17 October, 2017
Notification of Section 2(87) of the Companies Act, 2013 and the Companies (Restrictions on number of layers) Rules, 2017
The Ministry of Corporate Affairs (‘MCA ’) has, by way of notifications dated September 20, 2017, notified the proviso to Section 2(87) of the Companies Act, 2013 (‘Companies Act ’) and the Companies (Restrictions on Number of Layers) Rules, 2017 (‘Layers Restrictions Rules ’). Pursuant thereto, no company can have more than two layers of subsidiaries other than (i) banking companies, (ii) non-banking financial companies, (iii) insurance companies, and (iv) Government companies. Existing companies, which currently have more than two layers of subsidiaries, are:
i. required to file a return in Form CRL – 1, disclosing details in relation to such companies, within 150 days from September 20, 2017; and
ii. restricted from having any additional layer of subsidiaries over and above the layers existing on the date of notification of the Layers Restrictions Rules, and will not, in case one or more layers are reduced by it subsequent to the commencement of these rules, have the number of layers beyond the number of layers it has after such reduction or maximum layers allowed under the Layers Restrictions Rules (whichever is more).
The Layers Restriction Rules specify that for computing the number of layers, a layer comprising of one or more wholly owned subsidiary or subsidiaries will not be counted. It has also been clarified that Layers Restrictions Rules do not derogate from the proviso to Section 186(1) of the Companies Act which deals with the layers of investment companies a company may have. These provisions do not restrict any company from acquiring a company outside India with subsidiaries beyond two layers, as per the laws of such foreign country.
Exemption to Certain Unlisted Public Companies from Appointment of Independent Directors
By way of notification dated July 5, 2017, the MCA amended the Companies (Appointment and Qualification of Directors) Rules, 2014 inter-alia amending Rule 4 whereby an unlisted public company which is a joint venture, wholly owned subsidiary, or a dormant company, has been exempted from appointing independent directors. In this regard, the MCA has, by way of notification dated September 5, 2017 clarified that “joint venture” would mean a joint arrangement, entered into in writing, whereby the parties that have joint control of the arrangement, have rights to the net assets of the arrangement. The usage of the terms is similar to that under the accounting standards.
Notification of Provisions related to Investigations by Serious Fraud Investigation Office
On August 24, 2017, the MCA issued a notification for bringing into force subsections (8), (9) and (10) of Section 212 of the Companies Act. Section 212 deals with investigation into affairs of a company by the Serious Fraud Investigation Office (‘SFIO ’). The newly notified subsections deal with the powers of arrest given to the designated officers of the SFIO .
The MCA has also notified the Companies (Arrests in connection with Investigation by Serious Fraud Investigation Office) Rules, 2017 (‘SFIO Rules ’) on August 24, 2017, which SFIO Rules are to be read with Section 212 and 469 of the Companies Act and inter alia elaborate the powers and manner in which arrests are to be made by SFIO officers pursuant to Section 212.
Amendment to the Companies (Acceptance of Deposit) Rules, 2014
Under Rule 3 of the Companies (Acceptance of Deposit) Rules, 2014 (‘Deposit Rules ’), a company is prohibited from accepting or renewing deposits from its members if the amount of such deposits, together with the amount of other deposits outstanding as on the date of acceptance or renewal of such deposits, exceeds 35% of the aggregate of the paid-up share capital, free reserves and securities premium account of the company; provided that in case of private
companies the applicable limit was 100% instead of 35%. Rule 3 of the Deposit Rules has been amended pursuant to the MCA notification dated September 19, 2017, whereby the enhanced limit of 100% has been extended to a Specified IFSC Public Company.1 The following classes of private companies have been exempted from the 100% limit as well:
i. a private company which is a start-up, for five years from its incorporation; and
ii. a private company which is not an associate or subsidiary of any other company; and the borrowings of such company from banks, financial institutions or body corporate is less than twice of its paid up share capital or INR 50 Crores, whichever is less; and such a company has not defaulted in the repayment of such borrowings subsisting at the time of accepting deposits under Section 73.
1 An unlisted public company licensed to operate by a regulatory authority from the International Financial Services
Centre located in an approved multi services Special Economic Zone.
For further information, please contact:
Zia Mody, Partner, AZB & Partners
zia.mody@azbpartners.com
