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THE COMPANIES (AMENDMENT) ACT, 2015
1.
INTRODUCTION
The Companies (Amendment) Bill, 2014, a bill to amend the Companies Act, 2013 (“Act”), has now been
passed by both the houses of the Parliament and has received the assent of the President of India on May
25, 2015 making it the Companies (Amendment) Act, 2015 (“Amendment Act”). The provisions of the
Amendment Act have come into force from May 29, 2015 (except Section 13 and 14 of the Amendment Act
which will come into force on such date as will be notified by the Central Government).
The Amendment Act has been introduced with the following legislative intent:
2.
(a)
Ease of doing business;
(b)
Removal of drafting errors from the Act;
(c)
Correction of oversight errors; and
(d)
Removal of provisions which are ex-facto oppressive to an environment to do business.
ANALYSIS AND IMPACT OF THE KEY AMENDMENTS
I.
Related Party Transactions (“RPTs”)
Section 297 of the erstwhile Companies Act, 1956 set out the requirement for procuring Central
Government approval for RPTs while the Act required a special resolution for RPTs where a shareholder
who was a related party was not allowed to vote on such special resolution. Now, the Amendment Act
further relaxes this provision and allows companies to enter into RPTs after passing an ordinary
resolution for the same. This will enable group companies in transacting inter se business. Further, the
requirement of shareholder’s approval in case of RPT between holding company and wholly owned
subsidiary (“WOS”) has been dispensed with. This exception was earlier present under the Companies
(Meetings of Board and its Powers) Rules, 2014 (“Rules”) and now has been incorporated in the
substantive law itself.
II.
Omnibus approval for RPTs
In addition to the amendment of allowing companies to undertake RPTs through an ordinary resolution,
the Amendment Act amends Section 177 whereby a new proviso to Section 177 (4) has been inserted
which reads as follows “provided that the Audit Committee may make omnibus approval for related
party transactions proposed to be entered into by the company, subject to such conditions as may be
prescribed.” Thus, for ease in doing business, now the audit committee will be empowered to give
omnibus approvals for related party transactions to be entered into by the company.
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This amendment seems to be in line with the provisions of the recently amended Clause 49 of the
Listing Agreement as regards omnibus approval of related party transactions by the audit committee
constituted under the Board of the company. This amendment may also result in defeating the
principles of healthy corporate governance practices to be followed by companies whereby they are
required to inform the shareholder of all pertinent details in relation to a related party transaction so as
to enable him to take an informed decision. The conditions for the omnibus approval are yet to be
notified and are expected to bring in more clarity on the subject.
[Note: This provision has not yet been enforced.]
III.
Minimum Capital Requirement
The requirement for having a minimum paid-up capital of Rupees 1,00,000 for private limited
companies and Rupees 5,00,000 for public limited companies has now been done away with. This
amendment is expected to reduce registration costs for incorporation of new companies. However, the
minimum capital requirements generally acted as filters and, to an extent, ensured the formation of
companies for bona fide and genuine purposes. This amendment may now encourage formation of
bogus shell companies.
IV.
Loan to WOS
Section 185 of Act prohibits a company from:
i. advancing any loan, including a loan represented by a book debt, to its director or to any other
person in whom the said director is interested; and/or
ii. giving any guarantee or providing any security in connection with any loan taken by the director or
any other person in whom the director is interested.
Transactions in the nature of loans and guarantees between a holding company and its WOS were
exempted from the applicability of Section 185. This exemption was already provided for in the Rules
and now it has been incorporated in the substantive law itself.
V.
Restriction on inspection of Board Resolutions
Section 117 of the Act required a company to file certain specified resolutions with the Registrar of
Companies and permitted public inspection of such resolutions, thus raising concerns of breach of
confidentiality. This provision under the Act was not well received by the stakeholders. The Amendment
Act now inserts a new proviso to clause (g) of Section 117 of the Act, which states that “ provided that
no person shall be entitled under section 399 to inspect or obtain copies of such resolutions ” thus
ensuring confidentiality of such resolutions.
VI.
Common Seal
The Amendment Act has omitted the words ‘and a common seal’ appearing under Section 9 of the Act
which means it shall not be mandatory for a company to have a common seal. This is not a major
2
change yet it is a welcome change. In the era of digital signatures and documents being maintained in
the electronic form, common seal was an obsolete requirement of the law.
VII.
Deposits
Section 76(A) has been inserted by the Amendment Act whereby a minimum penalty of Rs. 1 Crore is
sought to be imposed on companies which “accept or invite or allow or cause any other person to
accept or invite on its behalf” deposit in contravention of provisions of Section 73 of the Act or “ fails to
repay the deposit and interest thereon”. This insertion seeks to protect the interests of the funds of the
investors and imposes a harsh fine and punishment on the company as well as every other officer who
is in default in relation to such non-compliance.
VIII.
No dividend, without depreciation
The Companies (Declaration and Payment of Dividend) Rules, 2014 were amended by the Companies
(Declaration and Payment of Dividend) Amendment Rules, 2014 whereby companies were prohibited
from declaring dividend unless the previous year or years’ losses and unabsorbed depreciation which
had not been provided for by the company were set off against current year’s profits. This provision
has been incorporated in the substantive law by amendment of Section 123 of the Act. This is a
welcome move for ensuring financial health of a company.
IX.
Fraud Reporting-threshold limits
The Act required an auditor, who believes that an offence involving a fraud is being or has been
committed in a company, to report the same to the Central Government. The existing Section 143 (12)
has been substituted by a new clause which stipulates that if the auditor, during the course of his
audit, discovers or suspects a fraud, he has to report it to the Central Government when the amount of
the fraud crosses the threshold limit to be prescribed by the Central Government and in respect of
other frauds/suspected frauds below the threshold limit, the same needs to be reported by the auditor
to the audit committee constituted under the Board of the company and in cases where the company
does not have an audit committee, the same may be reported to the Board of the company. Whether
or not the amendment is a welcome change can be more affirmatively ascertained upon notification of
the threshold limits.
[Note: This provision has not yet been enforced.]
X.
Special Courts
The Amendment Act amends the provisions of Section 435 whereby the Special Courts constituted
under the Act shall try only those offences which are punishable by an imprisonment of two years or
more. All other offences may be tried by the Metropolitan Magistrate or Judicial Magistrate First Class.
XI.
Bail restrictions to apply only for offence relating to fraud.
Section 212 of the Act specified the offences under specific Sections of the Act which attracted the
punishment for fraud under Section 447 and which were to be cognizable offences and in respect of
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which, bail restrictions as specified in Section 212 (6) (i) and (ii) would apply. The Amendment Act now
widens the ambit of Section 212 to remove the specific list of offences and specifies that any offence
which falls within the definition of ‘fraud’ under Section 447 shall be considered a cognizable offence
and the bail restrictions bail restrictions as specified in Section 212 (6) (i) and (ii) would apply to any
such offence.
3.
SECTION-WISE SUMMARY OF AMENDMENTS
#
SECTION
1.
Section 2 (68) and
i.
The requirement for minimum paid-up share capital omitted.
AMENDMENT SUMMARY
(71),
ii.
The restrictions on commencement of business or exercising
Section 11
2.
borrowing powers by a company have been omitted.
Sections 9,
Common seal made optional and consequential changes for authorisation
Section 12,
for execution of documents inserted.
Section 22,
Section 46
Section 223
3.
4.
Insertion
of
new
Punishment provided for deposits accepted in violation of the provisions
Section 76A
of the Act.
Section 117 (3) (g)
Public inspection of Board resolutions filed with the Registrar of
Companies prohibited.
5.
Section 123 (1)
Provisions included for writing off past losses/depreciation before
declaring dividend for the year.
6.
Section 124 (6)
Shares will not be transferred in the name of Investor Education and
Protection Fund in the event any dividend has been paid or claimed for
any year(s) during the period of seven consecutive years.
7.
Section 134 (3)
Enabling provisions inserted to prescribe thresholds beyond which fraud
Section 143 (12)
is to be reported to the Central Government (below the threshold, it will
be reported to the Audit Committee) inserted. Disclosures for the latter
category also to be made in the Board's Report.
[Note: This provision has not yet been enforced.]
8.
Section 177(4) (iv)
Audit Committee empowered to give omnibus approvals for related party
transactions on annual basis.
[Note: This provision has not yet been enforced.]
9.
Section 185
Exemption provided in respect of transactions involving:
i.
Loans to wholly owned subsidiaries and guarantees in respect of
loans availed by wholly owned subsidiaries; and
ii.
Guarantees/securities on loans taken from banks/financial
institutions by subsidiaries.
10.
Section
188
188(3)
(1)
‘Special resolution’ replaced with ‘ordinary resolution’ for approval of
related party transactions by non-related shareholders.
Related party transactions between holding companies and wholly owned
subsidiaries (WOS) exempt from the requirement of shareholders’
approval.
11.
Section 212 (6)
Bail restrictions to apply in respect of all offences which are liable for
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action under Section 447 viz. Fraud.
12.
Section 248
One of the grounds on which the Registrar could remove the name of a
company was the subscribers to the Memorandum not paying the
subscription amount within 180 days, has been deleted.
13.
Section 419 (4)
Cases pertaining to winding up of companies cannot be heard by Special
Benches constituted by the President of the National Company Law
Tribunal.
14.
15.
Section 435
Special Courts to try only offences carrying imprisonment of two years or
Section 436
more.
Section 462
The procedure for laying draft notifications granting exemptions to
various classes of companies or modifying provisions of the Act in
Parliament amended.
The Amendment Act is a welcome initiative towards the objective facilitating ease in doing business.
However, the Amendment Act focuses on correcting anomalies and oversight errors rather than introducing
any major change. Contrary to expectations, the Amendment Act does not introduce exemptions for private
limited companies from applicability of certain provisions of the Act. Also, the dilution of conditions for
undertaking related party transactions might impact principles of good corporate governance.
The Ministry of Corporate Affairs continues to issue clarifications to the Act and the rules promulgated
thereunder from time to time to remove various difficulties. Keeping in line with its object of facilitating
ease in doing business, the Central Government should come out with a substantial and consolidated
amendment of the Act instead of issuing piecemeal amendments /clarifications.
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5 merely to
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