1. Panel suggests sweeping changes to Companies Act

Panel suggests sweeping changes to Companies Act

A government-appointed panel on Monday suggested sweeping changes to the Companies Act, 2013, making it easier for companies to raise funds and reward senior management and ensuring that steps to enhance shareholder democracy don't cripple the functioning of firms and the businesses they run.

By: | Updated: February 2, 2016 1:22 AM
The restriction on layers of subsidiaries and investment companies, which has been sought to be removed, has been a major irritant for corporate India.(Thinkstock)

The restriction on layers of subsidiaries and investment companies, which has been sought to be removed, has been a major irritant for corporate India.(Thinkstock)

A government-appointed panel on Monday suggested sweeping changes to the Companies Act, 2013, making it easier for companies to raise funds and reward senior management and ensuring that steps to enhance shareholder democracy don’t cripple the functioning of firms and the businesses they run. The committee, chaired by the corporate affairs secretary, proposed easing regulations for shareholders’ approval to the managerial remuneration and removal of the restriction on layers of subsidiaries and investment companies, moves that could address concerns raised by corporate groups after the 2013 overhaul of the Act by the UPA government.

After the Modi government took over, several of its senior functionaries including finance minister Arun Jaitley had said that amended Act was fraught with many drafting errors and contained some impractical provisions that would undermine its plan to make it easier to do business.

Among the major recommendations of the panel are a change in the definition of associate company and subsidiary company to ensure that only “equity share capital” is the basis for deciding holding-subsidiary relationship, instead of “both equity and preference share capital”. It also proposed simplification of the private placement process and doing away with separate offer letter and pitched for easing of the process of incorporation and reducing the number of filings to the Registrar of Companies (RoC).

According to the committee, which also comprises representatives from the Reserve Bank of India, the Securities and Exchange Board of India and the Institute of Chartered Accountants of India, the provisions relating to forward dealing and insider trading should be deleted from the Companies Act as listed companies are covered under Sebi regulations.

The ministry of corporate affairs has launched a public consultation process on the suggested changes and has invited comments from all stakeholders concerned till February 15 in this regard. The ministry had constituted the Companies Law Committee in June 2015 for examining and making recommendations on the issues arising out of implementation of the Companies Act, 2013.

“An unrestricted objects clause (needs) to be allowed in the memorandum of association dispensing with detailed listing of objects,” the panel suggested while suggesting self-declarations to replace affidavits from subscribers to memorandum and first directors. Moreover, it wants changes in various forms.

It also wants companies being allowed to give loans to entities in which directors are interested after passing special resolution and adhering to disclosure requirement.

The restriction on layers of subsidiaries and investment companies, which has been sought to be removed, has been a major irritant for corporate India.

The committee also wants rationalising penal provisions with reduced liability for procedural and technical defaults, while penal provisions for small companies has been sought to be reduced.

The committee held extensive consultations with stakeholders before making its recommendations and received more than 2,000 suggestions during the process.

The stakeholders consulted included all industry chambers, professional institutes, law firms, financial sector entities and other regulators.

The panel said that its endeavour has been to address difficulties and challenges expressed by various stakeholders and also to further the government’s objective of improving ease of doing business, encouraging start-ups and the need for harmonising various laws.

The suggestions also include measures to bring in greater clarity in the Act and Rules and harmonising the various provisions thereof while making its recommendations.

The panel has proposed changes in 78 sections of the Companies Act, 2013, which along with consequential changes, would result in about 100 amendments to the Act.

Approximately 50 amendments to the Rules have also been proposed. The recommendations cover significant areas of the Act, including definitions, raising of capital, accounts and audit, corporate governance, managerial remuneration, companies incorporated outside India and offences/penalties.

It wants no filing fees if financial statements and annual returns filed within prescribed time. Also, it has been suggested that auditors can report on internal financial controls with regard to financial statements.

Frauds less than Rs 10 lakh have been sought to be made compoundable offences, while bigger frauds can continue to be non-compoundable.

The panel has suggested reducing requirement for maintaining deposit repayment reserve account from 15% each for last two years to 20% during maturing year.

Foreign companies having insignificant/incidental transactions through electronic mode should be exempted from registering and compliance regime under the Act, the panel said.

It also wants disclosures in the directors’ report to be simplified, while duplications with Sebi’s disclosure requirements and financial statements can be removed while retaining the informative content for shareholders.

It has also recommended increased threshold for unlisted companies for compliance in context of requirement for independent directors, audit committee and nomination and remuneration committee.

A test of materiality can be introduced for pecuniary interest for testing independence of independent directors, while thresholds for relatives’ pecuniary interest can be revised to make it more practical, it said.

Another suggestion involves doing away with the requirement for a managerial person to be resident in India for 12 months prior to appointment.

The panel also wants disclosures in the prospectus required under the Act and Sebi regulations to be aligned, with a view to make these simpler, by allowing prescriptions to be as per Sebi regulations.

It has also suggested allowing ESOPs to promoters working as employees/directors. The sweat equity limit has been proposed to be hiked from 25% of paid up capital to 50% for start-ups.

Proposing a new section, the panel wants recognition of the concept of beneficial owner of a company and also a new clause for the need for a register of beneficial owners to be maintained by a company and and filed with the registrar.

 Removing irritants

Ease regulations for shareholders’ approval to the managerial remuneration.

Remove restriction on layers of subsidiaries and investment companies.

Change associate/ subsidiary company definition so that only ‘equity share capital’ will decide holding-subsidiary relation.

Simplify private placement process; do away with separate offer letter, ease incorporation, reduce the number of filings to the registrar, make valuation details public.

Scrap forward dealing and insider trading provisions as listed companies are regulated by Sebi.

With PTI inputs

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