Companies (Amendment) Bill,
2016
Vinod Kothari
Vinod Kothari & Company
1006-1009 Krishna Building
224 AJC Bose Road
Kolkata – 700017
Phone 033-22811276/ 22813742/7715
B-49, Panchsheel Enclave
New Delhi- 110017
Phone 011 41315340
E- mail- [email protected]
E-mail – [email protected]
www.vinodkothari.com
Email: [email protected]
601-C, Neelkanth
98 Marine Drive
Mumbai 400002
Phone 022-22817427
E-mail: [email protected]
2
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Kothari & Company.
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3
About Us
• Vinod
Kothari
Company,
&
▫ Based in Kolkata, Mumbai,
Delhi
• We are a team of
consultants, advisors &
qualified
professionals
having over 25 years of
practice.
Our Organization’s Credo:
Focus on capabilities; opportunities follow
4
Major areas of coverage
• Curative changes to iron out
creases of existing law
• Related party transactions
• Loans and investments
• Managerial remuneration
• Private placement, public
offers
• Objects of companies and
short-form MoA
• Changes
pertaining
to
subsidiaries, associates
• Changes
pertaining
to
auditors
• Changes
pertaining
to
accounts
• Declaration of dividend
• Small companies
• Enabling issue of shares at a
discount to lenders
• Amendments pertaining to
charges
• Declaration
of
beneficial
interest
• General meetings of companies
• Facilitating foreign companies
• Registration
of
firms
as
companies
• NCLT changes
• Prosecutions, fines, and special
courts
5
Highlights
• Most of the changes are to simplify, soften the
provisions of the Act
• Most of the changes are based on
recommendations of the CLC
▫ Several recommendations of CLC may be carried
out via Rules
• What will be the effective date
▫ For curative/declaratory amendments, the
amendments will date back to the date of the
original law
▫ For substantive amendments, the date of the
Amendment Act being made effective
6
Curative amendments
7
Amendments to iron out creases in
drafting or construction
• Several of the proposed amendments are
corrective, curative
▫ To fill gaps left by earlier law
▫ To make changes made by RoD Orders a part of
the law
▫ To bring some changes from the Rules to the
statute
▫ To correct inept drafting
8
Corrective amendments
• Sec. 2 (30)
▫ Debenture to exclude money market instruments, and such
other instruments as may be notified in consultation with
the RBI
 Money market instruments are governed by Chapter III-D of
the RBI Act
 Tenure upto 12 months
 Therefore, controversy about commercial paper not being
debenture gets resolved.
 Additionally, upto 12 month debentures are also excluded from
the definition
 Therefore, no DRR, or any other compliance with sec. 71
required in such cases
 However, will sec. 42 apply to short-term debentures?
 The word “security” in sec. 2 (81) refers to SCRA. SCRA
definition includes any transferable securities.
▫ Distinction between transferable security, and negotiable security
9
Corrective amendments -2
• Sec. 2 (57)
▫ Definition of “net worth” to be amended to add
credit balance in P/l account
 The amendment should have actually been done in
the definition of “free reserves”
 That would automatically reflect in the net worth
definition as well
▫ Unfortunately, definition of free reserves remains
the same as before
 Hence, doubts arise for the purpose of sec 180 (1)
(c), sec 186 etc whether surplus in p/l account to be
counted
Related party transactions
11
•
Several changes on related party
transactions
RPT continues to be the hotbed of legislative action
▫ Two RoD orders have amended definition in sec 2 (76)
▫ Amendment Act, 2015
 replaced special resolution requirement by Ordinary resolution
 Provided for omnibus approvals by audit committee
▫ Several circulars of the MCA
• Bill, 2016 proposes several changes
▫ Definition of “interested director” in sec. 2 (49) to be deleted
▫ Definition of “related party” becomes commutative in case of
investor and associate; joint venturer and joint venture
▫ Carve out in sec. 184 (5) to be extended to bodies corporate
▫ Process of ratification of contracts by audit committee under sec
177 (4) (iv); puts focus on contracts not covered by sec. 188
▫ Purported carve out for voting by related parties on general
meeting resolution puts a unique stress on numerical minority
 At the same time, it becomes clear that the bar on voting will be for
every related party, and not just the party to the contract
12
Definition of “related party”
• Replacement of the word ‘company’ with the words ‘body
corporate’ u/s 2(76)(viii)▫ the term ‘associate company’ cannot include associates
incorporated outside India since the company means a company
incorporated under Act, 2013 or any previous company law.
• Inclusion of investor in respect of an associate company:
▫ Currently, in case of an investor-associate, the down-stream
entity is related party, but upstream entity is not.
▫ Proposed addition of “investing company”
 Once again, the word “investing company” may be limited to
Indian entities only
• Inclusion of ‘venturer of a company’ under the purview of
related party▫ The manner in which the sub-clause (C) has been worded may
lead to confusion that the fellow-venturer is also a related party.
13
Ratification of transactions by audit
committee
• Current law does not explicitly require prior approval of audit
committee for related party transactions
▫ However, with the insertion of omnibus approval, it was seeming as if
the approval was prior
▫ Now, Bill adds a provision for ratification; also providers for power of
audit committee to avoid transactions not pre-approved by it
• Bill proposes to add 3 more provisos below sec. 177 (4) (iv)
▫ First one was added by Cos (Amendment) Act 2015 to provide for
omnibus approval
▫ Proviso 2: in case of transactions not covered by sec 188, where audit
committee does not approve transaction, it shall make recommendation
to the Board
▫ Proviso 3: provides power of the audit committee to ratify transactions
upto Rs 1 crore value, or else avoid them
▫ Proviso 4: provides for exemption for transactions with WOS, only for
transactions not covered by sec. 188
• .
14
Second proviso to sec 177 (4) (iv)
• Mandating Audit Committee to submit its recommendation to the
Board such transactions, other than transactions referred to in
section 188, where Audit Committee does not approve the same:
▫ This creates a new board reference point altogether
▫ Existing law – transactions not covered by sec. 188 are not required to go
to the board at all
▫ They come to the audit committee
 Audit committee may approve
 May disapprove
▫ There was no scope for the board to approve something not approved by
the audit committee
 In matters of RPTs, for logical reasons, audit committee had the upper
hand
• The proposed amendment:
▫ Widens the scope for board review, including for transactions not
covered by sec. 188, if not approved by the Board
▫ Seems to suggest that the Board may even approve transactions not
approved by the audit committee
15
3rd proviso to sec. 177 (4) (iv)
• Lays several things
▫ Seems limited to transactions upto Rs 1 crore only
▫ Transaction
 Entered into without prior approval
 Which should include prior omnibus approval as well
 Not ratified by the audit committee
 May be avoided by the audit committee at its option
 And
 The transaction is with a related party (should actually read as relative) to a
director, or is approved by any other director
 Such director shall indemnify the company for a loss incurred by it
• Power to ratify transactions upto Rs 1 crore
 Provision has contradiction with Rule 6A which empowers audit
committee to grant omnibus approval for transactions upto Rs 1 crore
• Complete legislative gap for transactions exceeding Rs 1 crore
▫ These are the transactions not covered by omnibus approval
▫ If not ratified by the audit committee
▫ Even the compensatory obligation of the director not provided for.
16
4th provision to sec 177 (4) (iv)
• Provides for exemption in case of transactions not covered by sec. 188, if entered into with
WOS
• Interestingly:
▫
▫
▫
Listing Regulations completely exempt transactions with WOS
Sec 188 provides exemption from seeking shareholders’ approval in case of transactions
between holding company and WOS
Sec 177 (4) (iv) had no exemption whatsoever
 Underlying rationale is that the concerns of base erosion and profit shifting do not become any
less relevant in case of transactions with WOS.
 Therefore, there is no case for not routing transactions through audit committee
• The scenario that now emerges for transactions with WOS:
▫
Transactions covered by sec. 188
▫
Transactions not covered by sec. 188
 Audit committee approval required u/s 177 (4) (iv); not required under Listing Regulations
 Board approval required if not in ordinary course of business or arms length
 Shareholders’ approval not required
 Audit Committee approval not required u/s 177 (4) (iv)
 Board approval not required, as not covered by sec. 188
 Shareholders’ approval not required
• Transactions not covered by sec 188 are financial transactions; may involve substantial
movement of resources.
▫
Exemption from audit committee approval may not be proper
17
Amendment in sec. 188
• Bill proposes to add a proviso below the second proviso to sec. 188 (1)
▫ Interestingly, there was a 4th proviso added by Amendment Act 2015 to provide
carve out for shareholders’ approval in case of transactions with WOS
▫ There is a proviso below the second proviso proposed to be added by the Bill
 There will be total of 5 provisos post this insertion
• Makes shareholders’ approval inapplicable where 90% of members, in
number, are relatives of promoters, or are related parties
▫ Bar on voting is applicable only to related parties
▫ By definition, relatives of promoters are not related parties at all. Hence, they are
not barred from voting anyway.
▫ Also, the proviso does not recognise promoters themselves:
 If counts only relatives of promoters
▫ However, if together with related parties, promoters’ relatives, are numerically
90% or more of members, then bar on related parties voting does not apply
• This brings a very significant change
▫ MCA circular 30/2014 becomes meaningless
• So, as in case of the listing agreement, all related parties will refrain from
voting
▫ Unless the case falls in the 90% numerical majority case
18
Numerical minority of shareholders gets the
power to block resolutions
• Bill proposes a carve out by exempting companies in which
ninety percent or more members, in numbers, are relatives
of promoters or are related parties, from seeking
shareholders’ approval.
▫ If shareholding pattern of A Ltd comprises of B Ltd holding 91%
of paid up capital and 100 shareholders holding remaining 9% of
paid up capital In this case, since A Ltd does not hold majority of shares in
numbers, the ones holding 9% of paid up capital will decide the
fate of the RPTs. If they choose to block the RPTs, there is no way
to get the same approved unless the RPT is in ordinary course of
business and on arm’s length basis
▫ If shareholding pattern of X Ltd comprises of Mr. Y (promoter)
along with one of his relative holding 91% of paid up capital and Z
Ltd (an unrelated entity) holding 9% of the paid up capital.
 In the instant case, Mr. Y and his relative need not abstain from
voting on the transaction as they hold majority of shares in
numbers.
19
Position for different companies
• Private companies
▫ Bar on related party voting does not apply
• Government companies
▫ Transactions between 2 government companies
exempted.
• Public, listed companies
▫ If going under sec. 188, related parties shall not
vote, unless covered by the numerical majority
threshold
▫ If going under Listing Regulations, all related
parties shall not vote
20
Sec 188- in brief
• Definition is specific
▫ Includes family members of HUF
• Related party transactions under the law are subject to serious
restraint
• Most transactions that a company may have with “related
parties” require approval of Board
▫ Directors are required to observe compliance u/s 184(2) with regard to
disclosure of interest and non- participation in a particular discussion.
• In the general meeting the member who is a related party shall
not vote if he is related party to the context of a particular
transaction
▫ Bill, 2016 proposes a carve out by exempting companies in which 90% or
more members, in numbers, are relatives of promoters or are related
parties, from complying with the said requirements.
21
Sec 177(iv)- in brief
• All transactions with related parties though not covered by section 188, shall
require approval of Audit Committee in terms of sec 177.
▫ Bill, 2016 proposes mandating Audit Committees to submit its
recommendation to the Board such transactions, other than transactions
referred to in section 188, where Audit Committee does not approve the
same.
▫ Seems to have a vertical distinction made in relation to transactions
covered under section 188 and those not covered under the same.
• Bill, 2016 proposes power to ratify transactions by Audit Committee to be
granted only for any transaction involving any amount not exceeding 1 crore
rupees.
▫ This seems to be contradicting with the provisions relating to omnibus
approvals, as provided under Rule 6A of MBP Rules which provided
deemed omnibus approval to transactions of aforesaid amount.
▫ RPTs exceeding value of Rs. 1 crores, not placed before Audit Committee
for prior/ omnibus approval remains unanswered
Scope of approval of Audit
Committee & shareholders after
Bill, 2016
23
Scope of Audit Committee (AC) approval under Act, 2013
Yes
Nature of
approval
granted
Whether matter placed before AC for
prior approval?
Prior approval
for specific
transaction
For
sec
188
transa
ction
Recommend
to Board if
not in OC or
not on AL
basis
Omnibus
Approval
For other
than sec
188
transaction
Other than
sec 188
transaction
177 (4) N.A
For
transaction
between HC
& WOS
For foreseen
transactions
meeting
criteria for
granting
Omnibus
Approval
Transaction
u/s 188
AC approval shall apply in
view of fourth proviso to
section 177 (4) (iv)
Disapproved
by AC
Deemed
approval for
unforeseen
transaction not
exceeding 1
crore rupees
Sec 188
transaction
Board can
consider u/s
177 (8)
No
Value of
transaction
Not
exceeding
Rs. 1
crore
Exceeding
Rs. 1 crore
AC may ratify
within 3 months or
the transaction
shall be voidable
at the option of the
AC*
?? No
clarity on
the same
Other than
Sec 188
transaction
AC will recommend to Board
pursuant to second proviso to
section 177 (4) (iv)
* May require director or employee to compensate if the contract or arrangement is with a related party to any director, or is authorised by any other director, the
directors concerned shall indemnify the company against any loss incurred by it.
24
Shareholder Approval under Act, 2013
No
Whether the RPT is not in ordinary
course of business (OC) or not on arm’s
length basis (AL) exceeding the limits
specified under Rule 15?
Provisions not
applicable
Yes
Whether Shareholders approached for
prior approval by a resolution or
ratification within 3 months of entering in
the transaction?
Yes
Whether 90% or more
members, in numbers are
held by relatives of promoters
or are related parties
Yes
Related parties need
not abstain from
voting on the
resolution
May approve
the
transaction
No
Voidable at
the option of
shareholders
No
Related parties to
abstain from voting
on the resolution
May
disapprove
the
transaction
Shareholders may choose
to ratify & not avoid the
RPT
Avoid the
transactions
May require director/employee to
compensate*
*if the contract or arrangement is with a related party to any director, or is authorised by any other director, the directors concerned shall
indemnify the company against any loss incurred by it.
Loans to Directors and Directors’
entities
26
Quick snapshot
•
•
•
•
Substitution of entire existing provisions
Partly prohibitory and partly restrictive
Aligning of interest rate with Section 186(7)
Directors of subsidiary, JV, associate companies
still excluded
27
Prohibition u/s 185(1)
• A company shall not▫ directly or indirectly
▫ advance any loan including any loan represented by
book debt to; or
▫ give any guarantee or provide any security in connection
with a loan availed by
 any director of the company, its holding company
 any partner or relative of above
 firm in which the above director or relative is partner
28
Restriction u/s 185(2)
• A company may by passing a special resolution and
on the condition of utilisation of money in principal
business activities▫ directly or indirectly
▫ advance any loan including any loan represented by
book debt to; or
▫ give any guarantee or provide any security in
connection with a loan availed by
 Any person in whom any of the director of the company is
interested
29
Person in whom director is interested
any private company of which any such director is a director or member
any body corporate at a general meeting of which not less than twenty five per
cent. of the total voting power may be exercised or controlled by any such
director, or by two or more such directors, together
any body corporate, the Board of directors, managing director or manager,
whereof is accustomed to act in accordance with the directions or instructions
of the Board, or of any director or directors, of the lending company
30
Exemption provided
• Exemption to :
▫ Loan
 to MD/WTD as part conditions of service to all
employees or pursuant to a scheme approved by an SR
 is in the ordinary course of business where interest
charged not less than prevailing yield of G sec of 1 year, 3
year, 5 year or 10 year
 made by holding company to WOS
 WOS to utilise money in its principal business activities
▫ Guarantee or security provided
 by holding company in respect of loan made to WOS or
loan made by bank or FIs to subsidiaries
 Subsidiary to utilise money in its principal business activities
31
Overview
Loans to Directors
[Section 185]
Are you private
company
Are you public
company
Does your share capital includes investment from any body
corporate
2.
Does your borrowings from Banks/Fis/Body corporate exceeds
lower of the following –
A. Twice of paid up capital
B. Fifty crore
3. Does default for repayment for such borrowings exist on date of
transaction
Are you govt.
company
1.
Yes – Prohibited
No - Allowed
Are you advancing loan to director or
giving guarantee or providing any
security in connection with any loan
taken by -
32
a) any director of company, or of a company which is its
holding company or any partner or relative of any such director
b) any firm in which any such director or relative is a partner
Is that any of the following a) Loan to MD/WTD
i. as part of conditions of service extended by company to all employees
ii. pursuant to any scheme approved by the members by a special resolution
b) loan or guarantee given or securities given for due repayment of any loan
by company in its ordinary course of business and interest is charged at a
rate not less than the rate of prevailing yield of 1Year/3Year/5year/10Year
Government security closest to the tenor of the loan
c) any loan made by holding company to its WOS company or an
guarantee/security provided by holding in respect of any loan made to
subsidiary company provided loan is used by subsidiary for principal
business activity
d) any guarantee given or security provided by holding company in respect
of any loan made by any Bank or FI to its subsidiary company provided loan
is used by subsidiary for principal business activity
Allowed
"any person in whom any of the director of the company
is interested" means—
(a) any private company of which any such director is a
director or member;
(b) any body corporate at a general meeting of which not
less than twenty-five per cent. of the total voting power
may be exercised or controlled by any such director, or
by two or more such directors, together; or
(c) any body corporate, the Board of directors, managing
director or manager, whereof is accustomed to act in
accordance with the directions or instructions of the
Board, or of any director or directors, of the lending
company.
No
Yes
Yes
any person in whom any of the director of the
company is interested
No
Allowed
No
Yes
Are the conditions being satisfied (a) a special resolution is passed by the company in general
meeting : Provided that the explanatory statement to the
notice for the relevant general meeting shall disclose the full
particulars of the loans given, or guarantee given or security
provided and the purpose for which the loan or guarantee or
security is proposed to be utilised by the recipient of the loan
or guarantee or security and any other relevant fact; and
(b) the loans are utilised by the borrowing company for its
principal business activities.
Prohibited
Yes - Allowed
No - Prohibited
Allowed
Loans and investments
by companies
34
Quick snapshot- 1/2
• Provisions of investment through layers of investment
companies to be omitted.
• The insertion of an ‘explanation’ to clarify the exclusion of
employees from the requirement of the section
▫ Same as provided in MCA circular dated 10th March, 2015
• The provisions with respect to aggregation of loans and
investments for the purpose of calculating limit to be
provided.
▫ As provided in Rules
▫ However, the aggregation only includes past loans etc. made
to body corporate ignoring other person.
▫ Combined reading leads to a confusion
35
Quick snapshot -2/2
• Exemption from shareholders resolution to loan, guarantee security
provided to WOS and JVs and acquisition of securities of WOS
▫ As provided in the Rules
• Substitution of sub- section (11) to provide exemption inter alia to
▫ Exemption to banking companies, lending companies, insurance
companies, housing finance companies:
 Giving of loans or providing guarantees or securities
▫ Exemption to investment companies
 Loans as well as investments?
 Garbled language talks of “investment made in respect of investment or lending
activities
▫ The implication seems to be that if investments are acquired in connection with lending
activities, they get exempted
▫ The word “financing of industrial enterprises” comes again in sec. 186 (11)
 Most lending NBFCs will need to pass special resolutions to avoid the sectoin
• Definition of investment companies
▫ Either of asset or income criteria
 Note, RBI requires both income and asset criteria to be satisfied to be treated as an
NBFC
36
Position in case of NBFCs
• Lending companies
▫ Say, an NBFC has paid up capital Rs 40 crores, free reserves
Rs 60 crores, assets Rs 500 crores
 Has given loans worth Rs 300 crores.
 How much can the company invest?
• Investment companies
▫ Say, an NBFC has paid up capital Rs 40 crores, free reserves
Rs 60 crores, assets Rs 500 crores
 Has made investments worth Rs 300 crores.
 How much can the company lend?
• Any NBFC
▫ Say, an NBFC has paid up capital Rs 40 crores, free reserves
Rs 60 crores, assets Rs 500 crores
 Has given personal loans Rs 200 crores, and made investments
worth Rs 300 crores.
 How much can the company lend?
37
Exemptions provided
Loan, Guarantee, Security,
investment made
Investment made
Banking company
investment company
Insurance company
Rights issue u/s 62
HFCs
Rights issue by any body corporate
a company which is established with the object of
and engaged in the business of financing industrial
enterprises
NBFC whose principal business is acquisition o
securities
a company which is established with the object of
and engaged in the business of providing
infrastructure facility
Investment made in respect of
lending or investment activities
Public offers and Private
Placement
39
Public offers
• The disclosures required in offer documents will be
as per SEBI’s requirements
▫ SEBI is expected to freeze disclosure requirements and
reports in offer documents in consultation with the
MCA
▫ Until that is done, the disclosures as per ICDR
regulations shall apply
• Sec 35 amended to provide safe harbour to directors
in case of statements purporting to be made by an
expert
▫ Reasonable ground to believe that the expert had
competence on the matter
▫ Had not withdrawn his consent
40
Private placement: 1/2
Substitution of entire section
To provide specifically that private placement offer and
application shall not carry rights of renunciation.
Restriction on utilisation of application money till
allotment is made and return of allotment is filed with
ROC.
To enable companies to make more than one issue of
securities at any time to the identified persons under
this section.
Filing of record of offers to be dispensed with.
41
Other changes in private
placement and rights shares
• Sec 62 (1) (c ) to be amended to make it subject
to sec 42
• In case of rights shares, the rights offer
permitted to be sent through any mode having
proof of delivery
42
Quick Snapshot- 2/2
Time limit for filing return of allotment in PAS-3 to
be reduced to 15 days from 30 days from the date
Failure to file the above form to make promoters
and directors liable to a penalty for each default of
1000 rupees for each day subject to maximum 25
lakhs.
Penalty on promoters and directors for
contravention of section 42 to be amended as
amount raised through such offer or 2 crore,
whichever is lower. (Earlier it was amount involved
in the offer or 2 crore, higher)
43
Issue of shares at a discount
• Banks/lenders making use of SDR mechanism were
facing difficulty in converting their loans into shares
▫ The company being losses, obviously the net value of
the share was lower than par
▫ However, Companies Act forced the lenders to convert
shares at par value
• Sec. 53 (2A) permits a company to issue shares at a
discount
▫ On conversion of debt into equity
▫ Based on statutory resolution plan or debt
restructuring scheme as per guidelines of the RBI
 “statutory resolution plan” is misleading, as conversion of
of debt into equity happens not under statute
44
Issue of sweat equity shares
• Sec. 54 to be amended
• To permit issue of sweat equity shares within 1
year from the date of commencement of
business
Managerial remuneration
46
Quick snapshot- 1/2
• Omission of the requirement
remuneration exceeding 11%
of
CG
for
• SR for remuneration more than 10%, 5% and 3% as
provided under sub-section (2) of 196
• Consent of lenders or creditors for payment
exceeding the limit as prescribed before general
meeting
• Dispensing of the requirement of CG approval for
payment in case of inadequate profit
47
Quick snapshot- 2/2
• Refund of excess payment or payment without
approval within 2 years or lesser period as decided
by company
• Waiver of any sum refundable shall require SR
within 2 years
• Such waiver shall require consent of lenders or
secured creditors
• Auditors report to contain a statement wrt
remuneration being paid in accordance with the
provisions and other details as may be prescribed
48
Few concerns under proposed
amendments-1/5
• What all defaults are relevant for the purpose of the
3rd proviso to sec 197 (1)?
▫ Default in term loan from bank
▫ Default in term loan from FI
▫ Default in payment of any dues (the term may include
principal, interest or any other dues) in respect of any non
convertible debentures
▫ Default in payment of any dues to any other secured creditor
(the above 4 collectively referred to as “financial creditors”
• Is the proposed provision (seeking consent of lenders)
applicable in case of private companies?
▫ No, Sec 197 requires the consent of shareholders only in case of
public companies. The proviso as proposed is linked with
shareholders’ approval. Hence, there will be no need to seek
lenders consent in case of private companies, even if such
private company has a running default with lenders.
49
Few concerns under proposed
amendments-2/5
• The company has taken a loan from an NBFC on which
default is subsisting. Can the company pay minimum
remuneration to its managerial personnel?
▫ No, if the financial facility from the NBFC is a secured loan.
• When do we say the loan is a secured loan?
▫ Where there is a security interest created to back up the
loan.
• The company contends that the company has paid all its
dues to the lender; however the lender contends that
there are unpaid dues. Will the company be eligible to
appoint
managerial
personnel
with
minimum
remuneration?
▫ Logically, a default should be recognised as default based
on the books of account of the company.
50
Few concerns under proposed
amendments-3/5
• What is the meaning of “prior approval” for the
above purpose? How will such approval be
sought? Is it from each of the 4 categories of
financial creditors, or from a majority of them at
a meeting?
▫ The approval is needed only from such financial
creditors, for whom a default is subsisting.
Apparently has to be bought from each of the
financial creditors.
• Is a default a pre condition for needing the
consent of the financial creditors?
▫ Yes
51
Few concerns under proposed
amendments-4/5
• At what point of time should the default be
subsisting?
▫ At the time of proposing the resolution in general
meeting
• If the company passes a resolution in year 1 inter
alia for payment of minimum remuneration, for a
period of 5 years, and in year 3, the company faces a
bad year and is not able to pay the dues to its
financial creditors. Can the company go ahead and
pay the minimum remuneration?
▫ Yes. The approval requirement is linked with the
passing of the resolution and not with the payment of
the remuneration
Few concerns under proposed
amendments-5/5
• If the company proposes to pay remuneration as
per percentages of profits (11% overall, 10% to all
WTDs, and 5% to each MD or WTD), is there a
need to seek the approval of the financial
creditors?
▫ No. the approval is required only where the limits
based on percentage of profits are exceeded.
• Is the payment of minimum remuneration
possible in case of a CEO?
▫ Yes. Remuneration to the CEO is not governed by
sec. 197, unless the CEO can be regarded as the
“manager”.
52
53
Approvals required for payment of
Managerial Remuneration
Company
Private Company
Public Company
Total Managerial
Remuneration
Up to 11% of Net
Profits of the
company
Individual Limits
Remuneration
payable to MD/
WTD/ Manager
Board
Resolution
Ordinary Resolution,
subject to the
provisions of Schedule
V
+
Prior approval of
Banks, Public
Financial Institutions,
Non-convertible
Debenture holders or
secured creditors
(applicable in case
of defaulting
companies)
Company has more
than one
MD/WTD/Manager
Company has any one
of MD/WTD/Manager
Exceeding 11% of Net
Profits of the company
Up to 5% of
the Net Profits
of the
company
Exceeding 5%
of Net profits
of the
company
Remuneration
payable to other
directors
Up to 1% of the
Net Profits of
the company
Provision of Section 197 not
applicable
Exceeding 1%
of Net profits
of the
company
Remuneration payable
to MD/ WTD/ Manager
Up to 10% of
the Net Profits
of the
company
Exceeding 10%
of Net profits
of the
company
Remuneration payable to
other directors
Exceeding 3%
of Net profits
of the
company
Exceeding 3%
of Net profits
of the
company
Board Resolution (if within the prescribed limits) i.e. up to 5%, 1%, 10%, 3% as the case may be;
Special Resolution + Prior approval of Banks, Public Financial Institutions, Non-convertible Debenture holders or
Board Resolution (if within the prescribed limits) i.e. up to 5%, 1%, 10%, 3% as the
secured creditors (applicable in case of defaulting companies) (if exceeding the prescribed limits)
case may be;
Special Resolution + Prior approval of Banks, Public Financial Institutions, Non-convertible
Debenture holders or secured creditors (applicable in case of defaulting companies)
(if exceeding the prescribed limits)
Deposits
55
Quick snapshot-1/2
• Deposit of amount to DRR on or before 30th day
of April each year
• Amount to be deposited shall be equivalent to
20% of deposit maturing during the following
financial year
• The prohibition on accepting further deposits to
apply indefinitely only to a company that had
not rectified/made good the defaults and to be
allowed to accept further deposits after 5 years
thereon
56
Quick snapshot-2/2
• Repayment period to be enhanced to 3 years
instead of 1 year from the commencement of the
Act, or n or before the expiry of the period for
which the deposits were accepted, whichever is
earlier.
• Provisions of deposit insurance to be done away
with
57
Holding companies, subsidiaries,
associates
58
Amendments in respect of holding,
subsidiary, associates
• Associate
▫ Sec 2 (6) continues to use the word “associate
company”
 No provision to say that the word “company” shall
include a body corporate
 Which is surprising, since the definition of “holding
company” in sec. 2 (46) proposed to be amended to
introduce the extension
 Hence, strictly speaking, foreign companies and
LLPs excluded from the definition
• Definition of joint venture
▫ Added in Explanation below sec. 2 (6)
59
Subsidiaries and holding companies
• Change in basis of subsidiary/holding company recognition
▫ Sec. 2 (87) (ii) to be amended
 Total voting power instead of total share capital
 Therefore, preference shares not to be counted for the purpose of
subsidiary recognition
 In view of the words “exercises or controls” preceding “total share
capital” in the original law, this may be regarded as corrective
amendment
• Definition aligned with accounting standards
• Meaning of “total voting power”
▫ Defined in sec. 2 (89)
 Definition of sec 2 (89) defines voting power as specific to any
particular matter; it is not general voting rights
 Specific voting rights may be different from total voting strength
 For example, for variation of class rights
▫ However, should be understood in the sense of total voting power
in general meeting
60
Some illustrations
• S has equity Rs 50 crores, held by X; convertible pref shares
Rs 100 crores, held by Y.
• S has equity Rs 50 crores, held by X; compulsorily convertible
pref shares Rs 100 crores, held by Y.
• S has equity Rs 50 crores, held by X; provisions of
shareholders’ agreement provide management rights to Y.
• S has equity Rs 50 crores, held by X; nonconvertible pref
shares Rs 100 crores, on which there has been default in
payment of dividends.
▫ The preference shares were non-cumulative and the dividend has
been skipped for more than 2 years since issue
▫ The preference shares were cumulative and the dividend has been
skipped for more than 2 years since issue, but has subsequently
been paid
▫ The preference shares were non-cumulative and the dividend has
been skipped for more than 2 years since issue, and still remains
outstanding
61
Layers of subsidiaries
• The restrictions on layers of subsidiaries in sec.
2 (87) has been deleted
• Similarly, the provision in sec. 186 (1) on
investing through not more than 2 layers of
investment companies has been deleted
62
Small companies
63
Provisions pertaining to small
companies
• Meaning of a small company
▫ The limits of paid up capital and turnover are as
follows:
Existing limit
May be notified
upto
Proposed
increase in maybe-notified limit
Paid up capital
Rs 50 lacs
Rs 5 crores
Rs 10 crores
Turnover
Rs 200 lacs
Rs. 20 crores
Rs 100 crores
• Additional conditions
▫
▫
▫
▫
A small company is a private company
Not a holding or subsidiary company
Not a sec 8
Not a company regulated by a special Act
64
Relaxations applicable to small
companies
• Small company is a private company
• Therefore, enjoys all exemptions of a private company
• Additional relaxations in the Bill
• Abridged form of board report and abridged annual
return for a small company
• Sec 446B
• The maximum amount of fines/imprisonment in case of
small companies will be half of what is fixed for normal
companies
• Existing relaxations
• Two Board meetings in a year
• Cash flow statement not required
• Short-cut merger for small companies
65
Incorporation and objects of
companies
66
Simplification of incorporation and
objects of companies
• Sec. 3A fills the gap in the law by providing for joint and
several liabilities of members
▫ If the number of members falls below the statutory minimum
• Companies may adopt model memorandum of association
▫ Thereby, reduce the bulk of the MoA
 99% of the bulk in the MoA comes from the objects clause
 Which is anyways taken care of the universal objects model
▫ Provision in sec 4 (6B) similar to articles
 To the extent the company does not exclude the model MoA, the
model MoA shall be deemed to be the MoA
• Sec. 7 (1) (c ) affidavit replaced by declaration
• Change of registered office
▫ Notice for change of registered office to be given in 30 days
 Not sure why the timeline increased from 15 days to 30 days in this
case
67
Universal object companies
• Proposed amendment in sec. 4 (1) (c) ushers a big change in traditional
thinking in corporate law
▫ Permitting universal object companies
▫ This was pointed out several years ago by L S Sealy and others; implemented by
UK law in 2006
▫ Several other countries have adopted universal object companies
• Now, there are 2 options:
▫ By default, a company will be a universal object company
 No need to define either main, incidental or other objects
▫ Or, the company may at its option, intend to pursue only specific or restricted
objects, in which case, it will write those objects, and the incidental powers
• Several companies have, by the nature of their business or applicable
statutes, got to limit objects
▫ Special purpose vehicles
▫ Insurance companies
▫ Housing finance companies; other non-banking finance companies
• For universal object companies, the doctrine of ultra vires becomes
meaningless
▫ The only internal requirement for commencing a new business will be a board
resolution for diversification of business
• Existing companies may be tempted to amend their memoranda
68
Charges
69
Registration of charges
• Sec. 77 to be amended to provide for exemption
from registration
▫ Such charges as may
consultation with the RBI
be
prescribed,
in
• Extended period of registration for modification
or satisfaction of charge
▫ Existing provision allow extension of time for
filing of a charge only in case of creation
 This is obviously an anomaly
 Sec 82 to be amended to permit filing of
modification or satisfaction also within 300 days
70
Beneficial interests, annual
return, shareholding changes
71
•
Filing of beneficial interest – sec.
89
Beneficial interest, if different from the interest of a registered
holder, needs filing under sec. 89
• Provisions of the section to be made clearer by addition of a
definition
▫ Meaning of beneficial interest to be added by sub-section (10) to
say, beneficial interest includes right or entitlement to any of the
rights of a member, or right receive or participate any dividend
• The section has to be read with opening lines of sec. 89
▫ Name of the person is entered in the register of members, but
person does NOT hold beneficial interest
▫ That is to say, if the beneficial interest holder’s name is borne on
the register of members, there is no case of applying sec. 89/90
• With extended definition, provisions may be attracted
▫ In case of voting arrangements – voting rights transferred
without registering transfer of shares
▫ Transfer of dividend rights
72
•
Filing of undisclosed beneficial
interest
holders
–
new
sec
90
Sec 90 is a new provision altogether; mandates filing of undisclosed
beneficial interest
▫ Once again, in view of the opening language of sec. 89, if the shareholder
is the beneficial owner as well, the section has to applicability
• Significant beneficial ownership
▫ 25% of shareholding in a company, or
▫ Right or actual exercise of contro
▫ Right or actual exercise of significant influence
• Section applies when all the following conditions satisfied
▫ Significant beneficial interest is held by an individual
 By an individual
 Whether acting alone or together, with one or more persons or trusts
 Including persons or trusts outside India
• Is the section similar to UBO identification
▫ That could have been the only possible intent
▫ However the language does not seem to suggest that
▫ Since beneficial ownership is defined in terms of sec. 89, which applies
only where beneficial interest is different from interest of registered
shareholder
73
Beneficial interests register
• Beneficial interests are to be filed as per the
Rules to be laid
▫ Company to file with the Registrar
• Company to maintain a register of beneficial
interests
• If the company has information about significant
beneficial interest of someone, which is not
notified to the company, the company may
notify the person seeking information
▫ Provision to apply to NCLT to force the person to
declare beneficial interest
74
Simplification of annual return
• Particulars of indebtedness go away
• Countries of incorporation in case of FIIs also
not required to be provided
• Extracts of annual return MGT 9 goes off
▫ Instead, full annual return to be put on the
website of the company
 This is applicable to every company, if the company
has a website
 Many companies may have commercial websites;
they may not have investor information
 Website here should mean website containing
investor information
75
MGT 10 goes
• The deletion of MGT 10 should be a relief for
most listed companies
• Changes in top 10 shareholders holdings, and
promoters’ holding, required to be filed within
15 days of the change
• Requiring companies to do a weekly monitoring
• The section has been dropped completely
76
Inspection of register of members
• A proviso added in sec. 94 (3) empowers the Central
Government to prescribe particulars of register of
members that will not be available for inspection
▫ Idea may be to prevent some information which may
not be available for extraction
▫ For example, PAN nos
▫ Several companies having old shareholders are getting
requests for specific information
 For example, shareholders having age of 60 and above
 Or shareholders in a particular locality
• Seems difficult to preserve information in case of
personal inspection
77
General meetings of companies
78
Flexible venue of general meetings
• Under the 1956 Act
▫ AGM was to be held in the same city, place or village as the
registered office
▫ EGM – there was no control
• Under the 2013 Act
▫ AGM was to be held in the same city, place or village as the
registered office
▫ EGM - control was introduced through the Rules, saying
EGM could be held in India only
• Proposed amendments
▫ AGM of listed company – same town as registerd office
▫ AGM of unlisted company – with prior consent of all
members, any place in India
▫ EGM of a WOS of foreign company – anywhere in the world
▫ EGM of any other company – any place in India
79
Choice between postal ballot and
e-voting
• Sec 110 provides for items that mandatorily require
postal ballot
▫ The whole purpose of postal ballot was more
participative decision-making, by enabling remote
participation
▫ This is anyway afforded where the company provides
e-voting option
• Accordingly, sec. 110 proposed to be amended to say
▫ Where the company is required to conduct a postal
ballot
▫ It may offer e-voting facility and call a meeting
 The option can be availed of companies required to
provide e-voting in terms of sec. 108
80
Accounts and consolidation
81
Consolidation, signing of accounts,
etc
• The proposed amendment in sec 129 (3) is mere
straightening of language
▫ The explanation below sec 129 (3) is getting merged
into the section
• The proposed change in sec. 134 (1) on signing of
financial statements is also a straightening of
language
▫ The financial statements need to be signed by
 Chairman or two directors, one of whom should be the
MD, where there is one
 CEO
 CFO
 CS
82
Board report disclosures
• For various disclosures in the Board report, as
per sec 134 (3), if the relevant disclosures are
there in the financial statements, a reference to
the same may be given
• The remuneration policy and CSR policy need
not be fully reproduced; reference to website
address may be given with gist of the policy
83
Sending of financial statements
with short notice
• Provision of sec. 136 sought to be amended to
provide what was otherwise most obvious
▫ Where the company has sought 95% members’
consent for short notice for the meeting, the
company may send financial statements also at
short notice
84
Financial statements of
subsidiaries
• 4th proviso to sec. 136 (1) to be amended to
require uploading of separate accounts
of
subsidiaries only in case of listed companies
• The accounts of the subsidiary may be
unaudited, if the law of the country in question
does not require the accounts to be audited
85
Auditors
86
Appointment of auditors
• The requirement for annual ratification of
auditors is removed
• Disqualification of auditor
▫ The disqualification in sec. 141 (3) (i) was very
badly worded
 Rendering of prohibited services by any associated
entities
 The language is made more meaningful now
 With direct or indirect service
87
more provisions about auditors
• Powers of auditors to seek information required for
consolidation extend to associate companies
▫ This seems queer, as associates are not under the control of
the investor company
• Auditors report on internal financial controls
▫ There has been a huge controversy on internal financial
controls, whether IFC as per sec. 143 (3) (i) is only control
over financial reporting
 Sec. 134 (5) puts a much wider meaning
 Board’s responsibility is obviously much wider
 Auditor’s responsibility is on financial reporting
• This author always had the view that IFC for sec. 143
means control on financial reporting, citing provisions
from US Exchange Act from where the provision comes
▫ Amendment in sec. 143 makes it clear now
88
Civil liability of the auditor
• Sec. 147 (3) was a lethal section providing for
auditors’ civil liability
• The section as it worded provided right of claiming
compensation to any person relying on erroneous
financial statements
▫ Sec. 147 (3) (ii) to be amended to limit the
compensation right only to members and creditors of
the company
• Also, vicarious liability of partners of an audit firm is
sought to be avoided by proviso to sec. 147 (5)
▫ Only the partner who was colluding the abetment to be
liable
89
Independent directors, board
and board meetings
90
Tests of independence
• In sec. 149 (6) (c ) introduces material pecuniary interest as the
basis of independence
▫ All along, Companies Act was seemingly giving an impression that any
pecuniary interest will amount to an interest
 MCA circular also clarified transactions on arms length basis will not be
construed as breaching the condition of independence
 Now, the amendment introduces the limit of 10% of the total income of the
director as the test
• Sec 149 (6) (d) is being changed with multiple tests of independence
in case of relatives of the director
▫
▫
▫
▫
Holding of security- face value of Rs 50 lacs, or 2% of voting power
Indebtednesss to the company
Giving of guarantee in respect of indebtedness to the company
Pecuniary transactions of 2% or more of its turnover
 Reference obviously seems to the company’s turnover
• Requirement of pre-deposit of Rs 1 lac for independent directors
under sec. 160 dispensed with
91
Other provisions about directors
• The requirement of resident directors in case of
a company may be satisfied in the year of
incorporation
• The provision in sec. 161 (4), seemingly
suggesting that casual vacancies cannot be filled
in a private company, to be amended
▫ However, casual vacancies also need to be
affirmed by the company in general meeting, in
the immediate next meeting
 This is a new requirement, was not there in the 1956
Act
92
Disqualifications of directors and
vacation of office
• Sec 164 (2) – proviso to be added, to disqualify a new incumbent joining a
defaulting company
▫ The new incumbent will not incur disqualification for 6 months
▫ A new proviso added to sec 167 (1) (a) says that the incumbent will vacate his
office in all companies, except the one which is in default
• This actually makes sec 164 (2) all the more serious
▫ The view earlier was that an incoming director could not be responsible for
failures which come to him as legacy
▫ So, a continued period of default (non-filing, non-payment) as also the
continuation of the director throughout the terms of default, were requisites too
attract the section
• The proposed amendment will mean
▫ All existing directors become disqualified, and vacate their offices, in terms of sec
164 (2), read with 167 (1) (a)
▫ New incumbents need to clear the default within barely 6 months of joining
 Or else, he becomes disqualified in all companies other than the one in default
▫ While this saves defaulting companies from being headless, it is a strong
disincentive to anyone to join the board of a defaulting company
▫ If the intent was to clear a default, this works exactly contrary to the intent
93
Board meetings using video
conferencing
• Sec 173 (2) prohibited use of VC in certain
matters
▫ For example,
statements
approval
of
annual
financial
• Proposed amendment says that if a physical
quorum is present at the place where the
meeting is held, other directors may participate
by VC
▫ The insistence on a physical quorum seems most
unreasonable
 In case of VC meetings, there may not be a physical
place of the meeting at all
94
Audit Committee and NRC
composition, business
• Audit Committee to be needed only in case listed public
companies
▫ Debt listed private companies get exempted
▫ Sec 149 as it stands requires only listed public companies to
appoint independent directors
• Same in case of Nomination and Remuneration
Committee
• Board evaluation
▫ Currently the NRC does evaluation of the Board
▫ Now , NRC has only to lay the manner of effective
evaluation
▫ Evaluation may be carried by
 Board
 NRC
 Or external agency
Registration of unregistered
companies
96
Registration of unregistered
companies
• Provisions for registration of unregistered
companies in Chap XXIII being extended to
firms having only 2 partners
▫ Sec 366
• This is a substantial opportunity for conversion
of firms into companies
• Note sec 368 provides for vesting of property on
registration
▫ As there is vesting under statute, it may be argued
that stamp duty etc on properties will not be
applicable
97
NCLT changes
98
NCLT-related changes
• Amendments being done relating to constitution
of the NCLT to comply with the directives of the
Supreme Court in Madras Bar Association case
99
Fines and prosecutions
100
Several changes about fines and
prosecutions
• Special courts provisions are being made more
practical by distinguishing between
▫ Offences involving imprisonment of 2 years or
more
▫ Other offences
• Sec 446A inserts a statutory guidance to
imposition of fines and imprisonment under the
Act
• Sec 447 pertaining to frauds also being
rationalised
▫ Based on impact of fraud
▫ Or public interest involved therein