The new Companies Act has been in force from 1st April 2014. Many provisions have been extremely hard on the business. The provisions in the Act itself came into picture due to the scams and frauds in some large corporates. A better way to curb such incidents is perhaps a very efficient and clean enforcement process, rather than more legislation.
Corporate India through many industry bodies had reached to out to the Government to easen some of the provisions. NovoJuris had the privilege of recommending changes and made a representation through NASSCOM and the referendum was filed by NASSCOM a few months ago.
LokSabha on 16th March 2016 passed the Companies (Amendment) Bill 2016 (referred as “Bill”) with 87 modifications. Some of the major highlights of the Bill are as follows:
|Topic||PROPOSED AMENDMENT||OUR VIEWS|
|Reservation of Name
|At present one could reserve the approved Name of the Company for a period of 60 days. In the Bill the word 60 days is substituted with the word “20 days from the date of approval”.||Founders will have to now decide fast and file the incorporation documents within 20 days from the date of name approval.
The incorporation process is now by a central office. The centralized system of approval of incorporation has been notified to come into effect from 28 March 2016.
|Director Identification Number (DIN)||It has been proposed to recognise any other identification number, as may be prescribed, in place of DIN.||DIN was introduced a few years ago to create and rich and authentic data base of individual directors and to address the phenomena of the companies that raised money from public and subsequently vanished away.
If the DIN mechanism is withdrawn, the incorporation process will perhaps be easier (?)
But the Government will still have to think through the tracking of director’s other companies and its compliances.
|Affidavit in respect of Subscribers to Memorandum||Submission of declaration on incorporation instead of filing an Affidavit.||Currently, an affidavit which requires notarization and apostalisation from each of the subscribers to the memorandum and from persons named as the first directors, if any, in the articles that he is not convicted of any offence in connection.
The process gets a bit easier by submitting a “declaration”.
|Intimation regarding Change in Registered Office to Registrar of Companies||The Bill proposes to increase the time-limit to 30 days from the date of change in address of the registered office of the Company.||Under the Companies Act 2013, the time-limit for reporting change in registered office was restricted to 15 days, now the same is proposed to be relaxed to 30 days.
Perhaps a better ways of “ease” would have been relaxation of heavy documentation (such as proof such as sale deeds/ registration of sale deeds/NOC of landlord)
|Change in definition of small company||Definition is proposed to be amended:
Paidup Capital from earlier Rs. 50 lakhs to now Rs. 10 crores.
Turnover: from minimum of Rs. 2 crores and maximum of Rs. 20 crores is now proposed to be revised to a maximum of Rs. 100 crores.
|Small companies have benefits of lesser compliances and reportings. By increasing the limits of paidup capital and the turnover, many more companies will get into the ambit of ‘small company’ and get benefits.|
|Omission of having specific Main Object clause||The amendment bill is aiming at omission of incorporating Main Objects in the MoA of the company||The proposed amendment states that the company may engage in any lawful act or activity or business, or any act or activity or business to pursue any specific object or objects, as per the law for the time being in force.
This is in-line with international practice.
|Definition of Net Worth.||Instead of the current definition of Securities Premium Account only, it will now be “Securities Premium Account and debit or credit balance of profit and loss account”.||There is more clarity now.
|Definition of Related party||Proposed that “related party” to include
(viii) any body corporate which is—
(A) a holding, subsidiary or an associate company of such company;
(B) a subsidiary of a holding company to which it is also a subsidiary; Or
(C) an investing company or the venturer of a company.
|With inclusion of “investing company or the venturer of a company”, implications of venture capital, private equity or institutional investment and the implication of transacting within the portfolio of the investor has to be examined very carefully.
Also the substitution of word body corporate in place of company looks is also increasing the scope of the definition and may arise in determining the status of a foreign corporate as a related party to a Company.
|Appointment of auditors||Doing away with the requirements of annual ratification by members with respect to appointment of auditors. Further, under the existing provisions, the auditor who has resigned from the company needs to file Form No. ADT-3 with the company and ROC||The proposed amendment reduces the penalty to be paid by auditor if he fails to file the e form ADT-3 not exceeding the amount of remuneration paid to him.
|Deletion of provisions regarding the restrictions on layers of investment companies.||Under the existing provisions a company was not allowed to make investment through not more than two layers of investment companies. The Bill proposes to remove the restriction.||This eases the structuring of group companies and inter-co investments.|
|Managerial remuneration||Proposed to do away with requirement of obtaining special resolution and approval of Central Govt. for payment of managerial remuneration in excess of prescribed limits of Schedule V.
Inserts another rigour: Prior approval of bank or public financial institution or non-convertible debenture holder or secured creditor required, before taking approval from shareholders.
|The current process of Central Govt permission is a lengthy procedural and time-consuming process. Shareholders approval is certainly a welcome respite.
The added rigour is required to protect the interest of lenders (and other stakeholders)
|Repayment of deposit||Bill proposes to provide that such public deposits shall be repaid within 3 years from the enforcement of Section 74 (Repayment of deposit etc., accepted before commencement of the Act) of the Companies Act, 2013 or before expiry of the period for which deposits were accepted, whichever is earlier.||By extending the payment period, it is an intermediary relief for companies who have deposits lying in their account.|
|Simplification of private placement||The Bill proposes that the Private Placement Offer Letter (PPOL) to be done away. The entire section has been substituted. Proposes to increase the number of people who can be made an offer.
Explanatory Statement referred to in Rule 13(2) (d) of Companies (Share Capital and Debenture) Rules, 2014, in the Private Placement Application Form.
|This will be a big relief for many startups. The Offer Letter was like a shorter version of public offer documents (DRHP).
The forms to be filed with ROC also will reduce along with waiting time for approval of ROC.
|Issue of shares at discounted price||The Bill allows company to issue shares at a discount to its creditors when its debt is converted into shares in pursuance of any statutory resolution plan or debt restructuring scheme in accordance with any guidelines or directions or regulations specified by the Reserve Bank of India under the Reserve Bank of India|
|Issue of sweat equity shares by a newly incorporated company||The bill proposes for deletion the condition c of section 54 (1) (c) regarding the requirement of completion of at least one year.||With a view to encourage the emerging startups and entrepreneurs the company may now issue sweat equity shares after its incorporation without waiting for one year.
However, under the guidelines for ESOP, Promoters are still not eligible. We had made a representation that Promoters should be eligible for ESOP.
|Annual Return||The Bill proposes to remove the extract of annual return forming part of Board’s report and providing disclosure of web address/web-link of the annual return in Board’s report. It also proposes to omit requirement regarding disclosure of indebtedness, and modify requirement of disclosure of names, addresses, countries of incorporation, registration and percentage of shareholding of Foreign Institutional Investors.||This reduces paperwork and makes for easier compliances.|
|Relaxation in filing of charge forms||The Bill provides an opportunity for the company to apply to the authority to seek extension for filing of charge form if the filing is not made within 300 days and certain classes of charges are exempted||With the insertion of the 4th proviso to section 77(1), a negative list is expected to be provided in consultation with the Reserve Bank of India, on which creation of charge need not be required. This might exclude registration of charges once again for pledges etc. as was there in the Companies Act, 1956.|
|Place of holding the Annual General Meeting||The Bill proposes that Annual general meeting of an unlisted company may be held at any place in India if consent is given in writing or by electronic mode by all the members in advance and such meeting is held.
9 a.m. and 6 p.m. on any day that is not a National Holiday.
|The Companies act 1956/2013 allowed companies to hold its general meetings only in the city where the registered office of the company is situated. This proposed change eases the holding AGM anywhere in India by obtaining 100 % approval from members.|
|Place of holding the Extraordinary general meeting General Meeting||The extraordinary general meeting of the company, other than of the wholly owned subsidiary of a company incorporated outside India, shall be held at a place within India.|
|Reduction in penalty if the Resolutions i.e form MGT 14, is not filed within time limit as mentioned under the act||The penalty for non filing of any resolution is now proposed to be reduced to Rs.1,00,000/ – for company and Rs. 50,000/- for the every officer in default.||The fine imposed for non filing of MGT-14 u/s 117 has been proposed to be reduced.
However the time limit to file within 300 days still continues.
Filing of Form MGT-14
|The resolutions passed pursuant to section 180(1) being special in nature would suffice filing of only one form MGT-14||The companies were required to file multiple form MGT-14 for u/s 117 one for the special resolution and the other for the Board resolution, however the requirement of filing form MGT-14 for passing Board resolution is done away with.|
|Authentication of Financial Statements||The Bill now proposes that CEO who is not a Director of the company can sign the financial statements erstwhile only such CEO who was also the director was allowed to sign the financial statements..||Currently, the financial statement, shall be approved by the Board of Directors, before they are signed on behalf of the Board by the chairperson of the company or by two directors out of which one shall be managing director, if any.|
|Dispatch of Financial statements at shorter notice||The Bill proposes to omit the requirement of dispatch of financial statements 21 days before the AGM||The present Act provides for holding AGM without providing 21 days prior notice, after obtaining consent of its shareholders. However, the financial statements had to be dispatched 21 days prior to the AGM. The proposed amendment provides convenience, if 95% of the shareholders consent.|
|Depositing of Rs.1,00,000 by Independent Director on appointment||The Bill provides that requirement of depositing Rs. 1,00,000 by an independent director is not required if his appointment is recommended by nomination and remuneration committee.|
|Number of Directorships||A separate explanation has been inserted in the Bill, stating the directorships in dormant company shall be counted for the purpose of calculate the ceiling limit of number of directorships||So counting the number of directorship for total directorships is now clarified.|
|Disqualification of Director||The Bill contains a new proviso stating any director who has been disqualified under section 167(2) shall cease to his directorship in other companies except the company in which he has defaulted.||This has a big impact since the director will cease his directorship in all other companies.
Perhaps the Government feels that this is a bigger deterrent and have the directors be more serious of compliances in all the companies in which he is a director.
|Filing form DIR-11 by the director on her resignation.||The Bill makes it optional to file form DIR-11 by director upon resignation.||Currently it is mandatory for every director to file Form DIR-11 with RoC upon resignation, which is now proposed to be optional. The intension of legislature for DIR-11 was to bar unauthorized filing of form DIR-12 for resignation of a Director, without intimating the same to resigning director.|
|Meeting through video conferencing or other means||A new proviso has been introduced in the Bill that where there is quorum in a meeting through physical presence of directors, any other director may participate through video conferencing meeting||This is certainly ease of doing business.|
|Loan to Director||The entire section has been rewritten in the Bill||The proposal allows companies to advance loan to any other person where the director is interested, subject to prior approval of the company by a special resolution.
Also, proposes that the loans extended to persons, including subsidiaries, falling within the restrictive purview of Section 185 should be used by the subsidiary for its principal business activity only, and not for further investment or grant of loan.
|Corporate Social Responsibility||The Bill provides for composition of the CSR Committee with any two directors, if the company is not bound by the compliances of appointing an independent director.|
We have limited our analysis of companies Amendment Bill 2016 only to the extent of its applicability on private limited, specially startups and closely held unlisted public companies.
Author: Vadiraja works as an Associate with NovoJuris and is part of the private equity team.