accept further deposits after 5 years thereon

55

Quick snapshot-2/2

• Repayment period to be enhanced to 3 years instead of 1 year from the commencement of the Act, or n or before the expiry of the period for which the deposits were accepted, whichever is earlier.

• Provisions of deposit insurance to be done away with

56

Holding companies, subsidiaries,

associates

57

Amendments in respect of holding,

subsidiary, associates • Associate

▫ Sec 2 (6) continues to use the word “associate company”

No provision to say that the word “company” shall include a body corporate

Which is surprising, since the definition of “holding company” in sec. 2 (46) proposed to be amended to introduce the extension

Hence, strictly speaking, foreign companies and LLPs excluded from the definition

• Definition of joint venture

▫ Added in Explanation below sec. 2 (6)

58

Subsidiaries and holding companies • Change in basis of subsidiary/holding company recognition

▫ Sec. 2 (87) (ii) to be amended Total voting power instead of total share capital Therefore, preference shares not to be counted for the purpose of

subsidiary recognition In view of the words “exercises or controls” preceding “total share capital” in the original law, this may be regarded as corrective amendment

• Definition aligned with accounting standards • Meaning of “total voting power”

▫ Defined in sec. 2 (89) Definition of sec 2 (89) defines voting power as specific to any

particular matter; it is not general voting rights Specific voting rights may be different from total voting strength

For example, for variation of class rights

▫ However, should be understood in the sense of total voting power in general meeting

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Some illustrations • S has equity Rs 50 crores, held by X; convertible pref shares

Rs 100 crores, held by Y. • S has equity Rs 50 crores, held by X; compulsorily convertible

pref shares Rs 100 crores, held by Y. • S has equity Rs 50 crores, held by X; provisions of shareholders’ agreement provide management rights to Y.

• S has equity Rs 50 crores, held by X; nonconvertible pref shares Rs 100 crores, on which there has been default in payment of dividends. ▫ The preference shares were non-cumulative and the dividend has

been skipped for more than 2 years since issue ▫ The preference shares were cumulative and the dividend has been

skipped for more than 2 years since issue, but has subsequently been paid

▫ The preference shares were non-cumulative and the dividend has been skipped for more than 2 years since issue, and still remains outstanding

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Layers of subsidiaries

• The restrictions on layers of subsidiaries in sec. 2 (87) has been deleted

• Similarly, the provision in sec. 186 (1) on investing through not more than 2 layers of investment companies has been deleted

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Small companies

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Provisions pertaining to small

companies • Meaning of a small company ▫ The limits of paid up capital and turnover are as

follows:

• Additional conditions ▫ A small company is a private company ▫ Not a holding or subsidiary company ▫ Not a sec 8 ▫ Not a company regulated by a special Act

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Existing limit May be notified upto

Proposed increase in may-be-notified limit

Paid up capital Rs 50 lacs Rs 5 crores Rs 10 crores

Turnover Rs 200 lacs Rs. 20 crores Rs 100 crores

Relaxations applicable to small

companies • Small company is a private company • Therefore, enjoys all exemptions of a private company

• Additional relaxations in the Bill • Abridged form of board report and abridged annual

return for a small company • Sec 446B • The maximum amount of fines/imprisonment in case of

small companies will be half of what is fixed for normal companies

• Existing relaxations • Two Board meetings in a year • Cash flow statement not required • Short-cut merger for small companies

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Incorporation and objects of

companies

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Simplification of incorporation and

objects of companies • Sec. 3A fills the gap in the law by providing for joint and

several liabilities of members ▫ If the number of members falls below the statutory minimum

• Companies may adopt model memorandum of association ▫ Thereby, reduce the bulk of the MoA

99% of the bulk in the MoA comes from the objects clause Which is anyways taken care of the universal objects model

▫ Provision in sec 4 (6B) similar to articles To the extent the company does not exclude the model MoA, the

model MoA shall be deemed to be the MoA

• Sec. 7 (1) (c ) affidavit replaced by declaration • Change of registered office

▫ Notice for change of registered office to be given in 30 days Not sure why the timeline increased from 15 days to 30 days in this

case

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Universal object companies • Proposed amendment in sec. 4 (1) (c) ushers a big change in traditional

thinking in corporate law ▫ Permitting universal object companies ▫ This was pointed out several years ago by L S Sealy and others; implemented by

UK law in 2006 ▫ Several other countries have adopted universal object companies

• Now, there are 2 options: ▫ By default, a company will be a universal object company

No need to define either main, incidental or other objects ▫ Or, the company may at its option, intend to pursue only specific or restricted

objects, in which case, it will write those objects, and the incidental powers

• Several companies have, by the nature of their business or applicable statutes, got to limit objects ▫ Special purpose vehicles ▫ Insurance companies ▫ Housing finance companies; other non-banking finance companies

• For universal object companies, the doctrine of ultra vires becomes meaningless ▫ The only internal requirement for commencing a new business will be a board

resolution for diversification of business

• Existing companies may be tempted to amend their memoranda

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Charges

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Registration of charges

• Sec. 77 to be amended to provide for exemption from registration

▫ Such charges as may be prescribed, in consultation with the RBI

• Extended period of registration for modification or satisfaction of charge

▫ Existing provision allow extension of time for filing of a charge only in case of creation

This is obviously an anomaly

Sec 82 to be amended to permit filing of modification or satisfaction also within 300 days

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Beneficial interests, annual

return, shareholding changes

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Filing of beneficial interest – sec.

89 • Beneficial interest, if different from the interest of a registered

holder, needs filing under sec. 89 • Provisions of the section to be made clearer by addition of a

definition ▫ Meaning of beneficial interest to be added by sub-section (10) to

say, beneficial interest includes right or entitlement to any of the rights of a member, or right receive or participate any dividend

• The section has to be read with opening lines of sec. 89 ▫ Name of the person is entered in the register of members, but

person does NOT hold beneficial interest ▫ That is to say, if the beneficial interest holder’s name is borne on

the register of members, there is no case of applying sec. 89/90 • With extended definition, provisions may be attracted

▫ In case of voting arrangements – voting rights transferred without registering transfer of shares

▫ Transfer of dividend rights

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Filing of undisclosed beneficial

interest holders – new sec 90 • Sec 90 is a new provision altogether; mandates filing of undisclosed

beneficial interest ▫ Once again, in view of the opening language of sec. 89, if the shareholder

is the beneficial owner as well, the section has to applicability • Significant beneficial ownership

▫ 25% of shareholding in a company, or ▫ Right or actual exercise of contro ▫ Right or actual exercise of significant influence

• Section applies when all the following conditions satisfied ▫ Significant beneficial interest is held by an individual

By an individual Whether acting alone or together, with one or more persons or trusts Including persons or trusts outside India

• Is the section similar to UBO identification ▫ That could have been the only possible intent ▫ However the language does not seem to suggest that ▫ Since beneficial ownership is defined in terms of sec. 89, which applies

only where beneficial interest is different from interest of registered shareholder

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Beneficial interests register

• Beneficial interests are to be filed as per the Rules to be laid

▫ Company to file with the Registrar

• Company to maintain a register of beneficial interests

• If the company has information about significant beneficial interest of someone, which is not notified to the company, the company may notify the person seeking information

▫ Provision to apply to NCLT to force the person to declare beneficial interest

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Simplification of annual return

• Particulars of indebtedness go away • Countries of incorporation in case of FIIs also

not required to be provided • Extracts of annual return MGT 9 goes off ▫ Instead, full annual return to be put on the

website of the company This is applicable to every company, if the company

has a website Many companies may have commercial websites;

they may not have investor information Website here should mean website containing

investor information

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MGT 10 goes

• The deletion of MGT 10 should be a relief for most listed companies

• Changes in top 10 shareholders holdings, and promoters’ holding, required to be filed within 15 days of the change

• Requiring companies to do a weekly monitoring

• The section has been dropped completely

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Inspection of register of members

• A proviso added in sec. 94 (3) empowers the Central Government to prescribe particulars of register of members that will not be available for inspection

▫ Idea may be to prevent some information which may not be available for extraction

▫ For example, PAN nos

▫ Several companies having old shareholders are getting requests for specific information

For example, shareholders having age of 60 and above

Or shareholders in a particular locality

• Seems difficult to preserve information in case of personal inspection

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General meetings of companies

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Flexible venue of general meetings • Under the 1956 Act ▫ AGM was to be held in the same city, place or village as the

registered office ▫ EGM – there was no control

• Under the 2013 Act ▫ AGM was to be held in the same city, place or village as the

registered office ▫ EGM - control was introduced through the Rules, saying

EGM could be held in India only • Proposed amendments ▫ AGM of listed company – same town as registerd office ▫ AGM of unlisted company – with prior consent of all

members, any place in India ▫ EGM of a WOS of foreign company – anywhere in the world ▫ EGM of any other company – any place in India

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Choice between postal ballot and

e-voting • Sec 110 provides for items that mandatorily require

postal ballot ▫ The whole purpose of postal ballot was more

participative decision-making, by enabling remote participation

▫ This is anyway afforded where the company provides e-voting option

• Accordingly, sec. 110 proposed to be amended to say ▫ Where the company is required to conduct a postal

ballot ▫ It may offer e-voting facility and call a meeting

The option can be availed of companies required to provide e-voting in terms of sec. 108

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Accounts and consolidation

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Consolidation, signing of accounts,

etc • The proposed amendment in sec 129 (3) is mere

straightening of language ▫ The explanation below sec 129 (3) is getting merged

into the section

• The proposed change in sec. 134 (1) on signing of financial statements is also a straightening of language ▫ The financial statements need to be signed by

Chairman or two directors, one of whom should be the MD, where there is one

CEO

CFO

CS

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Board report disclosures

• For various disclosures in the Board report, as per sec 134 (3), if the relevant disclosures are there in the financial statements, a reference to the same may be given

• The remuneration policy and CSR policy need not be fully reproduced; reference to website address may be given with gist of the policy

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Sending of financial statements

with short notice • Provision of sec. 136 sought to be amended to

provide what was otherwise most obvious

▫ Where the company has sought 95% members’ consent for short notice for the meeting, the company may send financial statements also at short notice

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Financial statements of

subsidiaries • 4th proviso to sec. 136 (1) to be amended to

require uploading of separate accounts of subsidiaries only in case of listed companies

• The accounts of the subsidiary may be unaudited, if the law of the country in question does not require the accounts to be audited

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Auditors

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Appointment of auditors

• The requirement for annual ratification of auditors is removed

• Disqualification of auditor

▫ The disqualification in sec. 141 (3) (i) was very badly worded

Rendering of prohibited services by any associated entities

The language is made more meaningful now

With direct or indirect service

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more provisions about auditors • Powers of auditors to seek information required for

consolidation extend to associate companies ▫ This seems queer, as associates are not under the control of

the investor company • Auditors report on internal financial controls ▫ There has been a huge controversy on internal financial

controls, whether IFC as per sec. 143 (3) (i) is only control over financial reporting Sec. 134 (5) puts a much wider meaning Board’s responsibility is obviously much wider Auditor’s responsibility is on financial reporting

• This author always had the view that IFC for sec. 143 means control on financial reporting, citing provisions from US Exchange Act from where the provision comes ▫ Amendment in sec. 143 makes it clear now

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Civil liability of the auditor

• Sec. 147 (3) was a lethal section providing for auditors’ civil liability

• The section as it worded provided right of claiming compensation to any person relying on erroneous financial statements

▫ Sec. 147 (3) (ii) to be amended to limit the compensation right only to members and creditors of the company

• Also, vicarious liability of partners of an audit firm is sought to be avoided by proviso to sec. 147 (5)

▫ Only the partner who was colluding the abetment to be liable

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Independent directors, board

and board meetings

89

Tests of independence • In sec. 149 (6) (c ) introduces material pecuniary interest as the

basis of independence ▫ All along, Companies Act was seemingly giving an impression that any

pecuniary interest will amount to an interest MCA circular also clarified transactions on arms length basis will not be

construed as breaching the condition of independence Now, the amendment introduces the limit of 10% of the total income of the

director as the test

• Sec 149 (6) (d) is being changed with multiple tests of independence in case of relatives of the director ▫ Holding of security- face value of Rs 50 lacs, or 2% of voting power ▫ Indebtednesss to the company ▫ Giving of guarantee in respect of indebtedness to the company ▫ Pecuniary transactions of 2% or more of its turnover

Reference obviously seems to the company’s turnover

• Requirement of pre-deposit of Rs 1 lac for independent directors under sec. 160 dispensed with

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Other provisions about directors

• The requirement of resident directors in case of a company may be satisfied in the year of incorporation

• The provision in sec. 161 (4), seemingly suggesting that casual vacancies cannot be filled in a private company, to be amended

▫ However, casual vacancies also need to be affirmed by the company in general meeting, in the immediate next meeting

This is a new requirement, was not there in the 1956 Act

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Disqualifications of directors and

vacation of office • Sec 164 (2) – proviso to be added, to disqualify a new incumbent joining a

defaulting company ▫ The new incumbent will not incur disqualification for 6 months ▫ A new proviso added to sec 167 (1) (a) says that the incumbent will vacate his

office in all companies, except the one which is in default

• This actually makes sec 164 (2) all the more serious ▫ The view earlier was that an incoming director could not be responsible for

failures which come to him as legacy ▫ So, a continued period of default (non-filing, non-payment) as also the

continuation of the director throughout the terms of default, were requisites too attract the section

• The proposed amendment will mean ▫ All existing directors become disqualified, and vacate their offices, in terms of sec

164 (2), read with 167 (1) (a) ▫ New incumbents need to clear the default within barely 6 months of joining

Or else, he becomes disqualified in all companies other than the one in default ▫ While this saves defaulting companies from being headless, it is a strong

disincentive to anyone to join the board of a defaulting company ▫ If the intent was to clear a default, this works exactly contrary to the intent

92

Board meetings using video

conferencing • Sec 173 (2) prohibited use of VC in certain

matters ▫ For example, approval of annual financial

statements

• Proposed amendment says that if a physical quorum is present at the place where the meeting is held, other directors may participate by VC ▫ The insistence on a physical quorum seems most

unreasonable In case of VC meetings, there may not be a physical

place of the meeting at all

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Audit Committee and NRC

composition, business • Audit Committee to be needed only in case listed public

companies ▫ Debt listed private companies get exempted ▫ Sec 149 as it stands requires only listed public companies to

appoint independent directors • Same in case of Nomination and Remuneration

Committee • Board evaluation ▫ Currently the NRC does evaluation of the Board ▫ Now , NRC has only to lay the manner of effective

evaluation ▫ Evaluation may be carried by

Board NRC Or external agency

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Registration of unregistered

companies

Registration of unregistered

companies • Provisions for registration of unregistered

companies in Chap XXIII being extended to firms having only 2 partners

▫ Sec 366

• This is a substantial opportunity for conversion of firms into companies

• Note sec 368 provides for vesting of property on registration

▫ As there is vesting under statute, it may be argued that stamp duty etc on properties will not be applicable

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NCLT changes

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NCLT-related changes

• Amendments being done relating to constitution of the NCLT to comply with the directives of the Supreme Court in Madras Bar Association case

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Fines and prosecutions

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Several changes about fines and

prosecutions • Special courts provisions are being made more

practical by distinguishing between ▫ Offences involving imprisonment of 2 years or

more ▫ Other offences

• Sec 446A inserts a statutory guidance to imposition of fines and imprisonment under the Act

• Sec 447 pertaining to frauds also being rationalised ▫ Based on impact of fraud ▫ Or public interest involved therein

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companies (amendment) bill, 2016 - vinod kothari

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