India: Companies (Amendment) Act, 2015: Key Highlights

The Government of India (GOI) had received several representations from industry stakeholders for amending various provisions of Companies Act, 2013 (CA 2013) to ensure ease of doing business in India. Towards this, the Companies (Amendment) Act, 2015 (CA Amendment 2015) received the assent from the President of India on 25 May 2015 after both the houses of the Parliament approved the CA Amendment 2015. The CA Amendment 2015 has been published in the Official Gazette on 26 May 2015 and is a welcome step towards addressing some of the concerns under CA 2013, though there are several other concerns which are yet to be addressed by the GOI.

The Central Government is authorised to appoint different dates for implementation of different provisions in the CA Amendment 2015. Accordingly, while most provisions have become effective from 29 May 2015, certain amendments are yet to be notified (as specifically mentioned below).

Further, on 29 May 2015, in order to align CA 2013 and the rules thereunder with the CA Amendment 2015, the Ministry of Corporate Affairs (MCA) has also issued amendments to relevant Rules under CA 2013 (namely, the Companies (Share Capital and Debenture) Second Amendment Rules, 2015, the Companies (Declaration and Payment of Dividend) Secondment Amendment Rules, 2015, the Companies (Incorporation) Second Amendment Rules, 2015, the Companies (Registration of Charges) Amendment Rules, 2015 and Companies (Registration Offices and Fees) Second Amendment Rules, 2015), however, these amendments to the rules are yet to be notified in the Official Gazette.

Some of the key amendments and clarifications in the CA Amendment 2015 are as follows:

  • No Minimum Paid-up Share Capital: The minimum paid-up share capital requirement of INR 100,000 (in case of a private company) and INR 500,000 (in case of a public company) under CA 2013 has been done away with. Consequently, the definitions of private and public companies stand amended.

    Accordingly, no minimum paid-up capital requirements will now apply for incorporating private as well as public companies in India.
  • Relaxations vis-a-vis Related Party Transactions:

    • Section 188 of CA 2013 lists out such related party transactions, which require approval from the board of directors and/or the shareholders, as prescribed. If such related party transactions meet the thresholds prescribed in CA 2013 and the rules thereunder, approval from the shareholders by way of passing of a special resolution (i.e. requiring approval of three-fourth majority of shareholders) was required.

      The CA Amendment 2015 has relaxed the approval requirement from a special resolution (i.e. requiring approval of three-fourth majority of shareholders) to an ordinary resolution (i.e. requiring approval of simple majority of shareholders) in case of related party transactions which require shareholders' approval.
    • Further, Section 188 and the rules thereunder provided that in case of related party transactions between a holding company and its wholly owned subsidiary, a special resolution passed by the holding company was sufficient.

      The CA Amendment 2015 has relaxed and done away with the requirement of a special resolution in the above cases provided the accounts of the wholly owned subsidiary are consolidated with the accounts of the holding company, and placed before the shareholders at a general meeting for approval.
    • In order to align with Clause 49 of the Listing Agreement, Section 177 has been amended to include a proviso to enable the concerned audit committee to provide omnibus approval for related party transactions subject to prescribed conditions.

      The above amendment to Section 177 has not been notified as yet.
  • Inspection of Resolutions, etc. filed with the Registrar: Earlier, under Section 117 read with Section 399 of CA 2013, certain resolutions (e.g. all special resolutions, resolutions for terms of appointment of managing director, winding-up resolutions, resolutions in relation to sale of undertaking / borrowings, etc.) filed by a company with the Registrar of Companies were open for inspection by any person or to obtain copies.

    The CA Amendment 2015 has limited public access of such resolutions relating mainly to strategic business matters. Such documents will no longer be available for public review or permitted to take copies of. This addresses the concerns raised by several corporates in India, specifically private companies, in terms of exposure of critical business matters in public.
  • Common Seal Optional: CA 2013 required common seal to be affixed on certain documents (such as bill of exchange, share certificates, etc.) Now, the use of common seal has been made optional. All such documents which required affixing the common seal may now instead be signed by two directors or one director and a company secretary of the company.

    Consequently, several sections of CA 2013 dealing with common seal have been amended to incorporate the above requirement.
  • No declarations for commencement of business, etc.: CA 2013 required all companies to file following additional declarations with the Registrar of Companies prior to commencement of business or exercising any borrowing power: (i) declaration by a director that minimum paid-up share capital has been paid; and (ii) company has filed verification of registered office.

    The CA Amendment 2015 has removed the above requirements and deleted Section 11 of CA 2013. This reduces the filings to be made by companies in India.
  • Violation of Acceptance of Deposits, etc.: CA 2013 introduced stringent provisions in relation to acceptance/ renewal / repayment of deposits. However, no specific penalty was prescribed for non-compliance with the relevant provisions i.e. Section 73 and Section 76. This lacuna has been filled by the CA Amendment 2015.

    A new Section 76 A has been introduced for the above non-compliances. The defaulting company will be liable for fine of a minimum amount of INR 10,000,000 and a maximum of INR 100,000,000 in addition to the amount of deposit or part thereof, along with interest. Further, every officer of the company in default is punishable with imprisonment which may extend upto 7 years or with a fine amounting to a minimum of INR 2,500,000 and maximum of INR 20,000,000 or both. Such officer may attract additional penalty for fraud under CA 2013 if the non-compliance was done knowingly or with the intention to deceive the company, shareholders, depositors, creditors or tax authorities.
  • Reporting by Auditors in respect of Fraud: CA 2013 introduced the reporting obligations on auditors of companies to the Central Government if the auditor has reason to believe that a fraud has been committed by officers or employees of the company, irrespective of the amounts involved. The CA Amendment 2015 has provided that thresholds will be prescribed for reporting of frauds to the Central Government, or the audit committee or the board of directors. All such instances of frauds falling below prescribed thresholds will be reported to the board or the audit committee and will need to be disclosed in the annual report of the company, instead of mandatory reporting to the Central Government.

    The above amendment eases the administrative burden for the auditors, however, these amendments have not been notified as yet.
  • Exemptions to Section 185: Section 185 includes restrictions on loans by a company to a director or other interested persons / entities. However, the rules prescribed under Section 185 exempted any loans / guarantee / security by a holding company to its wholly owned subsidiary, and any guarantee or security by a holding company to a financial institution for loan availed by its subsidiary, provided the loan in each of these cases is utilised by the subsidiary for its principal business.

    The above provisions of the Rules have now been inserted under Section 185 of CA 2015 itself.
  • Dividend: Section 123 is an enabling provision for companies to declare divided in a financial year, subject to fulfilment of prescribed conditions. The CA Amendment 2015 has introduced a new proviso which states that a company cannot declare dividend for a financial year, unless the losses and depreciation carried over from past years have been set-off against the profits of the company, in the year it proposes to declare a dividend.
  • Special Courts: Section 435 read with Section 436 provides the Central Government the power to set up special courts to try offences under CA 2013.

    By way of the above amendment, special courts may now only try offences punishable under CA 2013, with imprisonment for 2 years or more. All other offences are to be tried by a Metropolitan Magistrate or a Judicial Magistrate of the First Class.

Khaitan Comment

The CA Amendment 2015 is a welcome move, however, it could have delivered far more. While relaxations in the regime governing related party transactions, limited access to strategic corporate resolutions, eliminating some procedural requirements (such as minimum paid-up requirement, use of common seal, etc.) will surely ease some of the procedural compliances, however, at the same time several concerns under CA 2013 are yet to be addressed by the GOI (such as easing the private placement process for closely held companies, specific exemption on insider trading provisions for private companies, stock options to promoters in case of private companies, etc). Towards this, the GOI has constituted the Companies Law Committee to identify and recommend the GOI on issues relating to implementation of CA 2013 and to also examine the recommendations from the various other stakeholders and regulatory agencies.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

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