Vol. 12 Issue 2.9 February 24, 2016

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Extensive changes proposed to the Companies Act, 2013

Earlier this month, the report of the Companies Law Committee (hereinafter

referred to as the “Committee”) was released for public comments. The Committee

was set up in June 2015 to holistically consider issues arising from the

implementation of the Companies Act, 2013 (“Act”) (alongwith the accompanying

rules), and to suggest appropriate changes to the legislation. Both the composition

and the long consultative process followed by the Committee are reflective of the

Government’s desire to consider holistically, difficulties and challenges expressed

by stakeholders. On conclusion extensive deliberations, the Committee’s report

has suggested more than 100 changes to the legislation spread over 78 sections,

in addition to changes to the rules.

The proposed changes cover definitional aspects, removal of anomalies and

inconsistencies, and relieving some very real implementation challenges being

faced by corporates. The report was open to public comments till February 15,

2016, after which it will be taken up by the Government for necessary action.

While the journey from this report to the statute book could take time, and may also

involve fine tuning of the recommendations, it is worthwhile keeping track of the

important suggestions made. The table below summarizes some of the key aspects

where recommendations have been made by the Committee.

Area Changes Proposed

by the Committee

Assessment

Definitions

Associates,

joint ventures,

holding and

subsidiaries

Under the Act, a

company is considered

to be an associate of

another, if such other

company has

significant influence

over it. The term,

significant influence

was defined to mean

control of atleast 20%

of ‘total share capital’

The proposed

changes would bring

the definitions under

the Act closer to those

under accounting

standards, and other

regulations issued by

SEBI2

The yardstick based

on ‘total share capital’

was proving to be

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(which included both

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preference). It has

been proposed that for

reckoning ‘significant

influence’ total voting

power (instead of total

share capital) be used

as a benchmark

It has also been

proposed that a

specific definition of

joint venture (same as

that under Ind AS 281)

be inserted

For reckoning holding

and subsidiary

relationships, the

yardstick of control

over 50% or more of

the ‘total share capital’

be replaced by ‘total

voting power’

Finally, an explanation

is proposed to be

inserted in the

definition of holding

company to specifically

include body

corporates

incorporated outside

India under the

definition

problematic in

structures where

preference share

financing was used

despite there being no

intention to control the

affairs of the

company. This

anomaly is proposed

to be removed

The clarificatory

change in the

definition of holding

company would clear

doubts on how the Act

applies to private

limited subsidiaries of

overseas listed/ public

companies

Foreign

companies

The Act, together with

rules prescribed a

rather expansive

definition of the term

‘foreign companies’,

which seemed to cover

even activities

(especially those

carried out through

electronic mode) which

were merely incidental,

without there being

The expansive

definition had created

significant doubts on

the applicability of

registration/ filing

requirements under

the Act in relation to

foreign companies

with marginal

presence in the

country. It is hoped

that a balanced

prescription by the

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Vivek Gupta, New Delhi

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Rajendra Nalam, Mumbai rajendra.nalam@bmradvisors.com

Kalpesh Maroo, Bangalore

kalpesh.maroo@bmradvisors.com

Kalpesh Desai, Mumbai

kalpesh.desai@bmradvisors.com

Vivek Gupta

Siddharth Sehgal

any desire to establish

presence in India

It has been

recommended that

rather than changing

the definition of

‘foreign companies’,

the Government be

provided prescriptive

powers under section

379 of the Act, such

that it excludes

activities entailing

incidental and

insignificant

transactions from

registration and filing

requirements under

the Act

Government in this

regard should clarify

doubts

Others The definition of

‘debenture’ is

proposed to be

amended to exclude

instruments covered

under Chapter III D of

the Reserve Bank of

India Act, 1934

(covering money

market instruments)

and such other

instruments as may be

determined by the

Central Government in

consultation with RBI/

SEBI

The definition of

‘financial year’ is

proposed to be

amended to allow

Indian associates and

joint ventures of

foreign companies to

apply for a different

financial year (ie other

than April – March);

currently, this facility is

available only to

subsidiaries of foreign

companies

In the definition of

‘related party’,

clarificatory

amendments have

been proposed to

include overseas

subsidiaries, joint

ventures, associates,

holding companies

specifically in its ambit

Matters relating to incorporation

Memorandum

of association,

documentation

requirements

The Committee has

recommended that

section 4(1)(c) be

amended to allow

companies the

additional option of

having a generic

objects clause ie “to

engage in any lawful

act or activity or

business as per the

law …”

Certain documentation

requirements in

relation to

incorporation of

companies are

proposed to be relaxed

Fund raising

Contents of

prospectus to

be prescribed

by SEBI/ civil

liability for

misstatements

Modifications have

been proposed in

section 26(1) to

empower SEBI to

prescribe the contents

of prospectus in

consultation with the

MCA3

With regard to

directors’ civil liabilities

for misstatements in

the prospectus,

Empowering SEBI to

prescribe contents of

prospectus would

facilitate regulatory

alignment and would

ensure that

simplifications

proposed by it under

ICDR norms4 are

carried through in the

Act as well

modifications have

been suggested to

hold experts liable for

statements prepared

by them, which the

directors have relied

upon

The proposed

amendment directors’

liabilities restores the

carve out available

under the previous

Companies Act

Changes to

private

placement

regime

The requirement of

circulating and filing

‘Private Placement

Letter of Offer’ in form

PAS -4, which had

detailed and lengthy

disclosures is

proposed to be

removed. Instead,

certain disclosures are

proposed to be made a

part of the application

form for the shares

itself

Changes have been

proposed in section

42(3) to specifically

permit companies to

keep open more than

one issue of securities

(subject to certain

conditions)

The requirement of

passing special

resolution for issue of

non-convertible

debentures is

proposed to be

dispensed with as long

as a board resolution

under section

179(3)(c) read with

section 180 is passed

In case of convertible

securities, it has been

proposed that the

requirement of

determining price in

advance should be

The proposed

relaxations are a

welcome step,

especially for private

companies raising

funds from a limited

pool of investors

The relaxations as

regards flexible

pricing, partly paid

shares and minimum

investment size having

no linkage to the face

value of securities

being issued, would

also provide much

needed flexibility in

PE/ VC contexts

Finally, the

anachronous

‘renunciation of rights’

route sometimes

misused for by-

passing the private

placement

requirements has

been

plugged. Clarifications

to establish clearly

that in case of ‘non-

public’ issues of

convertible securities,

both sections 62 and

42 have to be followed

would also dispel all

doubts on which

requirements have to

be complied with in

similar contexts

modified and

provisions allowing

pricing as per a

formula (on the lines of

FDI policy) may be

inserted

Changes have also

been proposed to

permit issuance of

partly paid shares on a

preferential allotment

basis in line with the

FDI policy

In case of equity or

mandatorily convertible

securities, the

minimum investment

size can be Rs 20,000

with no linkage to face

value (as is presently

the case). For non-

convertible

instruments, the

minimum investment

size has been

proposed at Rs

100,000 with no

linkage of

Calrificatory changes

have been proposed to

ensure that issue of

shares to non-

shareholders via

‘renunciation of rights’

cannot be made by by-

passing the

requirements of

section 42 of the Act

Certain relaxations

from documentation

and filing requirements

have also been

proposed to make the

process simpler and

quicker, whilst

balancing regulatory

concerns

Issue of shares

at discount

Currently, the

provisions of the Act

do not permit issue of

shares at a

discount. To enable

restructuring of

distressed companies,

it has been proposed

that when debt of such

companies is

converted into equity in

accordance with RBI

guidelines, a company

may issue shares at a

discount

Issue of shares

with differential

voting rights

The Committee has

recommended that

companies which have

defaulted on

repayment of loans

and interest etc be

permitted to issue

shares with differential

voting rights after a

cooling off period of 5

years from the end of

the financial year in

which the default was

made good. The

current rules seem to

have a blanket

restriction on

companies even where

defaults have been

corrected

Debentures Apart from the carve-

out of money market

instruments from the

definition, the following

changes are proposed

in the regime

governing debentures:

The relaxation in

reserve and security

requirements will bring

down cost of this

mode of financing

- The requirements for

maintenance of

debenture redemption

reserve (DRR),

currently 25% of value

of debentures, is

proposed to be

modified by allowing

companies to create

DRR on a step down

basis with reference to

the redemption

schedule for the next

one year. The

committee has also

recommended a

clarification be made in

the rules to provide

that maintenance of

DRR/ liquid funds is a

mandatory condition

irrespective of whether

the issuer has

sufficient profits

- With a view to facilitate

issue of secured

debentures based on

group support, the

Committee also

proposed that the term

secured debentures

also include

debentures secured by

a charge on the

property or assets of

any other entity, or any

other collateral as

security

- The Committee also

proposed that enabling

provisions be made for

issue of perpetual

debentures

Deposits Currently, the Act

requires companies to

keep not less than

Relaxation from

reserve requirements

would help reduce

15% of their deposits

maturing in the current

and next financial year

in a separate bank

account called the

deposit repayment

reserve account. This

requirement is

proposed to be

reduced to 20% of the

deposits maturing in

the current financial

year

The requirement of

procuring deposit

insurance under

section 73(2)(d) are

proposed to be

dispensed with. In any

event, a temporary

relaxation till March 31,

2016 had been

provided in this regard

It has been proposed

that private companies

engaged in

infrastructure sector

raising deposits from

their members not be

subjected to limits as

to the maximum

amount of deposits

(these limits are based

on paid up capital and

reserves)

Similar relaxation has

been proposed for

‘Start-ups’ (to be

defined separately)

incorporated as private

companies and raising

funds via deposits from

their members for the

first five years from

their incorporation

cost of funds of the

deposit route

Relaxations for private

companies engaged in

infrastructure and

Start-ups would also

open up avenues for

private vehicles raising

medium term financing

from their

shareholders

Expansion of

exclusion list from the

definition of deposit is

also a welcome move

Further, the following

are proposed to be

taken out of the current

definition of deposits:

- Advances of more than

365 days received in

the ordinary course of

business, as

evidenced by written

contract and during

normal business cycle

- Compulsorily

convertible

debentures, where the

conversion is within 10

years (currently, the

limit is 5 years)

- Amounts received

directly from AIFs,

DVCFs, and MFs

registered with SEBI

Management and administration

Shareholders’

meetings/

beneficial

interest in

shares

It has been proposed

to allow private

companies and wholly

owned subsidiaries of

unlisted companies to

hold their Annual

General Meetings

anywhere in India (as

opposed to the current

requirement of holding

these meetings at the

location of the

registered office),

subject to approval

from 100%

shareholders being

obtained in advance

The Committee has

also recommended

that wholly owned

subsidiaries of foreign

companies be

permitted to hold their

Some degree of relief

has been provided in

the manner of holding

shareholders’

meetings by public

companies (for private

companies flexibility

was already provided

via earlier changes to

legislation)

The manner and kind

of disclosures required

in relation to beneficial

interest/ beneficial

ownership will be an

important

aspect. Also of

interest would be how

such disclosures will

be assessed and used

by other authorities

(eg income tax)

extraordinary general

meetings outside India

(currently, such

meetings can be held

only in India)

It has been proposed

that where companies

are required to provide

for electronic voting

facility as per section

108 of the Act, the

provisions of section

110(1)(a) of the Act

(which provide for

items which have to be

mandatorily resolved

via postal ballot)

should not apply

Changes have been

proposed in section 89

of the Act, to provide

for specific definition of

beneficial interest in

shares and beneficial

ownership of a

company. It would

also be obligatory on

companies and

individuals to obtain

information on

beneficial ownership,

maintain them in

prescribed formats and

file them with the

registry. The changes

are in line with the

global move to put in

place mechanisms to

identify natural

person(s) controlling a

corporate entities in

the context of money

laundering and other

possible misuse of

corporate structures

Declaration of dividend

Interim

dividend,

dividend from

past reserves

etc

Amendments have

been proposed in

section 123 of the Act

to permit payment of

interim dividend even

after the close of a

financial year before

the AGM. Also, it is

sought to be clarified

that such dividends

can be paid out of both

(a) current years’

profits (till the date of

declaration), and (b)

surplus in profit and

loss account remaining

undistributed and

unallocated to any

reserve

It has also been

proposed that the

language of the Act

and relevant rules be

harmonized to clarify

the issue whether

regulations applicable

for distribution of

dividends in case of

inadequacy of profits,

will apply when such

distributions are made

from surplus balance

in the profit and loss

account, which has not

been transferred to

any reserves. The

need for clarification

has arisen since the

view taken in the

context of erstwhile

law was that such

provisions shall not

apply when

distributions are made

Amendments

proposed on this count

seek to align the

provisions of the Act

with well-established

commercial principles,

and would clear

unnecessary

ambiguity

from surplus balance

in profit and loss

account

Governance

Directors Currently, section

149(3) of the Act

requires that every

company have atleast

1 director who has

stayed in India for a

period of not less than

182 days in the

previous calendar

year. This requirement

is proposed to be

modified to provide

that the test of

residency would be

based on duration of

stay of the director in

the current financial

year. Further, it has

been proposed that

companies should be

given a period of 6

months from

incorporation to

comply with this

requirement

Further, with regard to

section 149(6), which

provides for

qualifications of an

independent director,

amendments are

proposed to provide for

a test of materiality for

the purposes of

determining whether

pecuniary relationships

could impact the

independence of

individual proposed to

be appointed as an

independent

These relaxations

should facilitate

appointment of

directors, especially

for foreign companies

The removal of

sections 194 and 195

dealing (respectively)

with forward dealings

and insider trading

provides clarity and

certainty in the context

of private

companies. In many

fund raising exercises,

these sections were

creating avoidable

difficulty

director. The

amendment would

align the requirements

of the Act with

prescriptions from

SEBI in this

regard. Apart from this

certain other

relaxations in eligibility

criteria have been

proposed

Directorships in

dormant companies

are proposed to be

excluded from the limit

on total number of

directorships contained

in section 165 of the

Act

The Committee has

also recommended

that necessary

flexibility may be

provided to do away

with the requirement of

DIN or provide an

option to shift to any

other universally

acceptable

identification at a

future date

With regard to

participation of

directors in board

meetings via video

conferencing, the

Committee

recommended that

directors joining via

this mode be allowed

to participate in the

meeting to discuss

matters (which,

currently, are not

allowed to be resolved

via video-

conferencing) subject

to appropriate quorum

being physically

present

Sections 194 and 195

of the Act prohibiting

forward dealing and

insider trading by

directors and key

management

personnel are

proposed to be

omitted, taking

cognizance of the fact

that these restrictions

are relevant only in

case of listed

companies for which

the SEBI norms

provide a robust

regulatory framework

Loans to

directors and

persons in

whom directors

are interested

Presently, barring a

few relaxations,

section 185 of the Act

restricts provision of

loans etc by a

company to other

entities in whom the

directors are

interested. Taking

cognizance of the fact

that these restrictions

impacted intra-group

financing, the

Committee has

proposed that section

185 be amended to

allow companies to

provide loans to such

entities subject to prior

approval via a special

resolution. Further,

such loans should be

used by the entity only

for its principal

business activity, and

This relaxation will

provide flexibility in

intra-group

financing. It remains

to be seen to what

extent the

Government considers

safeguards on this

issue

not for further

investment or grant of

loan

Loans and

investment by

companies

The Committee has

recommended that the

provisions of section

186(1) of the Act

restricting corporate

investment through

more than 2 layers of

investment companies

be removed. Similar

removal has also been

recommended in

section 2(87) of the

Act, which restricts the

layers of subsidiaries

for certain prescribed

classes of companies

(not yet prescribed)

The Committee also

recommended that

appropriate

explanations be

inserted in section 186

to take out loans given

to employees as a part

of conditions of

services from

approval/ compliance

requirements

contemplated in this

section

Relaxations are also

proposed in relation to

shares issued on rights

basis by body

corporates outside

India by exempting

them from the

requirements of

section 186

Removal of layering

restrictions should

permit greater

flexibility in structuring

investments; other

changes proposed to

the regime provide

incremental relief and

clarify certain

ambiguous issues

Related party

transactions

The Committee

recommended

Whilst which party

should be considered

withdrawal of circular

no. 30/ 2014 issued by

MCA, which clarified

as to which related

party could vote as a

shareholder on a

resolution for approval

of a related party

transaction. The

circular essentially

provided that only

parties interested in

the transaction would

be disentitled to vote

on such

resolutions. The

Committee felt that the

circular was

misinterpreted in many

situations. The

proposed removal

would bring the

position on this issue

in line with SEBI

requirements, where it

is impermissible for all

related parties to vote

on such resolution

At the same time, the

Committee recognized

that a complete voting

on embargo in joint

ventures/ closely held

private companies

would be impractical,

and hence permitted

voting by related

parties on shareholder

resolutions under

section 188 in case of

such companies

to be a ‘related party’

for the purposes of

voting restrictions

under section 188,

and which parties

should be allowed to

vote is a debatable

issue, given some

aggressive

interpretations in the

past, the Committee

has recommended

removal of the

clarificatory circular

issued by MCA. While

the issue itself is

debatable, the

removal of the circular

would make section

188 provisions

consistent with SEBI’s

position on the matter

(ie all related parties

should face voting

restrictions on

resolutions to approve

related party

transactions). At the

same time, sensible

carve outs have been

provided in relation to

unlisted companies

and joint ventures

Others The Committee

recommended removal

of the need for

Government approval

for remuneration to be

These changes shall

bring the provisions of

the Act in tune with

current circumstances,

and afford companies

paid to managerial

personnel beyond the

thresholds prescribed

under Schedule V of

the Act. The

Committee also

recommended that the

thresholds provided in

Schedule V be

increased, and further,

the remuneration be

approved by an

ordinary resolution in

cases where the payee

is unconnected with

the promoters, and

possessed relevant

domain knowledge

It is also

recommended that the

requirements of

Schedule V that

managing/ whole time

directors be resident in

India for previous one

year be dispensed with

Relaxations have also

been proposed in

section 203 of the Act,

permitting companies

to designate more

senior officers as ‘key

managerial personnel’

and also permitting

companies to engage

key managerial

personnel in more than

one role

with necessary

freedom to recruit and

remunerate talent

Other matters

ESOPs and

Sweat Equity

The current rules

restrict issue of sweat

equity to 25% of paid

up equity share

capital. The

Committee has

Restrictions in current

regulations were

presenting a hurdle in

incentivising

promoters in funded

start-ups, and also, in

recommended that for

Start-ups, this limit be

increased to 50% of

paid up equity share

capital

The current rules

prohibit the issue of

ESOPs to promoters/

promoter

directors. The

Committee has

recommended a

relaxation for Start-ups

by enabling issue of

ESOPs to promoters

working as employees/

employee directors/

whole time directors

their inducting fresh

talent. In this context,

the proposed

relaxations shall be

very helpful

Financial

statements,

Corporate

Social

Responsibility

The Committee has

recommended that for

the purposes of

preparing consolidated

financial statements,

the consolidation

principles as per the

applicable accounting

standards be followed

The Committee has

recommended that the

net-worth/ turnover/

profit criteria for

determining

applicability of CSR

provisions be reckoned

per the preceding

financial year

Company Law

Tribunals,

Special Courts

and penalties

The Committee noted

that after the Supreme

Court’s order of May

2015, the Government

had initiated the

process of constituting

the ‘National Company

Law Tribunal’/

The Committee’s

views on penalties and

compounding are

much

appreciated. That

technical and

procedural lapses

should not attract stiff

‘National Company

Law Appellate

Tribunal’. The

Committee however

recommended that the

directions of the

Supreme Court as to

the constitution of the

these tribunals be

included in the Act, as

a measure of propriety

The Committee also

recommended early

establishment of

Special Courts as

proposed in section

435 of the Act to

ensure faster

prosecution of

defaulting companies

The Committee also

reviewed levels of

penalties for various

offences under the Act,

and recommended

several changes on

the principle that the

penalty should be

commensurate with

the level and nature of

offence. Accordingly,

technical and

procedural offences

may attract lower

penalties

Finally, the Committee

recommended

changes to section 441

of the Act to provide

that offences

punishable with fine as

also those punishable

with penalty be treated

as compoundable (as

opposed to current

provisions where

penalties is a well-

accepted proposition;

hence, the

recommendations

should address

concerns that some of

the penal provisions of

the Act were too harsh

offences punishable

with fine only are

compoundable)

BMR Comments

The Committee has taken a comprehensive approach while considering the

areas of the newly introduced legislation. Almost all issues raised by corporates

as also the professional community have found mention in the report. At the

same time, recommendations for changes have been made with due prudence,

and only on issues with merit.

On the whole balance is sought to be achieved between regulatory imperatives,

and the need to create an enabling environment with focus on self-

governance. If the proposed changes find their way to the statute, it would

indeed be a strong step forward.

1 Indian Accounting Standard 28 – Investments in Associates and Joint Ventures. Indian converged version of

IAS 28

2 Securities and Exchange Board of India, the country’s securities law regulator

3 Ministry of Corporate Affairs, Government of India

4 SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, principal securities regulations

governing public issues of securities

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newsletter does not substitute the need to refer to the original pronouncements.

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