IMPORTANT AMENDMENTS TO COMPANIES ACT, 2013

The Companies (Amendment) Act, 2017 (Amendment Act) which recently received the President`s assent, brings about much needed modifications to the Companies Act, 2013 (Act) to govern companies in a more transparent and efficient manner.

This update endeavours to summarise some of the important amendments brought about by the Amendment Act:

• Associate Company and Joint Venture Company - Section 2(6): The Amendment Act has altered the definition of associate company wherein the term significant influence means control of at least 20% of the total voting power, or control of, or participation in business decisions under an agreement as opposed to the earlier definition which included control of 20% of the total share capital. The Amendment Act has also defined joint venture to mean a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement.
• Related Party - Section 2(76): The term related party, with reference to a company, now includes any body corporate whose investment in the company would result in the company becoming an associate company of the body corporate.
• Subsidiary Company - Section 2(87): The definition of subsidiary company has been amended to mean a company in which the holding company controls more than one half of the total voting power either on its own or with other subsidiaries as opposed to the earlier definition which included control over one half of the total share capital.
• Debentures - Section 2(30): The definition of debentures now specifically excludes the instruments referred to in Chapter III-D of the Reserve Bank of India Act, 1934 (derivatives, money market instruments etc); and (b) such other instrument issued by a company, as prescribed by the Central Government in consultation with the Reserve Bank of India.
• Several liability of members - Section 3A: A new section has been inserted wherein if the number of members of a public company is reduced below 7 and in case of a private company below 2, then the members during that time who were cognisant of the said reduction, shall be severally liable for the debts of the company if it carries on business for more than 6 months after such reduction.
• Private Placement - Section 42: The Amendment Act contains an express provision by which a company shall not utilise monies raised through private placement unless allotment is made and the return of allotment is filed with the Registrar of Companies. Further, it clarifies that the private placement offer and application shall not carry any right of renunciation.
• Beneficial Interest in shares - Section 89: This term is defined to include, directly or indirectly, through any contract, arrangement or otherwise, the right or entitlement of a person alone or together with any other person to— (i) exercise or cause to be exercised any or all of the rights attached to such share; or (ii) receive or participate in any dividend or other distribution in respect of such share.
• Register of significant beneficial owners - Section 90: Every person holding a beneficial interest of more than 25% of the shares of a company (significant beneficial owner) shall make a declaration to the company specifying the nature of his interest and other particulars and the company is required to maintain a register of beneficial owners and file a return of significant beneficial owners. This is an additional register now required to be maintained pursuant to the Amendment Act.
• Resident Director - Section 149: The requirement of having a resident director has changed from calendar year to financial year.
• Independent Director - Section 149: Earlier, the independent director could not have any pecuniary relationship with the company, holding company, subsidiary or associate company. Under the Amendment Act, an independent director can now have a pecuniary relationship not exceeding 10% of his total income with the company, its holding, subsidiary or associate company etc during the two immediately preceding financial years or during the current financial year. Further, no person can be an independent director if his relative, during the two immediately preceding financial years or during the current financial year, is (i) holding any security or interest in the company exceeding Rs 50,00,000/- or 2% of the paid-up capital of the company, its holding, subsidiary or associate company, (ii) is indebted to the company, its holding, subsidiary or associate company, (iii) has given guarantee or provided security in connection with the indebtedness of any third person to the company, its holding, subsidiary or associate company (iv) has any other pecuniary transaction or relationship with the company its holding, subsidiary or associate company, amounting to 2% or more of its gross turnover or total income singly or in combination with the transactions referred to in clause (i), (ii) or (iii) above. Further, if such relative is an employee, then the above restrictions shall not apply for his employment during the preceding 3 financial years.
• Audit Committee - Section 177: Under the Amendment Act, the audit committee shall also have power to make recommendations to the board of directors in respect of other transactions (i.e. other than related party transactions) which they do not approve. This will make the board of the company accountable for vulnerable transactions which do not require approval under Section 188 of the Act.
  Further, the audit committee has the power to make a related party transaction (“RPT”) voidable if such transaction does not exceed Rs 1,00,00,000/- and was entered into by a director or officer of the company without obtaining approval of the audit committee and was not ratified by the audit committee within 3 months from the date of the transaction. If such transaction is with the related party to any director, then the director concerned shall indemnify the company against any loss incurred by it. This amendment relaxes the pre- requisite approval requirement of the Audit Committee for the RPTs.
• Loan to Directors - Section 185: The Amendment Act completely substitutes the existing Section 185 of the Act. The new section now only restricts loan to certain persons and firms.
• Loans and investments by company - Section 186: The Amendment Act substitutes Section 186 (3) which now permits the company to grant a loan, guarantee or security (i) exceeding 60% of the paid-up share capital, free reserves and securities premium account; or (ii) 100% of its free reserves and securities premium account; whichever is higher, to its: (a) wholly owned subsidiary company; (b) joint venture company; and for investing in a wholly owned subsidiary company.
• Related Party Transactions - Section 188: Under the Amendment Act, where 90% or more members in a company are relatives of promoters or related parties, such members shall be allowed to vote on such special resolution to approve any contract or arrangement which may be entered into by the company with the related party.
• Managerial Remuneration - Section 197: Under the Amendment Act, the increase in the managerial remuneration payable by a public company does not require approval of the Central Government and authorisation by the members in a general meeting is sufficient.

MHCO COMMENT:

The Amendment Act has brought about significant changes which eliminate some of the superfluous provisions such as approval of Central Government for increase in managerial remuneration, approval of the members by a special resolution for loans given by a company to its subsidiary or joint venture company etc. Further, the Amendment Act brings clarity on various terms which were earlier ambiguous thereby addressing the numerous concerns raised by various stakeholders on the Act.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.

FURTHER LIBERALISATION OF FDI NORMS

The Union Cabinet very recently approved certain key amendments to the extant Foreign Direct Investment (FDI) Policy to further liberalizing and simplifying the existing policy, with the objective of attracting greater foreign investment in India.

Following are some of the key amendments approved by the Cabinet:

• 100% FDI in Single Brand Retail Trading (SBRT) now allowed under the automatic route:
  
  The extant FDI policy allows 49% FDI under automatic route, and FDI beyond 49% through the approval route. It has now been decided to permit 100% FDI under automatic route for SBRT. Further the SBRT entity is now permitted to set off its incremental sourcing of goods from India for global operations during initial 5 years, beginning 1 April of the year, when its first store is opened, against the earlier mandatory sourcing requirement of 30% of purchases from India. After completion of this 5 year period, the SBRT entity is required to meet the 30% sourcing norms directly towards its India’s operation, on an annual basis.
• Investments in Air India:
  
  FDI in Air India by foreign airlines is now allowed, under the Government approval route. However the total FDI in Air India, including that of foreign airlines shall not exceed 49%, either directly or indirectly.
• Investments in real estate brokerage services:
  
  The Government has clarified that that real-estate broking service does not amount to real estate business and is therefore, eligible for 100% FDI under the automatic route.
• Issue of shares for non-cash consideration:
  
  As per the extant FDI policy, the issue of equity shares against non-cash considerations was only permitted under Government approval route. It has now been decided that issue of shares against non-cash considerations like pre-incorporation expenses shall be permitted under the automatic route in case of sectors falling under the automatic route.
• FDI in Indian Investment Companies:
  
  FDI in Indian companies, which is engaged solely in investing in the capital of other Indian companies/ LLP’s were allowed upto 100% with prior Government approval in the extant FDI Policy. As per the new amendments, if the above activities are regulated by any financial sector regulator, then FDI upto 100% under automatic route shall be allowed; and, if they are not regulated by any financial sector regulator or where only part is regulated or where there is doubt regarding the regulatory oversight, foreign investment up to 100% will be allowed under Government approval route, subject to conditions including minimum capitalization requirement, as may be decided by the Government.

MHCO COMMENT:

The amendments have significant liberalized the existing FDI regime and will go a long way in easing the norms of doing business in India. This should attract greater FDI in India and thereby shore up its foreign exchange reserves.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.

THE CONSUMER PROTECTION BILL 2018

The Consumer Protection Bill of 2018 (Consumer Bill) has been recently introduced in Lok Sabha. It seeks to amend the existing Consumer Protection Act of 1986 (Consumer Act). 

The rational of the Consumer Bill seems to be due to the emergence of global supply chains, rise in international trade and the rapid development of e-commerce, new delivery systems have arisen for goods and services and these have provided new options and opportunities for consumers. Equally, this has rendered the consumer vulnerable to new forms of unfair trade and unethical business practices. There is, therefore, a need to amend the Consumer Act to address the myriad and constantly emerging vulnerabilities of the consumers.

The key amendments proposed by the said Consumer Bill are as follows:

1.    Jurisdiction: The territorial jurisdictions of the dispute redressal forum will now include the place of residence or business of the complainant, in addition to that of the opposite party and the place of occurrence of the cause of action. The pecuniary jurisdiction of the District Commission and the State Commission (Forum) has also been enhanced to Rs 1 crore and Rs 10 crores respectively instead of the existing Rs 20 lacs and Rs 1 crore respectively. Further, consumers can also file their complaints before the Forum electronically. It also confers the power upon the Forums to review their orders.

2.    Mediation: If it appears to the Forum that the matter can be settled between the parties they have been given the power to refer the matter to Mediation.

3.   Central Consumer Protection Authority: It establishes a Central Consumer Protection Authority (Authority) to regulate the matters relating to violation of rights of the Consumers, unfair trade practices and false or misleading advertisements which are prejudicial to the interests of public and consumers. It is entrusted with a power to suo-moto inquire or cause an inquiry or investigation to be made into violations of consumer rights or unfair trade practices and recall the goods that are unsafe or dangerous and reimburse the price to purchasers or discontinue any practice that is unfair. It also has the power to impose penalty on the endorsers of such harmful or unsafe products.

4.      Product Liability: The Consumer Bill provides for a provision wherein a product liability action can be brought by a complainant on the product manufacturer, product seller or the service providers for compensation in relation to any harm caused to a consumer by such defective product or service.

5.   Unfair Contracts: Contracts having terms like excessive security deposits to be given by a consumer for the performance of contractual obligations, excessive damages for a breach of the contract, refusing to accept early repayment of debt, or permitting unilateral termination of the contract or imposing on the consumer any unreasonable charge, obligation which puts the consumer to a disadvantage are regarded as unfair contracts and shall be declared as null and void by the Forum. 

6.    Penalty: The Consumer Bill states that any manufacturer or service provider, who puts up a false or misleading advertisement, will be punished with imprisonment of up to 2 years and fine of up to Rs 10 lacs. For every subsequent offence, the offender will be punished with imprisonment that may extend to 5 years and fine, which may extend to Rs 50 lacs.   

MHCO COMMENT:   

With the growth of e-commerce, there was a need to address various issues for protection of rights of the consumers. The introduction of the Consumer Bill and enhancing the jurisdiction of each of the Forums seems to be an attempt towards providing a simpler mechanism for resolution of disputes concerning misleading ads and unfair contracts which the Consumer Act failed to provide. Although the Consumer Bill makes in mandatory for the endorsers of the Product to conduct due diligence before endorsing any product, the Consumer Bill fails to provide broad parameters for the conduct of such due diligence.

 

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.