India: Further Amendments To Companies Act

Introduction.

The Companies Amendment Act, 2017 ("Amendment Act") was enacted with the intent of overcoming the practical challenges associated with implementation of the Companies Act, 2013 ("Companies Act").

The Amendment Act was primarily based on the report of the Company Law Committee. The Ministry of Corporate Affairs ("MCA") had constituted the Company Law Committee with the mandate of (a) making recommendations on issues arising from the implementation of the Companies Act 2013, and (b) examining the recommendations received from the Bankruptcy Law Reforms Committee, the High-Level Committee on Corporate Social Responsibility, the Law Commission of India, and other agencies.

The MCA had initially notified 43 sections of the Amendment Act pursuant to its notification dated 9 February 2018. It has notified an additional 28 sections on 7 May 2018. In general, the amendments notified pursuant to the notification dated 7 May 2018 have provided much-needed clarity on the interpretation of several provisions of the Companies Act. In addition, the MCA has sought to relax many procedural requirements under the Companies Act, including the penalties levied in case of any failure to comply.

Additional provisions notified.

Amendments to the following key-provisions were notified on 7 May 2018:

AMENDED SECTION

SUMMARY

2(6) (Definition of Associate Company)

'Significant influence' now means control of at least 20% of the total 'voting power' (as opposed to 'total share capital') or control of or participation in taking business decisions under an agreement. The corresponding rule (i.e., Rule 2(1)(r) of the Companies (Specification of Definitions Details) Rules, 2014) pertaining to the definition of 'total share capital' has been removed

Additionally, 'joint venture' has now been defined as a joint arrangement where parties have joint control of the arrangement and have rights to the net assets of the arrangement

Essentially, the 'share-capital-test' for determining significant influence has now been replaced with the 'voting-power-test'. This will help in addressing practical difficulties associated with determining 'significant influence' in companies wherein a portion of share capital is in the form of convertible preference capital

2(87) (Definition of Subsidiary Company)

Similar to the definition of "associate company", the test for determining a holding-subsidiary relationship is now linked to the exercise or control of more than one-half (50%) of the 'total voting power' (as opposed to 'total share capital')

The amendment made to section 2(87) is similar in nature to the amendment made to section 2(6) and has been made with similar intent of addressing the problem associated with determining 'significant influence' in companies wherein a portion of share capital is in the form of convertible preference capital

26 (Matters to be stated in prospectus)

The Securities and Exchange Board ("SEBI") of India now has the power (in consultation with the Central Government) to specify the information that should be stated in prospectuses of to-be-listed companies

Accordingly, sub-clauses (a), (b) and (d) of clause (1) of Section 26 (which pertained to information to be provided in the prospectus) have been omitted

Corresponding changes in the Companies (Prospectus and Allotment of Securities) Rules, 2014, have also been made

Under the amended section 26, SEBI has now been exclusively empowered to specify the information which needs to be stated in a prospectus of a to-be-listed company

54(1)(c) (Issue of sweat equity shares)

Prior to the notification dated 7 May 2018, companies were required to wait for one year from the date of commencement of business before issuing sweat equity. This requirement has now been removed

77(1) (Duty to register charges, etc.)

Companies are exempt from the requirements of section 77, including the requirement to register such charges with the Registrar of Companies ("RoC"), in respect of certain charges or categories of charges (prescribed in consultation with the Reserve Bank of India). As on date, no such charges or categories have been prescribed

78 (Application for registration of charge)

Prior to the notification dated 7 May 2018, the Companies Act prescribed that a person in whose favour a charge is created may apply to the RoC for registration of such charge upon the expiry of a time period. This time period was never specified. However, a time period of 30 days has now been specified

117(1) and (2) (Resolutions and agreements to be filed)

The minimum fine leviable in case of default in compliance with section 117(1) (Filing of resolutions and agreements with the RoC) has been reduced to INR 100,000 for the defaulting company and INR 50,000 for the officer in default

Banking companies have been exempted in respect of resolution passed to grant loans or give guarantee or provide security in respect of loans given under the ordinary course of business

129 (Financial statement)

Section 129 has been amended to specify that accounts of subsidiary and associate companies should be consolidated in accordance with applicable accounting standards. Given that the term 'joint venture' has now been defined, there is now clarity around the nature of joint-ventures whose accounts ought to be consolidated

137 (Copy of financial statement to be filed with Registrar)

Filing of unaudited financial statements of a foreign subsidiary that is not required to get its accounts audited is now permitted along with a declaration to such effect

139 (Appointment of auditors)

With a view to reducing procedure, the requirement of ratifying the appointment of auditors by members at every annual general meeting has been removed

Corresponding changes to Rule 3 of the Companies (Audit and Auditors) Rules, 2014, have been made

Section 149 (Appointment and qualifications of directors)

It has been clarified that in case of newly incorporated companies the requirement of having a director residing in India for at least a 182-day period has been reduced proportionately basis the remainder portion of the financial year post such incorporation

Pecuniary relationships between a company and its independent director now excludes the remuneration of such director and transactions up to 10% of the total income (cumulative income from any source) of the independent directors

The scope of the restrictions on pecuniary relationship between a relative of an independent director and a company has been relaxed

Previously, there was a blanket ban on any kind of pecuniary relationship between relatives of an independent director, which has been now relaxed in line with SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2015

The restriction on appointment of an individual as an independent director (if a relative of such an individual was an employee of the company during immediately three preceding financial years) has been removed

164 (Disqualifications for appointment of director)

Disqualification of a newly appointed director of a company on account of (a) failure by such company to file its financial statements or annual returns (for a continuous period of three years) or (b) such company's failure to repay deposits or redeem debentures or pay any interest or dividend thereon, is now subject to a grace-period of six months

168 (Resignation of director)

The requirement to intimate the RoC of any director resignation has now been made optional. Corresponding changes to Rule 16 of the Companies (Appointment and Qualification of Directors) Rules, 2014, have been made

Section 173 (Meetings of board)

Directors are now allowed to participate through video-conferences in meetings where items set out in the proviso to section 173(2) (such as approval of board's report, approval of annual financial statements, approval of merger, etc.) are taken up by the board; provided there is otherwise sufficient quorum of directors that are physically present. Corresponding changes to Rule 4 of the Companies (Meetings of Board and its Powers) Rules, 2014, have been made

Section 177 (Audit committee)

The notification dated 7 May 2018 has restricted the requirement for a company to constitute an audit committee to public listed companies. Previously, private companies with listed debt securities were also required to constitute audit committees. Corresponding changes to Rules 6 and 9 of the Companies (Meetings of Board and its Powers) Rules, 2014, have been made

Further, the audit committee is now required to make appropriate recommendations to the board on related party transactions, other than  those covered in section 188, that have not been approved by the Audit Committee

Audit committees have been empowered to ratify any transaction, other than those covered in section 188, not exceeding INR 10 million if such transaction was entered into by a director or officer

The audit committee's powers are not applicable to transactions, other than those covered in section 188, between a holding company and its wholly owned subsidiaries

The amendment made to section 177 is a much-needed overhaul of the powers of the audit committee. Additionally, the exclusion of private limited companies with listed debt securities from complying with section 177 and exclusion of transactions between holding and wholly owned subsidiary from audit committee's watch, would significantly reduce the compliance burden

Section 185 (Loans to directors, etc.)

The existing prohibition on loans/guarantee/security to (a) directors of borrowers/security providers, (b) directors of holding companies of borrowers/security providers, (c) partners or relatives of such directors, and (d) firms in which such directors/relatives are partners, continues. However, loans/guarantee/security to 'persons in whom a director is interested' are permitted, subject to two requirements (a) shareholder approval by way of special resolution, and (b) end-use restriction for principal business activities

The notification dated 7 May 2018 also introduces new exemptions to section 185 for (a) loans to managing director/whole-time director, (b) companies which provide loans/guarantee/security in the ordinary course of business and charge interest at a rate higher than yield of 1/3/5 years government security, (c) loans/guarantee/security by holding company to its wholly owned subsidiary, and (d) guarantee/security by holding company to its subsidiary company for loans availed from banks/financial institutions

The amendment to section 185 goes a long way in easing up the practical challenges associated with intra group financing/security creation. Further, the requirement of obtaining shareholders' approval under the amended section would ensure that there are adequate safeguards to prevent misuse of relaxations provided under section 185

Section 186 (Loans and investments by company)

Loans to, or guarantees or securities for loans of, employees are now excluded from the ambit of section 186

Further, shareholders' approval by way of special resolution is not required: (a) if the company provides a loan, guarantee, security to a joint venture company or a wholly owned subsidiary, or (b) for investing in a wholly owned subsidiary

Corresponding changes to Rule 13 of the Companies (Meetings of Board and its Powers) Rules, 2014, have been made

Exceptions to the applicability of section 186 are now limited to:

  • banking, insurance and housing finance companies (in the ordinary course of their business)
  • companies established with the object of, and engaged in the business of, financing industrial enterprises or of providing infrastructural facilities
  • investments made:

    • by any investment company
    • in shares allotted pursuant to rights issue
    • in respect of investment or lending activities, by registered non-banking financial companies, whose principal business is acquisition of securities

For determining 'investing companies', 50% of its total assets or 50% of its gross income should pertain to its investment in shares, debentures or other securities

The amendments made to section 186 would augment flexibility of financing structures available with companies for their financing needs. However, inclusion of term 'investing company' would still leave certain amount of ambiguity associated with interpretation of section 186

Additionally, amendments to sections 403 (Fee for filing, etc.), 410 (Constitution of appellate tribunal), 435 (Establishment of special courts), 438 (Application of Code to proceedings before special courts), 439 (Offences to be non-cognizable) and 440 (Transitional provisions) have been notified.

The sections notified pursuant to the notification dated 7 May 2018 provided much needed relief from the practical difficulties associated with the implementation of Companies Act, which were primarily caused by legislative oversight such as taking in account convertible preference share capital while determining 'significant influence', or inclusion of private companies with listed debt securities within the ambit of section 177. Hopefully, the government would continue with its collaborative approach for future reforms to the Companies Act.

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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