Companies Act 1956 was replaced in the year 2013 with a new avatar as the Companies Act 2013. When an act was on the statute book for a period of almost 60 years and a new act has come in its place, it was bound to have issues from practical perspectives, besides challenges and shortcomings.
To overcome these issues, the new Act had to undergo several amendments in its first few years. If we look at the evolution of this Act, of the total 470 sections of the Companies Act, 2013 the status as on date is as under:
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Particulars
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Number
Of sections
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Sections
Notified on different dates
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428
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Sections
yet to be enforced
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2
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Sections
Deleted
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40
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Total
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470
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Major amendments were done in the year 2015. At the time of these amendments it was felt that the matter needs further relook and hence Companies Law Committee was constituted (CLC) to address these issues. The CLC made its recommendations which culminated in Companies Amendment Bill, 2016.
Companies Amendment Bill, 2016 was introduced in Lok Sabha in March 2016 and was referred to Standing Committee on Finance (Committee) for further examination. After considering various suggestions of the Committee this Bill was renamed as Companies Amendment Bill, 2017 and was reintroduced and passed in Lok Sabha in July 2017.
This Bill was approved by Rajya Sabha on 19th of December 2017 and has received President’s Assent on 3rd January 2018. It was notified on the same day in the official gazette and will be called as The Companies (Amendment) Act, 2017.
OBJECTIVE/GUIDING PRINCIPLES BEHIND AMENDING THE COMPANIES ACT, 2013
The amendments introduced in The Companies (Amendment) Act, 2017 are guided by the following objectives1 :-
(i) addressing difficulties in implementation owing to undue stringency of compliance requirements,
(ii) facilitating ease of doing business for companies, including start-ups, in order to promote growth with employment,
(iii) harmonisation with accounting standards, and other financial and economic legislations,
(iv) rectifying omissions and inconsistencies in the Act, and
(v) Carrying out amendments in provisions relating to qualification and selection of members of NCLT and NCLAT in accordance with the Supreme Court directions.
The key amendments in the Companies (Amendment) Act, 2017, are2 :
a) Simplification of the private placement process, involving doing away with separate offer letter, details/record of applicants to be kept by company and to be filed as part of return of allotment only, and reducing number of filings to Registrar
[section 42].
b) Allowing unrestricted object clause in the Memorandum of Association dispensing with detailed listing of objects, with a view to ease incorporation of companies; Self-declarations to replace affidavits from subscribers to memorandum and first directors [sections 4 and 7].
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1 37th Report of the Standing Committee on Finance dated 01-12-2016 Para 1.12
2 37th Report of the Standing Committee on Finance dated 01-12-2016 Para 1.14
c) Provisions relating to forward dealing and insider trading in securities to be omitted from Companies Act as these are covered under SEBI regulations [sections 194 and 195].
d) Requirement of approval of Central Government for Managerial remuneration above prescribed limits to be replaced by approval through special resolution by shareholders in general meeting [sections 196 and 197].
e) Companies may give loans to entities in which directors are interested after passing special resolution and adhering to disclosure requirement [section 185].
f) Amendment of definitions of associate company and subsidiary company to ensure that ‘equity share capital’ is the basis for deciding holding-subsidiary relationship rather than “both equity and preference share capital” [section 2].
g) Rationalisation of penal provisions with reduced liability for procedural and technical defaults. Penal provisions for small companies and One Person Companies to be reduced [various sections].
h) Auditor reporting on internal financial controls to be restricted with regard to financial statements [section 143].
i) Frauds involving an amount less than Rupees 10 lakhs to be compoundable offences [section 447].
j) Reducing requirement for maintaining deposit repayment reserve account from 15% each for two years to 20% during the maturing year [section 73].
k) Test of materiality to be introduced for pecuniary interest for testing independence of Independent Directors [section 149].
l) Recognition of the concept of beneficial owner of a company proposed in the Act. Register of beneficial owners to be maintained by a company, and filed with the Registrar. [Section 90].
m) Re-opening of accounts to be limited to 8 years [section 130].
n) Requirement for annual ratification of appointment/continuance of auditor by members to be removed [section 139].
o) Provisions relating to Corporate Social Responsibility to bring greater clarity [section 135].
CHANGES IN KEY DEFINITIONS
Let us now consider a few important amendments made by the Act in the definitions. In total, 14 Definitions have been amended. I am discussing major amendments hereunder.
I. Associate Company – Section 2 (6)
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Section before Amendment
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After Amendment
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Remarks
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For the purposes of this clause, ?significant influence
means control of at least twenty per cent of total
share capital, or of business decisions under an agreement;
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For the purpose of this clause—
(a) the expression “significant influence”
means control of at least twenty percent, of total voting power, or
control of or participation in business decisions under an agreement;
(b) the expression “joint venture” means a
joint arrangement whereby the parties that have joint control of the
arrangement have rights to the net assets of the arrangement;’
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The definition is made more specific from existing percentage
of share capital to percentage of total voting power.
Latter portion of the Explanation is amended from control
of business decisions under an agreement to “or control of
or participation in business decisions under an agreement.”
However, a joint venture is defined but joint
arrangement is still not defined.
Probable Impact would be –
? Total
voting power to be referred to;
? Control
determined through total voting power only and not by capital
? Agreement
is essential element to establish control through participation
Presently an Associate Company is a related party of
Investor. However, for Associate Company, Investor was not a related party
(i.e. Converse was not true). This anomaly is sought to be removed by
amending Section 2(76) to include an investing company or the venturer of the
company as related party of an investee i.e. an Associate;
(For more details please refer amendment to section
2(76) below).
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Definition of Associate Company in clause 6 of section 2 is amended so as to substitute existing explanation as under:
GENESIS OF THIS AMENDMENT:
In fact, at the time of representations before Standing Committee, various stake holders had suggested that the words “control of or participation in business decisions under an agreement” from the explanation may be deleted.
The Ministry of Corporate affairs however in response suggested3 as under:
“Various innovative and complex instruments are being used by business entities to exercise control or significant influence over other entities. It is felt that in order to cover various situations including through issue of instruments referred to above through which companies may exercise significant influence over other companies, the phrase “or control of or participation in business decisions under an agreement” needs to be retained in the explanation. “
Suggestion of MCA was accepted and that of the stakeholders rejected. However, in the process, this definition of Significant Influence has undergone a change to incorporate even participation in business decisions under an agreement.
II. Financial Year – Section 2(41), Change of Financial Year in the case of Associate Company of a Company incorporated outside India
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Section before Amendment
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After Amendment
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Remarks
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First Proviso:
Provided
that on an application made by a company or body corporate, which is a
holding company or a subsidiary of a company incorporated outside India and
is required to follow a different financial year for consolidation of its
accounts outside India, the Tribunal may, if it is satisfied, allow any
period as its financial year, whether or not that period is a year:
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“Provided
that on an application made by a company or body corporate, which is a
holding company or a subsidiary or associate company of a company
incorporated outside India and is required to follow a different financial
year for consolidation of its accounts outside India, the Tribunal may, if it
is satisfied, allow any period as its financial year, whether or not that
period is a year.”
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Post
Amendment, even an Associate Company of a company incorporated outside India
can apply to the Tribunal for a different financial year.
This
amendment will facilitate ease of doing business.
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3 37th Report of the Standing Committee on Finance dated 01-12-2016 Para 2.4
III. Section 2(46), Holding Company
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Section before Amendment
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After Amendment
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Remark
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?holding company, in relation to one or more other
companies, means a company of which such companies are subsidiary companies;
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Explanation—For the purposes of this clause, the
expression “company” includes anybody corporate
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Presently Body corporate is not included in the
definition of Holding Company.
This amendment has far reaching implications for
ascertaining the status of the Subsidiary company as to whether it is Public
or Private. For the said purpose, one will have to ascertain the status of
Body Corporate. (Definition of Public Company u/s. 2(71) may be referred.)
Henceforth, Subsidiary Companies who would otherwise be
a Small Company, will now have to ascertain whether they continue to be so,
based on the status of their holding company (body corporate) (Refer section
2(85) of the Companies Act)
A body corporate, which may earlier be excluded from
Related Party Disclosure, will now be included as a related party.
For more details, please refer amendment to section
2(76) below.
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GENESIS OF THIS AMENDMENT:
The Stakeholders in their written memorandum suggested on this clause as under:-
“The proposed insertion should not take place in view of the “ease of doing business” in Indian Companies.”
The Ministry responded as under:
“Attention is invited to section 4 of the erstwhile Companies Act, 1956, wherein the proposed explanation was applicable for both the terms ‘holding company’ and ‘subsidiary company’. The intention behind the change in section 2(46) is to bring harmony between provisions of section 2(87) and 2(46) of the Bill. It goes without saying that overseas holding companies will have to comply with the provisions of the jurisdictions in which these are incorporated. However, it would be appropriate to have this provision to ensure that transactions entered with overseas holding companies are carried out with adequate disclosures and thus any abuse is avoided. The suggestion, therefore, may not be considered.”
The Committee, while endorsing the view of the Ministry, recommended that the proposed amendment in Explanation to Clause 2(v) relating to clause (46) of the Companies Act, 2013 on definition of “holding company” may be retained in order to ensure adequate disclosure in regard to transactions entered with overseas holding companies.
IV. Section 2(49), Interested Director
Interested director was defined u/s. 2(49) as under:
“interested director” means a director who is in any way, whether by himself or through any of his relatives or firm, body corporate or other association of individuals in which he or any of his relatives is a partner, director or a member, interested in a contract or arrangement, or proposed contract or arrangement, entered into or to be entered into by or on behalf of a company;
The term interested director was relevant for the purposes of section 174 (Quorum), 184 (Disclosure of interest by director) and section 189 (Register of contracts or arrangements in which directors are interested).Unfortunately, definition of interested director was very wide and leading to the confusion as to which definition is to be used.
FAQs published by ICSI in the year 2014 sought to answer the question but that too with a caution. (Refer last two lines in reply to the question)
Question and reply reads as under:
Q. Section 2(49) defines the term ‘interested directors’ whereas at various sections reference to section 184 is drawn to mean/define interested director. Section 2(49) is wider than section 184 leading to confusion – which definition should be applied?
Ans. Section 2(49) of the Companies Act, 2013 defines interested director as a director who is in any way, whether by himself or through any of his relatives or firm, body corporate or other association of individuals in which he or any of his relatives is a partner, director or a member, interested in a contract or arrangement, or proposed contract or arrangement, entered into or to be entered into by or on behalf of a company;
Section 184 (2) provides that every director of a company who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement or proposed contract or arrangement entered into or to be
entered into—
(a) with a body corporate in which such director or such director in association with any other director, holds more than two per cent. shareholding of that body corporate, or is a promoter, manager, Chief Executive Officer of that body corporate; or
(b) with a firm or other entity in which, such director is a partner, owner or member, as the case may be,
shall disclose the nature of his concern or interest at the meeting of the Board in which the contract or arrangement is discussed and shall not participate in such meeting.
Wherever the term ‘interested director’ appears in the Act and the Rules thereon, read sections 2(49) and 184 together.
Section 2(49) is now deleted and thus confusion in the term is sought to be avoided.
V. Section 2(51), Key Managerial Personnel (KMP)
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Section before Amendment
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After Amendment
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Remarks
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“Key
managerial personnel” in relation to a company, means—
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“Key
managerial personnel” in relation
to a company, means—
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This
change in the definition now enables Companies to designate whole time
employees as KMP besides the four designation based categories.
This
is an enabling provision.
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(i)
the Chief Executive Officer or the managing director or the manager;
(ii)
the company secretary;
(iii)
the whole-time director;
(iv)
the Chief Financial Officer; and
(v)
Such other officer as may be prescribed.
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(i)
the Chief Executive Officer or the managing director or the manager;
(ii)
the company secretary;
(iii)
the whole-time director;
(iv)
the Chief Financial Officer;
(v) such other officer, not more than one level below the
directors who is in whole-time employment, designated as key managerial
personnel by the Board; and
(vi)
such other officer as may be prescribed
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VI. Section 2(57), Net Worth
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Section before Amendment
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After Amendment
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Remark
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“net worth” means
the aggregate value of the paid-up share capital and all reserves created out
of the profits and securities premium account, after deducting the aggregate
value of the accumulated losses, deferred expenditure and miscellaneous
expenditure not written off, as per the audited balance sheet, but does not
include reserves created out of revaluation of assets, write-back of
depreciation and amalgamation
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net worth” means
the aggregate value of the paid-up share capital and all reserves created out
of the profits, securities premium account and
debit or credit balance of profit and loss account, after deducting
the aggregate value of the accumulated losses, deferred expenditure and
miscellaneous expenditure not written off, as per the audited balance sheet,
but does not include reserves created out of revaluation of assets,
write-back of depreciation and amalgamation.
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In
absence of clarity, one was not clear about treatment to be given to Debit or
credit Balance in Profit and Loss Account. Unfortunately, while introducing
this amendment, transition to Ind AS of several companies is lost sight of.
It would have been in the fitness of things, if clarification on the
components of Other Comprehensive Income (OCI) was also given. Especially
this assumes importance because OCI includes unrealized gains too.
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VII. Section 2(71), Public company
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Section before Amendment
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After Amendment
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Remark
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Public company means a company which— (a) is not a private company;
(b) has a minimum paid-up share capital as may be prescribed: …………
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“(a) is not a private company; and”
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The word “and” is added so as to clarify that cumulative conditions
are to be observed. This provision is more clarificatory in nature.
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VIII. Section 2(76) Related Party
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Section before Amendment
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After Amendment
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Remark
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(viii)
any company which is—
(A)
a holding, subsidiary or an associate company of such company; or
(B)
a subsidiary of a holding company to which it is also a subsidiary;
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“(viii)
anybody corporate which is—
A.
a holding, subsidiary or an associate company of such company;
B.
a subsidiary of a holding company to which it is also a subsidiary; or
C.
an investing company or the venturer of the company;
Explanation — For the purpose of this clause, “the investing
company or the venturer of a company” means a body corporate whose investment
in the company would result in the company becoming an associate company of
the body corporate.
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“Company”
is replaced with “body corporate” and investing companies/ venturer are also
added to the list.
The
amended Explanation has expanded the scope of the definition of related
parties.
The
reference to body corporate is consequent upon inclusion of body corporate in
the definition of holding company.
Refer
discussions above for impact on Associate Company [Section 2(6)] and Holding
Company [Section 2(46)].
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GENESIS OF THIS AMENDMENT:
At the time of representations to the Committee, MCA had suggested as under:
Suggestions were received by the Committee, pointing out that the term “related party”, as currently defined, used the word ‘company’ in Section 2(76)(viii), meaning thereby that those entities that were incorporated in India would come in the purview of the definition. This resulted in the impression that companies incorporated outside India (such as holding/ subsidiary/ associate / fellow subsidiary of an Indian company) were excluded from the purview of related party of an Indian company. It noted that this would be unintentional and would seriously affect the compliance requirements of related parties under the Act. The Committee, therefore, recommended that section 2 (76) (viii) be amended to substitute ‘company’ with ‘body corporate’
IX.Section 2(87) Subsidiary Company
- Sub section is amended to the effect that a company will be treated as subsidiary in case the holding company exercises or controls more than 50% of the total voting power either of its own or together with one or more of its subsidiary companies. Currently, the Act provides for exercise or control of more than half of the total share capital (Which included Preference Capital). Henceforth, holding of Preference Shares only will not be considered for control and instead only voting power will be considered.
- Preference shares, which is often a quasi loan is rightly excluded. For example, optionally convertible redeemable preference shares are effectively a loan and the option exists only for the purpose of security of the lender.
- This change also makes the definition consistent with AS 21 – Consolidated Financial Statements. However, the change falls short of its coherence with the Ind AS.
- As regards layers of Subsidiaries, the proviso to Section 2(87) remains and was notified on 20th September 2017.
•It will be interesting to see what happened after introduction of Companies Amendment Bill 2016 as regards the proviso referred to above.
•The Companies Act 2013 permits Central Government to impose a cap on layers of subsidiaries a company can have. Companies Amendment Bill 2016 removed the restrictions on number of layers of a subsidiary company. Standing Committee had no recommendation on this issue. Finally (Quietly?) on 5th April 2017, amendments were circulated which restored the position which existed in the Companies Act 2013. (Source Notice of Amendments, The Companies (Amendment) Bill, 2016, Lok Sabha, April 5, 2017 http://www.prsindia.org/uploads/media/Companies,%202016/Notice%20of%20Amendments,%20Apr%205,%202017.pdf)
•One may now refer to the Companies (Restriction on number of layers) Rules, 2017 which have become effective from 20th September, 2017.
X.Section 2(91) Turnover
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Existing Definition
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As Amended
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Remark
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“turnover”
means the aggregate value of the realization of amount made from the
sale, supply or distribution of goods or on account of services rendered, or
both, by the company during a financial year;
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“turnover”
means the gross amount of revenue recognised in the profit and loss account
from the sale, supply, or distribution of goods or on account of services
rendered, or both, by a company during a financial year;
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Previously
“turnover” was indicative of realisations made.
Now the shift is to amount recognised in Profit and Loss
Account. The concept of turnover is important since several obligations of
the company are linked to the turnover.
Interestingly
amended definition now refers as “a company “instead of “the company” before
amendment.
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CONCLUSION
The Standing Committee Report states that more than two thousand suggestions were received from the stake holders4. Additionally, responses of CLC and views of MCA were considered in finally amending the Act. The amendments also include inputs given by Standing Committee. This entire process, having taken massive amount of interactions and deliberations over a period of about 2 years from 2016 has resulted in the Companies (Amendment) Act, 2017 which seems like a largely cohesive document as far as definitions are concerned. _
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4 37th Report of the Standing Committee on Finance dated 01-12-2016
Para 1.8
