24 January 2018

 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.