Panel suggests 100 amendments to Companies Act 2013

The Companies Law Committee set up to examine the Companies Act 2013 and make recommendations on the issues arising out of implementation of the Act, has proposed changes in 78 sections of the Act, which along with consequential changes, would result in about 100 amendments to the Act.

The committee has also proposed approximately 50 amendments to the rules.

The recommendations cover significant areas of the Act, including definitions, raising of capital, accounts and audit, corporate governance, managerial remuneration, companies incorporated outside India and offences/ penalties.

Some of the key changes proposed are:

• Managerial remuneration should be approved by shareholders;
• Definition of associate company and subsidiary company needs to be modified to ensure that 'equity share capital' is the basis for deciding holding-subsidiary relationship rather than ''both equity and preference share capital'';
• Private placement process needs to be substantially simplified, doing away with separate offer letter, making valuation details public, details/record of applicants to be kept by company and to be filed as part of return of allotment only, and reducing number of filings to the registrar;
• Incorporation process of companies should be made easier and greater flexibility allowed to companies: An unrestricted objects clause to be allowed in the memorandum of association dispensing with detailed listing of objects, self-declarations to replace affidavits from subscribers to memorandum and first directors, and changes in various forms;
• Provisions relating to forward dealing and insider trading to be omitted from Companies Act. Listed companies are covered under Sebi Act/Regulations;
• Companies may give loans to entities in which directors are interested after passing special resolution and adhering to disclosure requirement;
• Restriction on layers of subsidiaries and investment companies to be removed;
• Change in the definition of term 'relative' for determining disqualification of auditor;
• Rationalise penal provisions with reduced liability for procedural and technical defaults. Penal provisions for small companies to be reduced;
• No filing fees if financial statements and annual returns are filed within prescribed time;
• Auditor to report on internal financial controls with regard to financial statements;
• Frauds less than Rs10 lakh to be compoundable offences. Other frauds to be continued to be non-compoundable;
• Reducing requirement for maintaining deposit repayment reserve account from 15 per cent each for last two years to 20 per cent during the maturing year;
• Foreign companies having insignificant/incidental transactions through electronic mode to be exempted from registering and compliance regime under Companies Act, 2013;
• Disclosures in the directors' report to be simplified and duplications with Sebi's disclosure requirements and financial statements to be removed while retaining the informative content for shareholders;
• Increased threshold for unlisted companies for compliance in context of requirement for independent directors (IDs), audit committee and nomination and remuneration committee;
• Test of materiality to be introduced for pecuniary interest for testing independence of ID; thresholds for relatives' pecuniary interest to be revised to make it more practical;
• Requirement for a managerial person to be resident in India for twelve months prior to appointment to be done away with;
• Disclosures in the prospectus required under the Companies Act and Sebi Regulations to be aligned, with a view to make these simpler, by allowing prescriptions to be as per Sebi Regulations;
• ESOPs to be allowed to promoters working as employees/directors;
• Limit on sweat equity to be raised from 25 per cent of paid-up capital to 50 per cent for start-ups;
• Recognition of the concept of beneficial owner of a company proposed in the Act. Register of beneficial owners to be maintained by a company, and filed with the Registrar;
• Provisions with regard to consolidation of accounts to be reviewed and those with respect to attachment of standalone accounts of foreign subsidiaries to be relaxed in certain cases;
• Re-opening of accounts to be limited to 8 years;
• Mandatory requirement of taking up some items only through postal ballot to be relaxed in case of a company that is required to provide electronic voting at its general meetings; and
• Requirement for annual ratification of appointment/continuance of auditor to be removed.

The committee had extensive consultations with stakeholders before making its recommendations. More than 2,000 suggestions were received during the consultation process.

The stakeholders consulted included all Industry chambers, professional institutes, law firms, financial sector and other regulators.

Six broad-based groups were set up to review the suggestions received during the public consultation, each group being convened by a member of the committee, and consisting of subject-matter experts, including industry representatives, lawyers, company secretaries, cost accountants, investors' representatives and chartered accountants.

The committee said it has endeavoured to reconcile competing interests of the various stakeholders keeping in mind the difficulties and challenges expressed by them, and also being mindful of the government's objective of furthering ease of doing business, encouraging start-ups and the need for harmonising various laws.

The committee also kept in mind the need to bring in greater clarity in the Act and rules and harmonising the various provisions thereof while making its recommendations.

The Companies Law Committee was constituted in June 2015 for examining and making recommendations on the issues arising out of implementation of the Companies Act, 2013. The Committee submitted its report to the government on Monday (1 February 2016).

The committee was chaired by secretary, ministry of corporate affairs and consisted of Bharat Vasani (nominee of the Confederation of Indian Industries), Reva Khetrapal (retired judge of the Delhi High Court), Y M Deosthalee (nominee of the Federation of Indian Chambers of Commerce and Industry), AS Durga Prasad (president of the Institute of Cost Accountants of India), Manoj Fadnis (president of the Institute of Chartered Accountants of India), Atul Mehta (president of the Institute of Company Secretaries of India), NS Vishwanathan (executive director from RBI) and PK Nagpal (executive director from SEBI), as co-opted members and joint secretary (policy) at the corporate affairs ministry.

The full report is available on the website of the ministry of corporate affairs, www.mca.gov.in, and the ministry will receive public comments on the report online till 15 February 2016 on the facility made available specifically for the purpose at the portal.