Column: Need for speed, caution as well

Written by Lalit Kumar | Updated: Sep 24 2013, 10:37am hrs
It is happening and that too at a hastened pace. History shows that earlier attempts to replace the company law never generated such flurry of activities as has been the case this time. The pace has resulted in around one-fifth of the sections of the new Act being enforced in less than a month and a half since the Rajya Sabha approved the Bill. The draft rules are also already out for public comments. This shows the governments will to implement the new law in its entirety at the earliest. This is laudable. It should be no surprise if the coming days are packed with action. But, speed also brings with it jerks. The notified sections could pose transition challenges from the old to the new law. But that happens every time any law is replaced.

Certain important definitions have also been notified, e.g. associate companies, CEO, CFO, control, books and papers (allowing them in electronic form); financial statements now include cash flow statement and statement of changes in equity. The Act also defines global depository receipt, key managerial personnel (KMP), net worth, postal ballot, private and public company, promoter, related party, subsidiary company, turnover and total voting power, among other terms.

Many operative provisions have also been notified. These include provisions relating to prospectus (including shelf prospectus and red herring prospectus) and allotment of securities (other than private placement which is not notified); restriction on subsidiary to hold shares in its holding company; payment of dividend in proportion to amount paid-up on each share. On the list of the new provisions notified is the free transferability of securities of a public company. However, notwithstanding this concept of free transferability, the new Act recognises the contract agreed between persons in a public company restricting transfer of securities as an enforceable contract, this being a major change. The other notified sections include extraordinary general meeting; contents of explanatory statement; quorum for shareholders meeting; restricting members right to vote when calls and other sums are due; ordinary and special resolutions; punishment for failure to distribute dividend after its declaration.

Upholding the interest of accountable corporate governance, the provisions on the appointment of additional directors, restriction on the boards powers to pass certain resolutions without shareholders approval by special resolution have also been notified. Similarly, there is a fair expectation that the cause of transparency will also be served with the notification of rules on contribution for charitable purposes, to political organisations and contribution to the national defence fund. Rules on loans to directors (interestingly, this will now apply to even private companies), restrictions on non-cash transactions with directors, prohibition on forward dealing in securities by director or KMP, prohibition on insider trading of securities, compensation to managing director or whole-time director for loss of office have been notified to prevent unethical and illegal business practices. Certain provisions relating to foreign companies have also been notified though, strangely, the section defining foreign companies hasn't beenhence its implementation remains uncertain. Keeping in focus legal relief for aggrieved parties certain provisions relating to NCLT and Appellate NCLT, definition and punishment for fraud (perhaps one of the major changes in the new Act), punishment (similar to that for fraud) for false information and omission of material facts, Sebis power to regulate issue and transfer of securities, protection of actions taken in good faith and central governments rule making power including the rules for winding up have also been notified.

Since the Companies Act, 1956, already had corresponding provisions for many newly notified sections, doubts and uncertainty had cropped up when suddenly the new sections were notified on September 12the haunting question was which one will prevailthe new sections or the old sections or both will co-exist and run in parallel. This issue came up because Section 465 of the new Act, dealing with repeal and savings, does not provide that new sections will repeal the corresponding old ones as the new Act is implemented in phases. Recently, the government issued a follow-up circular clarifying that the new provisions will be applicable and the corresponding old provisions will cease to apply. This has brought relief.

The other lingering issue with the new Act is that some sections have been notified in a strange manner. One relates to buy-back and the other to registration of charges. Newly notified sections 69 and 70 deal with some aspects of buy-back but the main section 68 dealing with buy-back has not been notified yet. So how will this be implemented Will section 77A of the Companies Act, 1956 continue and be read with sections 69 and 70 of the new Act This remains completely ambiguous. Further, Section 86 of Chapter VI (dealing with registration of charges) has been notified which provides punishment for contravention of Chapter VI, while other sections of Chapter VI are not notified. Consequently, section 86 will have no teeth because to invoke this section there has to be contravention of some other section of Chapter VInone of which has been notified. Thats where the speed brings jerks! A line of clarification by the ministry would be helpful. All said, the mood right now is heartening and progressive given a new law in force after decades.

The author is partner, J Sagar Associates