The Companies (Amendment) Act, 2017

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The Companies (Amendment) Act, 2017

2018

Introduction

The Ministry of Law and Justice published the Companies (Amendment) Act, 2017 (Amendment Act) for general information in the Official Gazette of India on 3 January 2018.

The Ministry of Corporate Affairs has notified Sections 1 and 4 of the Amendment Act, through a notification dated 23 January 2018. Further, a large number of sections of the Amendment Act will come into force from 9 February 2018.

The other sections of the Amendment Act shall come into force once they have been notified.

The Amendment Act amends the Companies Act, 2013 (Principal Act). This update addresses the major changes in law that will be applicable once all sections of the Amendment Act are notified.

The Companies (Amendment) Bill, 2017 was introduced in the Lok Sabha on 16 March 2016 as the Companies (Amendment) Bill, 2016. This bill was based on the report of the Companies Law Committee submitted in February 2016. After its introduction in the Lok Sabha, the bill was referred to the Standing Committee on Finance on 12 April 2016, which submitted its report on 7 December 2016. The Government, after considering the suggestions of the Standing Committee and other factors, gave notice of amendments as approved by the Cabinet to the Lok Sabha. The Companies (Amendment) Bill, 2017 was thereafter passed by the Lok Sabha on 27 July 2017 and received the assent of Rajya Sabha on 19 December 2017. Presidential assent was accorded to the bill on 3 January 2018. The Ministry of Corporate Affairs, through a notification dated 23 January 2018, has notified the commencement of Sections 1 and 4 of the Amendment Act. Further, a large number of sections of the Amendment Act will come into force from 9 February 2018.

Major changes

The major changes that will be brought out in the Principal Act, as a consequence of the commencement of the Amendment Act, are set out below:

Definitions: The Amendment Act makes changes to the following definitions:

(a) Associate company: The term œassociate company has been amended to include an explanation to the term joint venture used in the definition and an updated explanation to the term œsignificant influence.

The term œsignificant influence has been significantly expanded in scope to mean control of at least 20% of total voting power (as opposed to share capital, as it was before the amendment) or control of, or participation in business decisions under an agreement (as opposed to only control of business decisions).

The term œjoint venture has been defined to mean a joint arrangement whereby the parties that have joint control of the arrangement have the rights to the net assets of the arrangement.

(b) Holding company: This definition has been amended by way of an insertion of an explanation to include foreign companies (which have Indian subsidiaries) and Indian companies (having foreign subsidiaries) in the definition of œholding company.

(c) Key managerial personnel: This definition has been amended to allow companies to designate a manager as a key managerial personnel under the Principal Act.

(d) Related party: The Amendment Act has expanded the definition of the expression related party to include associate companies, foreign holding companies and foreign subsidiaries.

(e) Subsidiary company: The expression subsidiary company has now been linked to the exercising or control of more than one-half of the total voting power (as opposed to the total share capital earlier) of a company.

Liability of members: The Amendment Act has inserted a new Section 3A in the Principal Act which prescribes that in case the number of members of a company falls below the minimum (being seven members and two members in case of public and private companies, respectively) and the company carries on business with such reduced number of members, then all the remaining members (who are cognizant of the fact that the business of the company is being carried out with the reduced number of members) shall be severally liable for the whole debts of the company.

Authentication of documents: The Amendment Act now enables a company to authorize an employee (in addition to key managerial personnel and officers) to sign any documents or proceedings requiring authentication by the company or any contract on behalf of the company.

Matters to be stated in prospectus: The prospectus issued by a company will now be required to set out information as specified by the Securities and Exchange Board of India, in consultation with the Central Government. The previous requirements, as set out in Section 26(1) (a), (b) and (d), have been omitted by the Amendment Act. However, a company will still be required to make a declaration in the prospectus relating to compliance with the Principal Act, the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992. The reason for this amendment is to harmonize the provisions of the Principal Act with the existing provisions.

Private placement: The Amendment Act has amended this section to introduce the defined term identified persons, which refers to persons that have been identified by the board, who will be offered securities under the private placement process. While this concept was implicit in the earlier section, the express inclusion seeks to clarify the purpose of the private placement process by stipulating that the persons should be identified in advance. Further, the Amendment Act has also stipulated that there shall be no right of renunciation in a private placement offer. The penalties in relation to contravention of the provisions relating to private placement have also been rationalized. The maximum penalty for non-compliance has now been revised to the amount raised through the private placement or INR20 million, whichever is lower.

Acceptance of deposits: The Amendment Act has amended one of the conditions required in case a company accepts deposits from the public. A company is now required to deposit a sum equivalent to 20% of the deposits maturing the following financial year in a separate bank account (called the deposit repayment reserve account) maintained with a scheduled bank, by the 30th of April each year. Further, the requirement to provide deposit insurance has been done away with. In addition, a company that has committed a default in the repayment of deposits may again begin accepting deposits once it has made good the default and a time period of five years has elapsed since the default was made good.

Beneficial ownership: The Amendment Act has introduced an inclusive definition for the expression beneficial owner. The Amendment Act has also introduced new provisions relating to significant beneficial ownership of companies. Every individual, whether alone or otherwise, who holds in excess of 25% of the beneficial interest (termed as a significant beneficial owner) in a company is required to make a declaration to the company. Further, the company is required to maintain a register of such significant beneficial ownership and file a return of significant beneficial owners of the company.

The Amendment Act also provides a mechanism for the determination of the significant beneficial ownership of shares. On non-compliance with the provisions relating to significant beneficial ownership, the company can approach the National Company Law Tribunal to seek the curtailing of the rights attached to such shares.

Annual return: The Amendment Act has made certain changes in respect of annual returns to be filed by companies. There is no longer a requirement to disclose the indebtedness of a company in the annual return. Further, there is no longer a requirement to include an extract of the annual return in the report of the board of directors; the annual return is now required to be uploaded in its entirety on the website of the company, and a link to the annual return is required to be included in the report of the board of directors.

Place of AGM and EGM: The Amendment Act prescribes that the annual general meeting (AGM) of an unlisted company may now be held at any place in India (as opposed to the city of the registered office of the company) if consent is received from all its members.

Further, the Amendment Act has prescribed that the extraordinary general meeting (EGM) of a wholly owned subsidiary of a company incorporated outside India can be held outside India.

Declaration of dividend: As per the new amendment, an interim dividend may now be declared after the close of the financial year but before the holding of the annual general meeting. Further, the computation of profits shall exclude any amounts representing unrealized gains, notional gains or a revaluation of assets and any change in the carrying amount of an asset/liability on measurement at fair value.

Financial statements: It is now mandatory for a company to prepare a consolidated financial statement that accounts for its associate companies as well (in addition to its subsidiary companies).

Corporate social responsibility (CSR): The Amendment Act has altered Section 135(1) to clarify that the financial criteria (net worth, turnover or net profit) used to determine the applicability of the section shall be on the basis of the metrics in the preceding financial year, as opposed to the earlier language of œany financial year. The Amendment Act has also prescribed that in the case of a company where the appointment of an independent directors is not mandatory, the CSR committee may be constituted with two directors.

Directors: The Amendment Act has altered the requirement for newly incorporated companies to have a director resident in India for a period of a 182 days. The revised provision states that such requirement shall apply proportionately at the end of the financial year in which the company is incorporated. Further, the Amendment Act has also made changes to the conditions for being an independent director.

Disqualification of directors: The Amendment Act has made an alteration to Section 164(2) of the Principal Act by the introduction of a provisio that states that in case a person is appointed as a director in a company that is in default of Section 164(1)(a) or (b) (which relates to non-filing of financial statements or annual returns and default on repayment of deposits or failure to redeem debentures), then that director shall not suffer the disqualification under Section for 164(2) for a period of six months from the date of his appointment. This change has been made so that a newly appointed director has the ability to rectify the non-compliance of the company without the fear of disqualification.

Further, the Amendment Act also prescribes that the disqualification under clauses (d), (e) and (g) shall continue to apply in cases where an appeal or petition has been filed against the order of disqualification or conviction.

Vacation of office of directors: The Amendment Act has made a change to Section 167 of the Principal Act to state that in case of a disqualification under Section 164(2), the director so disqualified shall vacate his office in every company save for the one in respect of which the disqualification was sustained. This change was necessary because in the absence of such language, the director so disqualified would vacate office in all companies, including the ones that caused the disqualification. At such a juncture, there would not be any directors remaining in the company to remedy the defects that caused the disqualification under Section 164.

Loans: The Amendment Act has altered Section 185 of the Principal Act to allow companies to provide loans to entities in which their directors are interested, subject to passing a special resolution and the borrowing entity utilizing the funds for its principal business purposes.

Managerial remuneration: By virtue of the Amendment Act, the requirement to obtain the approval of the Central Government for the payment of remuneration exceeding 11% of the net profits has been done away with. Companies can now pass a special resolution in their general meeting for the payment of enhanced remuneration to their directors and managerial personnel.

Rationalization of punishments: The penalties for various offenses that have been set out in the Principal Act have been rationalized by the Amendment Act. This includes changes to Section 447 and the introduction of Sections 446A and 446B.

Conclusion

The changes set out in the Amendment Act are based on the recommendations contained in the Report of the Companies Law Committee, dated 1 February 2016. Some of the changes are also of clarificatory in nature. The overall rationale behind the amendment is to facilitate the ease of doing business in India.

Some of the most major implications are as follows:

The provisions of the Principal Act have been harmonized with other existing laws and regulations, especially those made under the Securities and Exchange Board of India Act, 1992.

The provisions of the Principal Act that had inconsistencies and omissions have been corrected.

Penalties under the Principal Act that were onerous and not commensurate with the offence committed have now been rationalized.

Some changes that have been brought about in the Principal Act are clarificatory in nature and have brought much-needed clarity on certain provisions.