MAR 17, 2016

Key Highlights of The Companies (Amendment) Bill, 2016

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The result of the long consultative process undertaken by the Company Law Committee constituted by the Ministry of Corporate Affairs in an attempt to revamp the Companies Act 2013 is out in form of the Companies (Amendment) Bill 2016 (‘Bill’).

The Bill in the wake of facilitating ease of doing business aims to bring some radical changes in the Companies Act 2013. Further the Bill will certainly bring cheer among the corporates as it address some of their major concerns.

A brief summary of key amendments proposed in the Bill are outlined below

S.No. Section Proposed Amendment
1. Section 2(6)- Definition of ‘associate company’ Change in explanation of the term ‘significant influence’ under the definition of Associate Company has been proposed. Significant influence is proposed to mean control of atleast 20% of the voting power or control or participation in business decision under an agreement. Further the term ‘Joint Venture’ has also been defined.
2. Section 2(30)- Definition of ‘Debenture’ Under the definition of the terms “Debentures”, it is proposed to exclude instruments referred to in Chapter III-D of the Reserve Bank of India Act 1943 and such other instrument prescribed by the Central Government in consultation with RBI.
3. Section 2(51)- Definition of ‘Key Managerial Personnel’ Under the definition of the term “Key Managerial Personnel”, Officers not more than one level below the directors who is in whole time employment, designated as KMP by the Board, are proposed to be included.
4. Section 2(76)- Definition of ‘Related Party’ Foreign subsidiaries are proposed to be treated as the related party. Further an investing company or the venture of a company are also proposed to be considered as related party.
5. Section 2(87)- Definition of ‘subsidiary company’ It is proposed that a company will be treated as subsidiary in case the holding company exercises or controls more than one-half to the total voting power either at its own or together with one or more of its subsidiary companies. Currently instead of ‘total voting power’, ‘total share capital’ is used.
6. Section 4- Memorandum It is proposed that instead of specific objects in the Memorandum of Association of the Company, the Memorandum may state 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. Provided that in case a company proposes to pursue any specific objector objects or restrict its objects, the Memorandum shall state the said object or objects for which the company is incorporated and any matter considered necessary in furtherance thereof and in such case the company shall not pursue any act or activity or business, other than specific objects stated in the Memorandum.
7. It is proposed that name reserved by the RoC shall be valid for 20 days from date of the approval instead of 60 days from the date of application, as currently provided.
8. Section 12- Registered office of company It is proposed that the company shall within 30 of its incorporation having a registered office instead of current requirement of 15 days.
9. Section 21- Authentication of documents, proceedings and contracts Apart from KMP and any Officer of the Company, it is proposed that an employee can also be authorized to authenticate documents on behalf of the Company.
10. Section 26- Matters to be stated in Prospectus Instead of detailed disclosure in the Prospectus, it is proposed that information and reports in financial statement as specified by SEBI in consultation with the Central Government may prescribe, shall be provided.
11. Section 42- Private placement Proposed changes related to private placement
  • Return of allotment has to be filed within 15 days instead of 30 days.
  • Money received under the private placement shall not be utilized unless the return of allotment is filed with the RoC.
  • Private Placement offer letter shall not contain any right of renunciation.
12. Section 54- Issue of Sweat Equity Shares It is proposed to allow issue of Sweat equity shares at an time after registration of the Company. Currently such shares can be issued only after the expiry of one year from the date of commencement of business.
13. Section 62- Further issue of share capital It is proposed that Right issue offer letter can be sent through courier.
14. Section 73- Prohibition on acceptance of deposits from public In case of deposits, it is proposed that an amount not less than 20% of the amount of depositing, on or before the 30th day of April each year, such sum which shall not be less than twenty per cent. of the amount of its deposits maturing during the following financial year and kept in a scheduled bank in a separate bank account to be called deposit repayment reserve account. Currently at least 15% of such amount is required to be deposited.
15. Section 73- Prohibition on acceptance of deposits from public It is proposed to omit the requirement of deposit insurance.
16. Section 73- Prohibition on acceptance of deposits from public It is proposed that in case a company has made default in repayment of deposits and period of 5 years has elapsed since the date of making the default good, then such company can accept the deposits further.
17. Section 74- Repayment of Deposits, etc., accepted before commencement of this act Where any amount of such deposit or part thereof or interest thereof remains unpaid on the commencement of the Companies Act 2013, it is proposed that such amount shall be repaid within 3 years from the date of commencement or before the expiry of the period for which the deposit was accepted, whichever is earlier. Currently the amount has to be repaid within 1 year or before the expiry of the period for which the deposit was accepted, whichever is earlier.
18. Section 89- Declaration in respect of beneficial interest in any share For the purpose of declaration of beneficial interest , it is proposed that beneficial interest in a share includes, directly or indirectly, through any contract, arrangement or otherwise, the right or entitlement of a person alone or together with any other person to—
  1. exercise or cause to be exercised any or all of the rights attached to such share; or
  2. receive or participate in any dividend or other distribution in respect of such share.
19. Section 90- Investigation of beneficial ownership of shares in certain cases The provisions are proposed to be revamped.
20. Section 92- Annual Return The requirement of MGT-9 is proposed to be omitted. The copy of annual return shall be uploaded on the website of the Company, if any, and its link shall be disclosed in the director’s report.
21. Section 96- Annual General Meeting It is proposed AGM of unlisted company may be held at any place in India if consent is given is writing or by electronic mode by all the members in advance.
22. Section 100- Calling of Extraordinary General Meeting It is proposed that EGM of wholly owned subsidiary of a company incorporated outside India can be held outside India.
23. Section 123- Declaration of dividend It is proposed that the Board of Directors of a company may declare interim dividend during any financial year or at any time during the period from closure of financial year till holding of the annual general meeting out of the surplus in the profit and loss account or out of profits of the financial year for which such interim dividend is sought to be declared or out of profits generated in the financial year till the quarter preceding the date of declaration of the interim dividend:

Provided that in case the company has incurred loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not be declared at a rate higher than the average dividends declared by the company during immediately preceding three financial years.
24. Section 129- Financial Statement The requirement of consolidating the accounts of a joint venture is proposed to be omitted.
25. Section 134- Financial Statement, Board’s report, etc. It is proposed that CEO whether appointed as a Director or not, will sign the financial statement. Currently CEO is required to sign, only if he is also acting as a director.
26. In case of Directors reports, it is proposed that disclosures which has been provided in the financial statement shall not be required to be reproduced in the report again. Further instead of exact text of the policies, key feature of policies along with its web link shall be disclosed.
27. Section 135- Corporate Social Responsibility Eligibility criteria for the purpose of constituting the corporate social responsibility committee and incurring expenditure towards CSR is proposed to be calculated based on immediately preceding financial year. Currently this eligibility is decided based on preceding three financial years. Further it also proposed to empower the Central Government to prescribe sums which shall not be included for calculating 'net profit' of a company under section 135.
28. Section 137- Copy of Financial Statement to be filed with Registrar It is proposed to enable the filing of unaudited financial statements of foreign subsidiaries which is not required to get its accounts audited.
29. Section 139- Appointment of Auditors The requirement related to annual ratification of appointment of auditors by members is proposed to be omitted.
30. Section 149- Company to have Board of Directors It is proposed that 182 days for determining whether a director is resident in India shall be computed with reference to the financial year. Currently it is calculated in reference to previous calendar year.

Further it is proposed that in case of new companies, the requirement of period of 182 days shall apply proportionately.

In the definition of Independent Director , the words ‘pecuniary interest’ is proposed to be substituted by "pecuniary relationship, other than remuneration as such director or having transaction not exceeding ten per cent. of his total income or such amount as may be prescribed”
31. Section 153- Application for allotment of Director Identification Number It is proposed to empower the Central Government to recognize any other identification number to be treated as director identification number.
32. Section 160- Right of persons other than retiring directors to stand for directorship It is proposed that the requirement of deposit of rupees one lakh with respect to nomination of directors shall not be applicable in case of appointment of independent directors or directors nominated by nomination and remuneration committee.
33. Section 165- Number of Directorship It is proposed that the directorship in a dormant company shall not be included in the limit of directorships of 20 companies.
34. Section 167- Vacation of office of director It is proposed that in case a director incurs any of disqualifications under section 164 (2), he shall vacate office in companies other than the company which is in default. It also seeks to amend section 167 with respect to appeal against conviction order.
35. Section 177- Audit Committee It is proposed that instead of listed company , listed public company shall constitute an audit committee.

It is proposed that related party transactions other than those prescribed under section 188, if not approved by Audit committee, will require the approval of Board of Directors.
36. Section 178- Nomination and remuneration Committee and Stakeholders Relationship Committee It is proposed that instead of listed company, listed public company shall constitute a Nomination and Remuneration Committee.

It is proposed that committee will specify methodology for effective evaluation of performance of Board and committees and individual directors either by the Board, nomination and remuneration committee or an independent external agency and for its review.
37. Section 185- Loan to directors, etc. A completely new section 185 is proposed. Some of the key changes are :
  • Complete restriction on providing loan , guarantee or security in connection with loan to any director, director of the holding company or any partner or relative of any such director or any firm in which any such director or relative in a partner
  • Loan to parties covered under clause (c) to (e) of explanation to section 185(1) is allowed subject to special resolution of shareholders and certain other prescribed conditions

    Current exemption provided under section 185(1) continues to remain
38. Section 186- Loan and investment by company
  • It is proposed to omit the restrictions on layers of investment companies.
  • It also proposed  to exclude employees from the ambit of this section
  • It is proposed that shareholders’ approval will not be required where a loan or guarantee is given or where a security has been provided by a company to its wholly owned subsidiary company or a joint venture company, or acquisition is made by a holding company, by way of subscription, purchase or otherwise of, the securities of its wholly owned subsidiary company.
39. Section 188- Related Party Transactions It is proposed that the requirement related to restriction on voting by relatives in the general meeting shall not apply to a company in which ninety per cent or more members in numbers are relatives of promoters or related parties. It also seeks to provide that non-ratification of transaction shall be voidable at the option of the Board or shareholders, as the case may be.
40. Section 194- Prohibition on Forward dealings in securities of company by director or Key Managerial Personnel It is proposed to omit this section
41. Section 195- Prohibition on Insider trading of securities It is proposed to omit this section
42. Section 197- Overall maximum managerial remuneration and managerial remuneration in case of absence or inadequacy of profits  It is proposed that the approval of the Central Government shall not be required at the time of the payment of remuneration exceeding 11% of the net profits of the company.
43. Section 366- Companies capable of being registered It is proposed to allow conversions into companies from partnership firms, LLP, Society etc. with two or more members instead of seven or more members.
44. Section 403- Fee for Filings, etc. It is proposed that only document, fact or information required to be submitted, filed, registered or recorded, as the case may be, under section 89 (Declaration in respect of beneficial interest in any share), 92 (Annual Return), 117 (Resolutions and agreements to be filed), 121 (Report on Annual General Meeting), 137 (Copy of financial statement to be filed with registrar) or 157 (Company to inform director identification number to registrar) may be submitted, filed, registered or recorded, as the case may be, within a period of two hundred and seventy days from the expiry of the period so provided in those sections, on payment of such additional fee as may be prescribed. Further it is proposed that in case of documents referred in section 89, 92, 117, 121, 137 or 157 is not submitted, filed, registered or recorded, as the case may be, within the period of two hundred and seventy days from the expiry of the period so provided in those sections or in any other case within the period prescribed under the relevant section, then such information, document or fact can be filed on payment of such higher additional fees as may be prescribed.
45. Section 447- Punishment for Fraud It is proposed instead of any fraud, only fraud involving an amount of at least ten lakh rupees or one percent. of the turnover of the company, whichever is lower shall be punishable with imprisonment for a term which shall not be less than 6 months but which may extend to ten years and shall also be liable to a fine which shall not less than the amount involved in the fraud but which may extend to three times the amount involved in the fraud. Further that where the fraud involves an amount less than ten lakh rupees or one per cent. of the turnover of the company, whichever is lower, and does not involve public interest, any person guilty of such fraud shall be punishable with imprisonment for a term which may extend to five years or with fine which may extend to twenty lakh rupees or with both.