Private company

Companies (Amendment) Bill, 2014

After the last draft notification on the proposed exemptions to private companies in June 2014, two days ago, the Union Cabinet, approved the introduction of the Companies (Amendment) Bill, 2014 in Parliament to make certain amendments in the Companies Act, 2013.

The Companies Act, 2013 was notified in two phases where a total of 280 odd sections and 22 sets of Rules corresponding to such sections have so far been brought into force. The PIB release states that amendments have been proposed to the new Act to address some issues raised by stakeholders such as Chartered Accountants and other professionals.

The amendments are being proposed for inter alia the following reasons:

  1. Ease of doing business (this has been very high on the political agenda)
  2. Rectifying errors or omissions and
  3. To meet corporate or other stakeholders demand.

Interestingly, some changes are being proposed to be brought into the Act though there is already an exemption or a similar provision in the Rules such as:

  • Including provision for writing off past losses/depreciation before declaring dividend for the year
  • Exemption under section 185, which deals with loans to directors, in respect of loans to wholly owned subsidiaries and guarantees/securities on loans taken from banks by subsidiaries.

The idea probably is to take away the freedom of the ministries to amend certain accepted positions and protect the core principles of company law from the vagaries of delegated legislation

In this post we seek to identify the important changes attributed to ‘ease of doing business’ and those that have been made to ‘meet corporate demand’.

It is proposed to omit the requirement of minimum paid up share capital. Many jurisdictions, such as Singapore do not require a minimum paid up capital or require a very nominal capital investment for the incorporation of a company. This would be a welcome move for all start-ups and other foreign investors seeking to incorporate a company in India.

In order to meet the demand of the auditors certain changes are being proposed to the provisions relating to related party transactions. It is proposed to empower the Audit Committee to give omnibus approvals for related party transactions on annual basis. This is to ensure that certain repeated transactions do not require the passing of a special resolution with 3/4th majority and reducing the compliance requirements for corporates. This proposal is being stated to have been made to bring the corporate governance norms in line with the requirements of SEBI. However, earlier this year SEBI updated the corporate governance norms to bring the same in line with the Companies Act, which provided for a more stringent regime than the then existing Clause 49. Additionally, the proposals provide for an ordinary resolution instead of a special resolution for approval of related party transactions by non-related shareholders. Lastly, the Bill proposes to exempt related party transactions between holding companies and wholly owned subsidiaries from the requirement of approval of non-related shareholders. The draft notification placed on the MCA Website on June 24 stated that it was proposed to exempt private companies from the purview of related party transactions entirely. However the same is not mentioned in the press release pertaining to the Bill, casting serious doubts on whether private companies will get any special relief from this Bill.

The Bill also seeks to amend provisions in respect of fraud. It is proposed to introduce enabling provisions to prescribe thresholds beyond which fraud shall be reported to the Central Government. Any event or circumstance below the threshold, need be reported only to the Audit Committee. However, necessary disclosures are required to be made in the Board report in this behalf.

Interestingly, public inspection of Board resolutions filed in the Registry are proposed to be prohibited. The Companies Act requires presently the filing of board resolutions with the Registrar. The concern of the industry was that certain commercial, confidential and sensitive information will be revealed to the general public which would not be desirable.

While the changes, particularly in respect of related party transactions, would be welcome by the business community at large, the need of the hour is to exempt private companies and really small companies from the vigour of compliances imposed under the new Act. The lacuna in the bill is glaring inasmuch as the exemptions proposed to be offered to private companies, if in fact offered would go a long way to ‘ease doing business in India’.

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