Companies Amendment Bill 2014 - Vinod Kothari

Companies (Amendment) Bill 2014Bill, 2014

By Vinod Kothari

Vinod Kothari & CompanyPractising Company Secretariesg p y

1006‐1009 Krishna224 AJC Bose RoadKolkata – 700017

601‐C, Neelkanth, 98 Marine Drive,Mumbai 400002

Phone 033‐22811276/ 22813742/7715E‐mail – [email protected]

Phone 022‐22817427 E‐mail: [email protected]

www.vinodkothari.comEmail: [email protected]

Copyright

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Copyright

Th t ti i t f Vi d K th i• The presentation is a property of Vinod Kothari & Company. No part of it can be copied, reproduced or distributed in any mannerreproduced or distributed in any manner, without explicit prior permission.

• In case of linking, please do give credit and full link

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About Us• Vinod Kothari & Company,C S t i iCompany Secretaries in Practice▫ Based out of Kolkata, MumbaiMumbai

• We are a team of consultants, advisors &

lifi d f i lqualified professionals having recently completed 25 years of practice.

Our Organization’s Credo:

Focus on capabilities; opportunities follow

Quick Overview of Act, 2013

There are lots of materials and articles on the Companies Act, 2013 here:http://india‐financing.com/component/content/article/281.html

About Companies Act 2013

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About Companies Act, 2013

Structure of Act, 2013:470 Sections 7 Schedules, divided into 29 Chapters21 Rules with 17 amendments to rules45 i l45 circulars7 Removal of Difficulty Orders

It would be misleading to believe that the Act is simpler orIt would be misleading to believe that the Act is simpler or shorter

Huge amount of law has been moved to RulesSeveral important provisions were introduced by way of Rules as p p y yan afterthoughtSome important provisions were completely droppedAmendment Bill, 2014 aims to do away with these lacuna

Several sections have been consolidated to single scheduleSeveral sections have been consolidated to single schedule.

Draft exemption for private companies still awaited

Background

On 2nd December, 2014, the Union Cabinet approvedintroduction of the Companies (Amendment) Bill, 2014 inParliament to make certain amendments in theParliament to make certain amendments in theCompanies Act, 2013.

On 17th December 2014 the Lok Sabha passed the BillOn 17 December, 2014 the Lok Sabha passed the Bill

A total of 14 provisions have been approved by the LowerHouse which leads to amendment of 21 sections in the Act.

Rajya Sabha assent is awaited.

Reasons for AmendmentReasons for Amendment

Issues raised by stakeholders and professionals expressing practical difficulties in complying with some of the requirements laid down in the commenced provisions

This ultimately leads to ease of doing business in the country

To fill the gap between the Act and the allied Rules

To meet corporate demandTo meet corporate demand

India’s poor ranking of 142 in World Bank’s Report of ‘Doing Business in 2015’ which is down from 139 in last year2015 which is down from 139 in last year

Align certain provisions with SEBI’s Listing Agreement

Category Wise Amendments 1/2Ease of doing Business

1. Omitting requirement for minimum paid up share capital for public and private

g y /

companies.

2. Requirement of having a common seal of the company upon incorporation has beenmade non‐mandatory

Related Party Transactions

1. Empowering Audit Committee to give omnibus approvals for related party transactionson annual basis (Aligning with SEBI Policy)

2. Requiring only ordinarily special approvals of related party transactions instead ofspecial special resolution;

3. Exempt related party transactions between holding companies and wholly owned

Reduce rigors of provisions

1. Prohibiting public inspection of Board resolutions filed in the Registry.

p p y g p ysubsidiaries from the requirement of approval of non‐related shareholders.

2. Rectifying the requirement of transferring equity shares for which unclaimed/unpaiddividend has been transferred to the IEPF even though subsequent dividend(s) has beenclaimed.

Category Wise Amendments 2/2g y /Removing Implementation Difficulties

1. Special Courts to try only offences carrying imprisonment of two years or more.

2. Providing a ‘material’ limit for reporting of frauds to the Central Government. Fraudsbelow the threshold, it will be reported to the Audit Committee. Disclosures for thelatter category also to be made in the Board’s Report.

3. Prescribing specific punishment for deposits accepted under the new Act

4. Winding Up cases to be heard by 2‐member Bench instead of a 3‐member Bench.

Others

1. Including provision for writing off pastlosses/depreciation before declaring

Missed in the Act but was covered in the Ruleslosses/depreciation before declaringdividend for the year .

2. Incorporating the exemptions underthe rules to section 185 in the Act itself.

To insert the provisions already contained in the Rules in the Act itself

3. Bail restrictions to apply only foroffence relating to fraud u/s 447.

Though earlier provision is mitigated, concession is made to Law Ministry & ED

Proposed amendment no 1 1/2

Omitting requirement for minimum paid up share capital,

Proposed amendment no. 1 – 1/2

Omitting requirement for minimum paid up share capital, and consequential changes

I b id fIn a boost to aid ease of doing business in India, the definition of private and public companies are

MCA has reserved the right to specify the

same by way of its rule ki

Minimum capital requirements have been done away

Minimum capital requirements have been done away p p

proposed to be changed making powerswithwith

Possibly companies can now be incorporated with a paid up capital of Rs 2?a paid up capital of Rs. 2?

Affected sections in the Act – 2/2 Affected sections in the Act – 2/2

Sections Pertains to

2 (68) Definition of private Company2 (68) Definition of private CompanyRemoves the requirement of having Rs. 1 lakh capital.

2 (71) (b) Definition of Public CompanyRemoves the requirement of having Rs. 5 lakh capital.Removes the requirement of having Rs. 5 lakh capital.

11 (1) (a) Commencement of businessDeclaration to be given at the time of commencement –Omission of company requiuing minimum paid up capital


Making common seal optional, and consequential changes


g p , q gfor authorization for execution of documents

A common seal is a stamp of thed it ffi ticompany and its affixation on any

document made it legally bindingon the company.For the purpose of ease of doingp p gbusiness in the country, therequirement of having a commonseal is being optional and asignature by its officers wouldsignature by its officers wouldsuffice for legally binding thecompany

For ease of doing business in the country, this requirement is being optional and authentication can be done by either 2 directors or 1 director and CS for legally binding the company.

Affected sections in the Act – 2/2 Affected sections in the Act – 2/2 Sections Pertains to

9 Requirement of Common Seal upon registrationq p gMakes it optional

12 (3) (b) Name of the company to be engraved on the common sealMakes it optional

22 (2) Execution of Bill of exchange, etc.Power of attorney can be issued by 2 directors or 1 director and a company secretary, if any

22 (3) Deeds to have binding effect such as they have been issued under the seal of a company where it is signed on behalf of the company by a person holding power of attorney and under his sealunder his seal Mention of common seal removed.

46 (1) Issue of share certificatesCan now be signed by either 2 directors or 1 director and g ya company secretary, if any.

223 (4)(a) Authentication of the report of any InspectorMakes the authentication by affixing the seal optional

Proposed amendment no. 3 – 1/2Prescribing specific punishment for Depositsaccepted under the new Act

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Penal consequences for noncompliance with the deposit This glaring gap was alreadycompliance with the depositprovisions in general as laid downin Sections 73 and 76 was missedout from the Act and as well as the

g g g p yrepresented by us to the Ministry vide ourcorrespondence dated 20th August, 2013.

Rules.

On the same lines, the Bill proposes tointroduce a new section 76A forproviding for the penal charges forfailing to comply with sections 73 and

These charges are similarto those prescribed under sections 74 and 75

of the Act and would alsofailing to comply with sections 73 and76. attract fraud liability under section 447.



New Section 76A inserted Providing for penal consequences for nonNew Section 76A inserted Providing for penal consequences for non‐compliance with deposit provisions u/s 73 and 76:

the company shall, in addition to the payment of the amount of deposit or part thereof and the interest due, be punishable with fine which shall not be less than 1 crore rupees but which may extend to 10 crore rupees; andevery officer of the company who is in defaultevery officer of the company who is in default shall be punishable with imprisonment which may


Prohibiting public inspection of Board


g p presolutions filed with the RoC.

The amendment stems from filing of FormgMGT‐14 for resolutions passed in pursuanceof section 179 (3).

Section 399 provides any person the right to electronicallySection 399 provides any person the right to electronicallyinspect any document filed or registered with the RoC onpayment of prescribed feesThe amendment prohibits such public inspection of Board

l ti fil d b i i F MGT 14 ith th R Cresolutions filed by companies in Form MGT‐14 with the RoCThe intent behind the amendment is that Board resolutionsbeing private internal company matters, public should not begiven access to these documents.g

MCA without actually doing away with the requirement of filing resolutions haschosen to amend the law itself!



117 (3)(g) MGT 14 to be filed for resolutions passed in117 (3)(g) MGT‐14 to be filed for resolutions passed in pursuance of sub‐section (3) of section 179.


Including provision for writing off past losses/depreciationbefore declaring dividend for the year

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before declaring dividend for the year .The amendment merely incorporates the provisions contained in the Rules,in the Act itself.• The proposed amendment to the Act is already appearing in Rule 5 of theThe proposed amendment to the Act is already appearing in Rule 5 of the

Companies (Declaration and Payment of Dividend) Rules, 2014, which wasamended w.e.f. 12th June, 2014.

This is a major change from the 1956 Act which provided that only if there is aloss before depreciation, and then there is a loss after depreciation, it is necessaryto offset only the depreciation and not the loss before depreciation.• This is derived upon a combined reading of proviso (a) below sec 205 (1)

with proviso (b)with proviso (b)Now, Rule 3 (5) requires all “carried over losses” and all unprovided depreciationto be offset before declaring any dividends.• Major shift from the old Act.j• Difficult of companies that have just turned around to attract capital on the

strength of dividend payments since now it has to make good all its pastlosses before it starts distributing dividends


S i P i Sections Pertains to

123 (1) Declaration and Payment Of Dividend


Rectifying the requirement of transferring equity shares forwhich unclaimed/unpaid dividend has been transferred to

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which unclaimed/unpaid dividend has been transferred tothe IEPF even though subsequent dividend(s) has beenclaimed.

Section 124 provided that shares in respect ofwhich unpaid or unclaimed dividend has beentransferred to IEPF (i e after 7 years of lyingtransferred to IEPF (i.e. after 7 years of lyingunpaid or unclaimed) shall also be transferredto IEPF.The proposed amendment provides that if

Noteworthy

dividend has been paid / claimed in any of the 7consecutive years, the shares will not be liableto be transferred.


S i P i Sections Pertains to

124 (6) (not yet enforced) Unpaid dividend Account

Proposed amendment no 7 – 1/2

Only ‘Material’ fraud to be reported to the Central

Proposed amendment no. 7 1/2

y pGovernment

‘Materiality’ to be determined by the MCA vide its Rulemaking authority

> Breach of Specified limit ‐ Report to the Central Government

< Any fraud below specified limit ‐ Report to the Audit Committee, if any, or the BoardThis means that frauds of immaterial value of as low as Rs. 100 will still be required to be reported to the Audit Committee / BoardFurther, the proposed amendment in the Bill seeks to suggest that every immaterialf d hi h t t t d t th C t l G t h ll fi d l i thfraud which are not not reported to the Central Government shall find a place in theBoards’ Report.Board’s Report would be filled with frauds of minor or immaterial value.Also, no clarity on whether those frauds which have already been noted by the y y yBoard also need to be reported.

No major change in the position as even now ‘immaterial’ frauds needs reporting

Affected sections in the Act – 2/2Affected sections in the Act – 2/2


134 (3) Disclosure in Board Report etc134 (3) Disclosure in Board Report, etc.Frauds below the ‘material’ threshold limit as reported by the auditor to the Board / Audit Committee shall find a place in the Boards’ Report

143 (12) Powers and duties of auditors and auditingstandardsOnly frauds above specified limits needs to be

t d b th dit t th C t lreported by the auditors to the CentralGovernment.Frauds of a lesser in value as prescribed aboveonly needs to be reported to the Audit Committee,y p ,if any or the Board.

E i A dit C itt t i ib l


Empowering Audit Committee to give omnibus approvalsfor related party transactions

However, the terms and conditions for such omnibus approvals will come by However, the terms and conditions for such omnibus approvals will come by way of the Rules.

Aims at aligning with Listing Agreement

Affected sections in the Act 2/2Affected sections in the Act 2/2


177 (4) (iv) Powers of the Audit Committee for approval or any177 (4) (iv) Powers of the Audit Committee for approval or any subsequent modification of transactions of the company with related parties

Proposed amendment no. 9 1/2

Exemption from Section 185 for:Exemption from Section 185 for:

loans / guarantee / security to WOS ; andguarantees/securities on loans taken from banks by g / ysubsidiaries

Rule 10 of the Companies (Meetings of Board and its Powers) Rules, 2014 provides for the same exemption

▫ Seemingly, as a matter of abundant precaution and clarity, the said provisions are proposed to be introduced in the Act itselfsaid provisions are proposed to be introduced in the Act itself



185(1) Loan to directors, etc

Proposed amendment no. 10 Exempt related party transactions between holding companies andwholly owned subsidiaries from the requirement of approval of nonl d h h ld

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related shareholders.

Four fold requirement for such exemption:1. Has to be a subsidiary company

• i.e. fulfilment of holding ‘total share capital’ – equity + convertible pref.capital

2. Has to be wholly owned‘• Wholly owned would mean holding ‘ownership capital’ i.e. both equity +

preference (whether or not convertible into equity)• This means that company holding entire equity but no preferencecapital (irrespective of whether it is convertible or not) will not becapital (irrespective of whether it is convertible or not) will not beconsidered to be a wholly owned subsidiary

3. Accounts should be consolidated with holding co.4 Such consolidated accounts are placed before shareholders for approval4. Such consolidated accounts are placed before shareholders for approvalAudit Committee and / or Board Approval would still be required.Amendment made to align with Listing Agreement, except for AC approval

Proposed amendment no. 11

Replacing ‘special resolution’ with ‘ordinary resolution’ forapproval of related party transactions by non related

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approval of related party transactions by nonrelatedshareholders.

This is supposed to enhance the ease of doing business in the country bypp g y yrelaxing the norms.• However, till exemptions for private companies are enforced, s. 188

will continue to pose a problem for private companies

The clarificatory circular of MCA dated 17th July, 2014 which providesthat only such related party as may be a related party to the contract orarrangement would not vote on such transaction, would still hold good.g , g

However, this will not make much difference considering that therequirement now is only an ordinary approval.

However, for listed companies, the provisions of Listing Agreement beingstricter (since it still requires SR for material RPTs) would prevail

Affected sections in the Act for proposed Affected sections in the Act for proposed amendment 10 and 11


188 (1) Related party transactionInstead of special resolution ordinary resolution

ld ff f f l dwould suffice for passing of related party transactions.Transactions between holding and wholly owned companies to no longer require general meeting co pa es to o o ge equ e ge e a eet gapproval

Proposed amendment Nos 12 & 13 1/2 Proposed amendment Nos. 12 & 13 – 1/2

Proposed Amendment no 12 Proposed Amendment no 13Proposed Amendment no. 12 Proposed Amendment no. 13

Bail restrictions to • Winding Up cases to apply only for offence relating to fraud u/s

g pbe heard by 2‐member Bench instead of a 3‐

447. member Bench.


Sections Heading of the Section

212 (6) Investigation into affairs of Company by Serious212 (6) Investigation into affairs of Company by Serious Fraud Investigation Office

419 (4) Benches of Tribunal

Proposed amendment Nos 14 – 1/2Proposed amendment Nos. 14 1/2

Special Courts to try only offences carryingimprisonment of two years or moreimprisonment of two years or more

Special Courts to be empowered to tryoffences which are punishable withimprisonment of 2 years or more• This would include fraud relatedand deposit related offences etc.

All other offences to be tried by aAll other offences to be tried by aMetropolitan Magistrate or a JudicialMagistrate of the First Class havingjurisdiction.



435 Establishment of Special Courts435 Establishment of Special Courts436 (1)(a) Offences triable by Special Courts

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Companies Amendment Bill 2014 - Vinod Kothari