SUMMARY OF KEY RECOMMENDATIONS OF THE COMPANIES LAW COMMITTEE Recommending Amendments to the Companies Act of 2013 1. BACKGROUND The Report by the Companies Law Committee (CLC) recommending amendments to the Companies Act of 2013 was released on February 1, 2016. The Committee chaired by the Secretary of Ministry of Corporate Affairs was established in June by the Ministry of Corporate Affairs. The Government received several representations requesting the review of the Companies Act, 2013 and in pursuance of which the CLC was formed. The mandate of the CLC was to: (a) make recommendations on issues arising from the implementation of the Companies Act, 2013, and (b) examine the recommendations received from the Bankruptcy Law Reforms Committee, the High Level Committee on Corporate Social Responsibility, the Law Commission of India and other agencies. 2. OVERVIEW The Report has been divided in two parts suggesting recommendations on the provisions under the Companies Act, 2013 in Part I and recommendations on the Rules in Part II of the Report. The recommendations of the Report, if implemented, will result in approximately 100 amendments in the existing Companies Act, 2013 and its Rules. Some of the recommended amendments are clarificatory and some are more substantive in nature. This note discusses some of the key substantive amendments that are subdivided under the heads of: Part I: Management of Company, Part II: Penal Provisions, Part III: Procedural Provisions, Part IV: Corporate Social Responsibility, Part V: Foreign Companies and Part VI: Start Ups Page 1 of 7
3. KEY HIGHLIGHTS PART I: MANAGEMENT OF COMPANY i. Under Section 7(1) (c) of the Act, directors and first subscribers are required to furnish affidavits regarding their not being convicted of offences. The CLC has suggested that the requirement indicated therein be replaced with the furnishing of self- declaration since a wrong declaration carries a stiff punishment under the Act. 1 ii. Under Section 21 a document requiring authentication by a Company had to be signed by any key managerial personnel or an officer of the company duly authorized by the Board. The CLC has suggested the said requirement be dispensed with and instead signatures by any employee of the company duly authorized by the Board shall enable authorizations. 2 iii. Section 197 of the Act caps the managerial remuneration payable by a public company as well as imposes the condition of seeking approval from the Central Government along with shareholders in the form of a special resolution for exceeding such limits. The Committee recommended that the requirement for government approval may be omitted altogether, and necessary safeguards in the form of additional disclosures, audit, higher penalties, etc. may be prescribed instead. 3 iv. The CLC has also recommended enabling a whole time key managerial personnel, holding necessary qualifications, to hold more than one position in the same company at the same time. 4 v. As per Schedule V of the Act, a Managing Director/Whole Time Director should have been a resident in India for previous one year. The CLC has recommended that, in order to draw on the larger pool of resources and increasing mobility of professionals/talent worldwide, this requirement may be done away with subject to satisfaction of other applicable regulatory clearances. 5 vi. The CLC has recommended the deletion of Sections 194 and 195 which restrict forward dealing by Directors and KMPs and insider trading by any person including directors and KMPs respectively. The said provisions seemingly are applicable to public and private companies. Since the securities of private company are not marketable, the Committee was of the view that the SEBI regulations are 1 Refer Para 2.3 of the CLC Report 2 Refer Para 2.6 of the CLC Report 3 Refer Para 13.3,13.4 and 13.5 of the CLC Report 4 Refer Para 13.11 of the CLC Report 5 Refer Para 13.14 of the CLC Report Page 2 of 7
comprehensive in the matter and hence in view of the reservations expressed by the various stakeholders, sections 194 and 195 be omitted. 6 PART II: PENAL PROVISIONS a. Punishment for Fraud Section 447 of the Act lays down the punishment for any person found guilty of fraud to imprisonment not less than six months but which may extend to ten years and fine not less than the amount involved in fraud but which may extend to three times the amount involved. Further in case the fraud involves public interest the minimum imprisonment cannot be less than three years. The CLC recommended that only fraud which involves an amount of rupees ten lakh or one percent of the turnover of the company, whichever is lower, may be punishable under Section 447 (and noncompoundable). Frauds below the limits, which do not involve public interest, may be given a differential treatment and compoundable since the cost of prosecution may exceed the quantum involved. 7 b. Offer or invitation for subscription of securities on private placement Any violation under Section 42 of the Act entails a penalty equivalent to the amount of the offer or of Rs. 2 crores whichever being the higher amount. Additionally the company is required to refund all monies to subscribers within a period of thirty days of the order imposing the penalty. As per the recommendation of CLC the said penalty shall be imposed based on the type of violation which may be either procedural or substantive in nature. The CLC states that any violation under sub-section (7) and (9) which is a procedural violation, in such a case, penalty of Rs.1000/- per day of default not exceeding Rs. 20 Lakhs commencing from the expiring of the time period within which the filings have to be made under the said sub-sections to be imposed. For the violations which are substantive in nature the penalty as prescribed presently shall apply except that between the offer amount and the amount of Rs. 2 crores the amount being the lower amount shall be payable as penalty. 8 Similar relaxation of penalty has been suggested under Section 117 in the light of the fact that the non-filing of resolutions too is a procedural breach. 9 6 Refer Para 12.23 of the CLC Report 7 Refer 28.15 of the CLC Report 8 Refer 28.22 of the CLC Report 9 Refer 28.23 of the CLC Report Page 3 of 7
PART III: PROCEDURAL PROVISIONS c. Fees for Filing The CLC has recommended that as per Section 403(1) of the Act which allows for belated filing of documents upon payment of additional fees up to a period of 270 days, the fact that such a provision is applicable only to Sections 89,92,121,137 and 157 has to be provided for with clarity. There has been a recommendation to enhance the additional fees substantially to deter non-compliance and in case of submission within the original period it should be made zero. Also formulating a separate provision for the provisions apart from the stated six sections has been suggested. 10 PART IV: CORPORATE SOCIAL RESPONSIBILITY The CLC considered recommendations from the High Level CSR Committee as well while making suggestions for amendment of Section 135 Corporate Social Responsibility along with the CSR Policy Rules, 2014. The following recommendations have been made in the Report: S. No. Existing Provision Recommendation 01. S.135(1) any financial To replace the said phrase to preceding year 11 financial year 02 Rule 3(2) of the Companies (CSR Policy) Rules, 2014 requires a company to spend on CSR for 3 financial years even when a company ceases to be covered under Section 135(1) of the Act. 12 The CLC recommended that a company which ceases to be a company covered under sub-section (1) for any financial year may not be required to spend on CSR for that financial year. 03. Rule 5(1), CSR Policy Rules, 2014- provides exemption to unlisted companies, private companies, and foreign companies to have the committee with less than three directors and without the Independent Directors where they were not required to be appointed. 13 To prescribe the said exemption in the manner of having two or more directors 10 Refer 22.2 of the CLC Report 11 Refer Para 9.17 of the CLC Report 12 Refer Para 9.11 of the CLC Report 13 Refer Para 9.16 of the CLC Report Page 4 of 7
03. Rule 2(1)(f), CSRP Rules,2014 excludes from the calculation of net profits the amount received as dividends from any other companies in India which are covered by Section 135 of the Act. 14 As per CLC such a Rule leads to an incongruous situation, wherein companies which were not required to spend on CSR would nevertheless be required to constitute the CSR Committee. CLC suggested that such an inconsistency be removed and prescriptive powers to exclude certain sums from net profits in Section 135(1) itself. 04. Section 384 of the Act 15 As per Rule 3 of CSRP Rules, 2014 Foreign Companies are also required to comply with the provisions of CSR. CLC recommended that Section 384 of the Act may specifically include this requirement. 05. Section 135(3)(a) of the Act states that the Companies shall indicate the activities to be undertaken by the company as specified in Schedule VII 16 06. Explanation below Section 135(5) states that the average net profit to be calculated in accordance with Section 198. 17 As per CLC recommendation the said provision should be amended to refer to the subjects as specified in Schedule VII. The recommendation has been to replace average net profit with net profit. Additionally prescriptive powers were also recommended to be introduced for specifying the manner of calculation of net profits of a foreign company, through Rules while referring to Section 381 PART V: FOREIGN COMPANIES S. No. Existing Provisions Recommendations 01. Definition Section 2(42) 18 The Committee felt that even though no amendment needs to be carried out in the definition of foreign company, those foreign companies with incidental, insignificant transactions may be exempted from the requirement for registration and other requirements under Chapter XXII by 14 Refer Para 9.17 of the CLC Report 15 Refer Para 9.19 of the CLC Report 16 Refer Para 9.20 of the CLC Report 17 Refer Para 9.21 of the CLC Report 18 Refer Para 1.10 of the CLC Report Page 5 of 7
providing for prescriptive powers under section 379. 02. Companies incorporated outside India without physical place of business in India Rule 6, Companies (Registration of Foreign Companies) Rules, 2014 19 03. Closure Of Project Office/Liaison Office/Branch Office Chapter XXII of the Act 20 04. Debentures, annual return, etc. and their inspection Section 384 of the Act states that the provisions of Chapter VI shall apply mutatis mutandis to charges on properties, which are created or acquired by any foreign company. Form FC-4 for filing annual returns by foreign companies provides only about properties in India. 05. Annual Return Section 384(2) of the Act provides that the provisions of Section 92 subject to exceptions as provided under the Rules shall apply to foreign companies in the same manner The CLC recommended that the companies conducting businesses online shall provide the details of the registered office and such other details required under Section 12 (3)on the landing/home page of the website(s). The same to apply to foreign companies as well. Foreign Companies which do not have physical presence in India, in such case the CLC recommended that the Rules may prescribe reporting of their principal place of business from where they are managing/administering their business in India. The Companies Act of 1956 prescribed a Form 52 for the closure of project office/liaison office/branch office, however, no such Form has been prescribed under the 2013 Act the same may be provided for along with the necessary Rules. The CLC recommends that clarity be provided that these provisions will apply only to charges on funds raised in India. CLC however, held that the Foreign Companies operating as branches in India, for e.g. a foreign bank, all the above details may not be available with it. Therefore the CLC recommended that the disclosures required under Form FC-4 may be reviewed. 19 Refer Para 2.9 of the CLC Report 20 Refer Para 15.2 of the CLC Report Page 6 of 7
as they apply to a company incorporated in India. 21 06. Accounts of foreign company Section 381 read with Rule 5(2) of the Companies (Registration Of Foreign Companies) Rules, 2014 provides that the provisions of Chapter X and Rules made thereunder, as far as applicable, shall apply mutatis mutandis, to foreign companies. 22 The Committee felt that the Ministry may clarify specifically the provisions of Chapter X that would be applicable in case of audit of Indian accounts of a foreign company PART VI: START UPS i. Rule 8(4) of the Companies (Share Capital and Debentures) Rules, 2014 restricts the issue of sweat equity shares to twenty-five percent of paid up equity share capital. The Committee recommended that start-ups, may be permitted to issue sweat equity shares beyond twenty-five percent and up to fifty percent of the paid up equity share capital. 23 ii. Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014 restricts issue of ESOPs to promoters or promoter directors even if they are employees of the company. The Committee felt that, in order to encourage start-ups, this rule may be relaxed to enable issuance of ESOPs to promoters who may be working as employees or employee directors or whole time directors. 24 21 Refer Para 15.4 of the CLC Report 22 Refer Para 15.5 of the CLC Report 23 Refer Para 4.10 of the CLC Report 24 Refer Para 4.11 of the CLC Report Page 7 of 7