India: The Companies Act 2013 - Changing India Inc....

Last Updated: 30 October 2013
Article by Sindhu Varma

Introduction

On August 30, 2013, the Companies Act 2013 ("Act") was finally notified thereby putting an end to a long wait for a comprehensive legislation that is expected to herald a new era in corporate governance and change the way India Inc. functions. The new Act is rule based since a large part of the Act is dependent upon the allied rules. All the sections have not been notified and in the first phase of its implementation, the Government has notified 98 sections on September 12, 2013. This newsletter provides a snapshot of some key, selective changes that are brought by the new Act.

1. Formation and Capital Structure

The legislation has introduced the concept of a one person company ("OPC") to the existing classes of companies, public and private, and has also envisaged additional/exclusive provisions for OPC, wherever necessary. The Act has made some notable changes with respect to incorporation as well as in the structure of its charter documents, Memorandum and Articles of Association1. The changes include penalty for facilitating incorporation by using wrong or incorrect information, additional formats of the charter documents for an unlimited company with and without a share capital. It also raised the maximum numbers of members allowed for private companies four times, from the prevailing 50 to 200, thereby paving way for an age of larger business houses, structured entirely on private participation.

There are some interesting amendments regarding companies' capital structure. One such modification is regarding the minimum subscription provisions. As a deviation from the old Act that prohibited allotment of shares to public unless minimum prescribed subscription in accordance with the prospectus was received, the new Act has extended this minimum subscription condition to all securities irrespective of whether shares or debentures. A blanket ban on issue of shares at a discount, barring sweat equity shares2 is contemplated under section 53 of the legislation. Provisions for issue of global depository receipts by means of public offering or private placement have been added under section 41, which could have the potential to facilitate foreign investment.

2. Conduct of Meetings: Board and Shareholders

Certain pioneering changes have been introduced in the way meetings are conducted. Already, Directors can attend and participate through video conferencing or other audio visual means in the board meetings. This really obviates the need to travel, particularly for the foreign directors. Further, a class of companies, to be notified by the Central Government for this purpose, will now be entitled to conduct voting electronically. But the Act is silent as to the different modes that can be adopted by the companies for the electronic voting system. The prescribed limit for quorum of public company's shareholders meetings has also been modified and will now be decided by the number of members of the company instead of 5, as earlier. An explanatory section, intended for giving additional clarity on the material facts to be included in the explanatory statement to be enclosed with the notice of general meetings and penalty for tampering with the minutes are other interesting additions.

Business hours are defined for conducting the Annual General Meetings ("AGM") and prohibitions are placed on conducting AGMs on national holidays instead of public holidays, a deviation from the 1956 Act. Another notable change concerns the first AGM which was to be held within 18 months from incorporation and was a privilege accorded to new companies under the 1956 Act. This provision has now been removed and the Act provides only 15 months for the conduct of the first AGM by newly incorporated companies. The alternate method for calculation of the limitation period for the first AGM based on the closing of the financial year has been retained.3

Since it will be difficult for OPCs to comply with procedural aspects regarding conduct of meetings due to its structuring, the Act has exempted them from the purview of majority of the applicable provisions.

3. The Board of Directors

The 1956 Act prescribed minimum 2 directors for a private and 3 for a public company respectively to constitute a Board. This criterion has been retained by the new Act, but the maximum limit of directors on the Board has now been raised from 12 to 15. The Act has also removed the stringent compliance of securing prior Central Government approval for raising the number of directors beyond the prescribed limit and, instead, a comparatively simpler method of approval by means of a special resolution of the shareholders has been introduced.

Additionally, new changes include mandatory presence of independent directors on the Board of listed public companies and minimum one woman director in the case of certain class of companies to be notified later, thereby bringing more transparency and gender equality into the Board rooms. The legislation clearly defines the role of such independent directors and has a detailed "Code for independent directors"4 appended to it, which contains explicit guidelines for professional conduct, roles and responsibilities of such directors. They are bound by this Code to play a role in the appointments, determination of remuneration and removal of executive directors, managers and key managerial personnel. In view of the fiduciary position held by directors, explicit provisions prescribing directors duties have been added to the new Act. These include keeping away from situations in which they have conflicting interest with that of the company, duty to make good in monetary terms any undue gain/advantage on the part of the directors etc.

4. Auditors

Limited liability partnerships are now included within the gamut of audit firms and entitled to be appointed as auditors. The auditors of a company are now bound to report on the efficiency and adequacy of the internal financial control system as well as the effectiveness of its operations. The Act stipulates mandatory rotation of statutory auditors. Instead of an annual appointment, individual auditors can hold office for a maximum period of 5 years whereas audit firms are allowed to retain the post for up to 10 years. A cooling period of 5 years is prescribed for reappointment of auditors who complete one term i.e., 5 years or 10 years as the case may be, of their office. This means that such auditors or audit firms cannot be reappointed by the same company for the next 5 years after termination.

The recommendation of the Audit committee will also play a significant role in the appointment of auditors including filling up of casual vacancies due to resignation. The retiring auditors are to file within the statutory period of thirty days a statement about the termination of their office with the company and Registrar of Companies and if the auditor is appointed by the Comptroller and Auditor-General of India ("CAG"), then to CAG also. A power to order removal of auditors of a company is now bestowed upon the new regulator National Company Law Tribunal ("Tribunal"). This is a significant departure from the 1956 Act.

Unlike the 1956 Act, the auditors will now compulsorily need to attend the AGMs. The accountability of the auditors is enhanced significantly by having the onus of reporting fraud noticed by them, during the performance of their duties, to Central Government. They are also prohibited from rendering certain service to the company such as accounting and book keeping services, internal audit, management services, actuarial services and, investment advisory services.

5. Other key provisions

(a) Corporate restructuring5 and winding-up6

Section 234 of the new Act permits cross-border mergers i.e., merger of Indian and foreign companies. India's central bank, Reserve Bank of India ("RBI") will play a significant role in such mergers as the approving authority along with Central Government. Likewise, provisions for mergers/amalgamations between small companies, holding and subsidiary companies and other prescribed class of companies are also separately provided for.

The statute has provisions for only two methods of liquidation i.e., voluntary winding-up and winding-up by the Tribunal. Further categorisation of voluntary winding-up into members and creditors based upon the declaration of solvency from the Board is removed by the Act.

A couple of other new provisions expected to bring radical changes to corporate governance include:

  1. Deep focus on Corporate Social Responsibility ("CSR"): An increased CSR responsibility is cast upon companies having net worth of INR 500 crores (US$ 80 million) or more, or turnover of INR 1,000 crores (US$ 160 million) or more or a net profit of INR 5 crores (US$ 0.8 million) or more during any financial year, to promote social, environmental and ethical conduct. Effective from April 2014, they will have to spend at least 2% of their three-year average profit annually on CSR activities. They are bound to constitute a CSR committee for the formulation and monitoring of a CSR policy that will envisage promotion of a wide range of activities including eradication of hunger and poverty, promotion of education, gender equality and empowering women, ensuring environmental sustainability and vocational skill enhancement. These provisions are introduced with an intention of making the companies responsible to the society in which they function. The general perception is that this will not only boost corporate charitable activity in India but also gives companies a range of varying tax benefits. Clearly, the advisers will need to devise a tax-efficient CSR strategy for India Inc.
  2. Class action suits: Any group or association of persons who are affected by any misleading statements or inclusion/omission of any matter in the prospectus of a company is entitled to initiate action. Likewise, individual members/depositors or any class of them who form an opinion that the affairs of the company are conducted in a prejudicial manner to them or to the company can approach the Tribunal for appropriate remedies in the form of damages or compensation or demand of other suitable action. These provisions enhance the minority shareholders power to protect their interests.
  3. Corporate Fraud: Unlike its predecessor, the new law has defined "fraud" and dealt extensively with it. With an increase in corporate misconduct and frauds in India, this may be the right approach as this law empowers an agency, Serious Fraud Investigation Office ("SFIO"), to tackle corporate scams. The SFIO will have a statutory status and will be mandated to investigate corporate frauds, coupled with an authority to impose punitive measures and in specific instances, even arrest persons found guilty of corporate crimes.

Conclusion

The hope is that the new contemporary and pragmatic legislation will bring radical changes to the way corporate India functions. It has all the right elements. Although it is more comprehensive and appears to be uncomplicated than its predecessor, it is still in its initial stage of implementation and will need many more clarifications and subsidiary rules from the law makers to make it fully operational. A more complete picture may emerge after the publications of the supporting rules that are still on the anvil. Until then, the situation of having two legislations in force on the same subject matter is certainly peculiar and could possibly create administrative burden. For instance, the definition of a "foreign company" has not been made effective under the new Act, yet the provisions applicable to foreign companies are in effect. In such a situation, it is unclear whether it would be essential to rely on the old Act for the definition while relying on the provisions of the new law. So, the company and its advisers will have to be mindful of both legislations, as well as the draft rules to ensure compliance with the law.

Footnotes

1 Tables A – J of the Companies Act 2013 contain formats of Memorandum and Articles to be followed by various types of companies.

2 See Section 54 of the Act which states that sweat equity shares may be issued subject to the conditions laid down in this section irrespective of the prohibition on issue of shares at a discount as contained in Section 53.

3 As per the proviso to section 96 (1), the first AGM is to be held within nine months from the date of closing of the first financial year of the company.

4 These are prescribed in Schedule IV of the new Act.

5 These are covered under Sections 230-240.

6 Sections 270-365.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Sindhu Varma
 
In association with
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert
Email Address
Company Name
Password
Confirm Password
Mondaq Topics -- Select your Interests
Accounting and Audit
Anti-trust/Competition Law
Consumer Protection
Corporate/Commercial Law
Criminal Law
Employment and HR
Energy and Natural Resources
Environment
Family and Matrimonial
Finance and Banking
Food, Drugs, Healthcare, Life Sciences
Government, Public Sector
Immigration
Insolvency/Bankruptcy, Re-structuring
Insurance
Intellectual Property
International Law
Law Practice Management
Litigation, Mediation & Arbitration
Media, Telecoms, IT, Entertainment
Privacy
Real Estate and Construction
Strategy
Tax
Transport
Wealth Management
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.