22 November, 2015
The Ministry of Corporate Affairs (‘MCA’) has earlier this year brought about several significant changes/ amendments to the Companies Act, 2013 (‘Companies Act’). This special edition of In- ter Alia…sets out in brief, the amendments brought about by the (i) Companies (Amendment) Act, 2015 (‘2015 Amendment Act’); and (ii) the notification dated June 5, 2015, notifying certain exemptions and modifications in respect of the applicability of certain provisions of the Com- panies Act to private companies (‘MCA Notification’).
The Companies (Amendment) Act, 2015
The MCA has, by way of notification dated May 25, 2015, enacted the 2015 Amendment Act and brought about changes to certain provisions of the Companies Act. The amendments made pursuant to the 2015 Amendment Act are as follows:
Paid – up Capital: The minimum paid up capital requirement for public and pri- vate companies has been done away with. Hence, going forward, a public and a private company can be incorporated without the need for minimum share capital of ¤5 lakhs or ¤1 lakh respectively.
Commencement of Business: Prior to commencement of business or borrowing powers, directors of every company having share capital, pursuant to Section 11 of the Companies Act, were required to file with the Registrar of Companies (‘RoC’) a declaration that every subscriber to the Memorandum of Association of a com- pany has paid the value of shares committed by such person and that the paid-up share capital is not less than the prescribed amount. This Section 11 of the Compa- nies Act has now been omitted, and the requirement for filing a declaration before commencement of business has been done away with.
Common Seal: Use of common seal has been made optional, even in relation to is- sue of share certificates under Section 46(1) of the Companies Act. Consequential changes have been made to Share Capital and Debenture Rules and the Registra- tion of Charges Rules for incorporating the changes in relation to the common seal for execution of documents including bills of exchange.
Acceptance of Deposits: Sections 73 and 76 of the Companies Act deal with ac- ceptance of deposits from the public. The 2015 Amendment Act has introduced a new Section 76A, which introduces penal provisions for contravention of Sections 73 and 76 or the rules thereunder or if a company fails to repay the deposit or part thereof or any interest due thereon within the specified time. Section 76A provides as under:
(a) The company will be liable to pay a fine of not less than ¤10 Million but which may extend to ¤100 Million, in addition to the payment of the amount of de- posit or part thereof and the interest due.
(b) Every officer in default will be punishable with imprisonment which may ex- tend to 7 years or with fine of not less than ¤25 lakh but which may extend to ¤20 Million, or with both. However, if it is proved that the officer in default, has contravened such provisions knowingly or willfully with the intention to deceive the company or its shareholders or its depositors, creditors or tax au- thorities, such officer will be liable for action for fraud under Section 447 of the Companies Act.
Dividend: An additional proviso has been added to Section 123 (1) of the Compa- nies Act which provides that no company is entitled to declare dividends, unless previous losses and depreciation which have not been provided in the previous year or years are set off against the profit of the company for the present year.
Transfer to Investor Fund: Under Section 124 of the Companies Act, it has now been provided that if no dividend has been paid or claimed for any year during a period of 7 consecutive years, the underlying share(s) will be transferred to the In- vestor Education and Protection Fund. The 2015 Amendment Act however clarifies that if any dividend is paid or claimed for any year during a period of 7 consecu- tive years, then such underlying share(s) will not be so transferred.
Obtaining Copies of Board Resolutions: No person is now permitted under Sec- tion 399 of the Companies Act to inspect or obtain copies of the board resolutions passed by a company under Section 179(3) of the Companies Act and which are filed with the RoC.
Loans to Directors: Section 185(1) of the Companies Act prohibits advancement of loan and provision of guarantees or securities by a company to any of its directors or to any other person in whom the director is interested. The prohibition is not applicable to loans provided (a) to managing director or whole-time director as a part of conditions of service applicable to employees and approved by a special resolution, or (b) in the ordinary course of business. The 2015 Amendment Act has introduced two more carve-outs to the prohibition under Section 185, as set out below:
(a) loan made, guarantee given or security provided by a holding company to its wholly owned subsidiary; and
(b) guarantee given or security provided by a holding company to its subsidiary in respect of a loan availed by such subsidiary from any bank or financial in- stitution;
However, it has been clarified that the carve-outs provided above in relation to loans availed of by the subsidiaries are available only if the proceeds of such loans are being utilized by the subsidiary company for its principal business activity.
Related Party Transactions: As per the 2015 Amendment Act, the requirement of passing a special resolution for related party transactions has been done away with. As a result, the prescribed related party transactions can now be approved by way of an ordinary resolution. Further, in order to bring Section 188 in line with the conditions prescribed under the listing agreement, it has been provided that related party transactions between a holding company and its wholly owned subsidiary (whose accounts are consolidated with such holding company and have been placed before the shareholders for their approval), no separate resolution is required for approving the same.
Bail Restrictions: Investigation into the affairs of a company by the Serious Fraud Investigation Office under Sections 211 and 212 of the Companies Act provided restrictions on bail for a number of offences. Pursuant to the 2015 Amendment Act, these bail restrictions are now to apply only for offences relating to fraud under section 447 of the Companies Act.
Special Benches of the Tribunal: Section 419(4) of the Companies Act provides that the President is empowered to constitute one or more special benches con- sisting of 3 or more members, for the disposal of any cases relating to rehabilita- tion, restructuring, reviving or winding up, of companies. The word ‘winding up’ has now been omitted from this provision.
Special Courts: Section 435 of the Companies Act provides that the Central Gov- ernment may establish or designate as many special courts as may be necessary for the purpose of speedy trial of offences under the Companies Act. By way of the 2015 Amendment Act, special courts are now permitted only to try offences punishable under Companies Act with imprisonment of 2 years or more in order to ensure speedy disposal of such cases by the special court. All other offences are to be tried by a Metropolitan Magistrate or a Judicial Magistrate of the First Class.
Power to Exempt: Section 462 of the Companies Act deals with the power of the Central Government to exempt class or classes of companies from the provisions of the Companies Act. The amendment introduced by the 2015 Amendment Act to Section 462 attempts to rationalise the procedure for issuing draft notifications granting exemptions to various classes of companies. Pursuant to the amendment, a copy of every notification proposed to be issued by the Central Government un- der Section 462(1) for the purpose of exempting a class or classes of companies from certain provisions of the Companies Act, is to be presented in draft before each House of the Parliament (collectively ‘Houses’), while in session, for a total period of 30 days. If both Houses disapprove of the issue of such notification, it will not be issued, or will be issued only in such modified form as may be agreed upon by both Houses. The 2015 Amendment Act additionally stipulates in the same section that, in reckoning any such period of 30 days, no account is to be taken of any period during which either of the Houses is prorogued or adjourned for more than 4 consecutive days.
Amendments Not Notified
The provisions of the 2015 Amendment Act, which are yet to be notified, are as follows:
i. Reporting of Fraud: The 2015 Amendment Act amends Section 143(12) of the Companies Act to provide for the reporting of fraud involving prescribed amounts by the auditor of a company to the Central Government. Pursuant to the amend- ment, in case of a fraud involving lesser than the specified amount (which is yet to be defined), the auditor is to report the matter to the audit committee constituted under Section 177 of the Companies Act or to the board of directors in other cases within such time and in such manner as may be prescribed. In case of companies whose auditors report frauds in the above mentioned manner to the audit com- mittee or the board of directors, but do not report the same to the Central Govern- ment, such auditor will also be required to disclose the details about the frauds in the report of the board of directors in such manner as may be prescribed.
ii. Omnibus Approval by Audit Committee: The amended Section 177(4)(iv) of the Companies Act empowers every audit committee (acting in accordance with the terms of reference specified in writing by the board of directors) to include an omnibus approval for related party transactions proposed to be entered into by the company subject to such conditions as may be prescribed (which are yet to be defined).
Notification regarding exemptions for private companies under the Companies Act, 2013
A brief overview of the exemptions and modifications brought about by the MCA Notifica- tion in respect of the applicability of certain provisions of the Companies Act to private compa- nies are set out below:
Related Party Transactions: Companies entering into related party transactions above certain limits as prescribed under the Companies Act and the rules made thereunder, must conform to the conditions set out in Section 188 of the Compa- nies Act. In respect of private companies, the MCA Notification has clarified that with respect to a private company (i) a holding, subsidiary or an associate compa- ny of such private company; and (ii) a subsidiary of a holding company to which such private company is also a subsidiary, will not be considered a related party for the purpose of Section 188. Consequently, private companies will not have to comply with the conditions set out in Section 188 for the purposes of entering into transactions with the aforesaid categories of companies.
Share Capital and Voting Rights: Provisions set out in Sections 43 and 47 which deal with (i) the issue of kinds of share capital; and (ii) the voting rights that the members of a company may exercise, will not apply to private companies if the memorandum of association or the articles of association of such private com- pany provides as such. The implications of this need to be understood in greater detail but this could mean that for the issuance of shares with differential rights, private companies no longer need to satisfy the conditions that have been pre- scribed by way of the rules; which would be a significant relaxation.
Further issue of Share Capital: Certain modifications have been made to Section 62 (1) (a) (i) of the Companies Act which effectively permit private companies to close the offer period for an offer of shares to shareholders (including preferential offers) within 3 days as opposed to a minimum of 15 days (provided that 90% of the existing shareholders approve the same), this will help with closing timelines.
Shares issued to employees of a company: The threshold in relation to the re- quirement for a shareholders’ resolution for issuance of shares to employees pur- suant to an ESOP Scheme under Section 62 (1) (b) of the Companies Act has been reduced from a special resolution to an ordinary resolution.
Restrictions on purchase of its own shares by a company: Private companies (a) in whose share capital no other body corporate has invested any money; (b) in which the borrowings from any bank/financial institution/body corporate is less than twice its paid up share capital or ¤500 Million whichever is lower; and (c) which are not in default of any borrowings subsisting at the time of conducting any transactions under Section 67, are not required to comply with the conditions set out under Section 67 of the Companies Act which relate to restrictions on pur- chase by a company or giving of loans by it for purchase of its own shares. Given that one of the conditions that need to be satisfied by a private company to avail of this exemption is that it should not have any body corporate as a shareholder, this exemption is unlikely to be available to most private companies.
Prohibition on acceptance of deposits from the public: Certain procedural as- pects of Section 73 of the Companies Act which relates to the manner and restric- tions on companies with regard to accepting deposits from the public, will no longer be applicable to private companies accepting amounts less than 100% of the relevant paid up share capital and free reserves from their members, provided such private companies make the relevant filings in this regard with the Registrar of Companies (‘ROC’). Effectively therefore the process has been made a little simpler for private companies.
Process of issue of notice and voting: By providing for such exemption in their articles of association, private companies can exempt themselves from complying with the process of conduct of meetings and process of conduct of poll as specified under Sections 101 through 107 and Section 109 of the Companies Act respectively.
Mandatory filings with the ROC: Private companies are exempt from making mandatory filings with the ROC with regard to the resolutions and agreements specified under Section 117 (3) of the Companies Act. Given confidentiality related concerns around such filings, this is an important relaxation.
Qualifications for appointment of auditors: Section141(3)(g)oftheCompanies Act provides that persons or partners of firms (or relatives of such persons) hold- ing appointment as auditors in more than 20 companies cannot be appointed as auditors. As per the MCA Notification, the aforementioned 20 companies will not include one person companies, dormant companies, small companies and private companies having paid up share capital of less than 1 Billion.
Loans to Directors: The MCA Notification provides that private companies (a) in whose share capital no other body corporate has invested any money; (b) in which the borrowings from any bank/financial institution/body corporate is less than twice its paid up share capital or 500 Million whichever is lower; and (c) which are not in default of any borrowings subsisting at the time of conducting any transactions under Section 185, will not have to comply with the conditions prescribed under Section 185 of the Companies Act for extending loans to direc- tors. Given that one of the conditions that need to be satisfied by a private com- pany to avail of this exemption is that it should not have any body corporate as a shareholder, this exemption is unlikely to be available to most private companies.
Disclosure of interest by a director: Section 184 (2) of the Companies Act pro- vided that interested directors could not participate in board meetings where the board was discussing the contracts/arrangements in which such director was in- terested. As per the MCA Notification, such a requirement will not apply to private companies, and interested directors may participate in such board meetings provided that such interest is disclosed in accordance with Section 184 (2) of the Companies Act.
Provisions under which private companies are exempt: In addition to the above, the MCA Notification provides that private companies will not have to comply with the following provisions of the Companies Act:
(a) Section 160 – this section deals with the right of persons other than retiring directors to stand for directorship;
(b) Section 162 – this section provides that resolutions for the appointment of multiple directors have to be passed separately;
(c) Section 180 – this section deals with the restrictions on the powers of a board of a company and sets out actions which may be taken by a board only by means of a special resolution. This is a significant change as private compa- nies may now dispose off substantial assets of a company without prior share- holders approval;
(d) Section 188 (2) – this section provides that interested shareholders may not vote on resolutions for entering into related party transactions. This is a sig- nificant change; and
Section 196 (4) and (5) – these sections deal with the manner of appointment and
remuneration of managing director, whole-time director and a manager. This could effectively mean that Schedule V of the Companies Act which stipulates the conditions for appointment of an MD will no longer apply to private companies and therefore the requirement for an MD to be a resident would now no longer apply to private compa- nies, which is a significant relaxation.
For further information, please contact:
Zia Mody, AZB & Partners
zia.mody@azbpartners.com
