1. Column: An unfinished business

Column: An unfinished business

The significant changes are limited to related-party transactions and fraud reporting

Updated: December 26, 2014 12:01 AM

Is the euphoria and hype that the Companies Act (Amendment) Bill passed by Lok Sabha last week will bring big bang reforms to ease doing of business justified? Do the amendments have that far-reaching an effect? Have all requests and representations of industry been addressed? Is it good enough to just send positive sentiments, that all is eased in the Indian company law? A closer examination of the amendments can only answer these questions.

The lawmakers’ context and the purpose of any legislation can be understood from the ‘statement of objects & reasons’ in the draft. Let’s look at what the amendment bill stated. It cited two reasons for amendment. First, it said the amendments are needed to address practical difficulties faced in complying with some of the requirements—which is quite true. Ever since the Companies Act’s piecemeal enforcement began, nothing but major challenges have come up—be it complying with some of extremely harsh provisions or selecting the correct interpretation of provisions out of the many possible, thanks to some ambiguously-drafted provisions.

Second, it said it will facilitate the ‘ease of doing business’. For that, let’s see what the amendments are and how they can ease business. The amendments relate to the manner of fraud-reporting by the auditors, disclosing fraud in director’s report, related-party transactions (RPT), restriction on public inspection of board resolutions filed with the RoC, transferring equity shares to Investor Education and Protection Fund when dividend remains unpaid or unclaimed for 7 consecutive years, restrictions on grant of bail, making common seal optional, doing away with minimum capital for companies, limiting powers of special courts to try offences, writing off all past losses before declaring any dividend, exempting loans/guarantees/security given by the holding company to its subsidiaries and providing punishment for accepting deposits in violation of the Companies Act.

Unlike earlier, now frauds, which cross the threshold limit, will have to be reported to the central government. For others, the report can go to the audit committee, or in its absence, to the board. The board will then disclose this in its report presented to the shareholders. There is no threshold limit provided in the Bill and is left to the ministry of corporate affairs (MCA) to prescribe.

RPTs will require an ‘ordinary resolution’ instead of a ‘special resolution’. This is, perhaps, the most critical amendment. It will dilute disinterested non-related-party shareholders’ voting powers. Of course, this will delight related-party shareholders. But non-related party shareholders and proxy firms for minority shareholders naturally seem unhappy. They say it will affect and put brakes on shareholders’ democracy and activism in India, which had just started to pick up. Their views aren’t totally without basis. The jury may still be out on this one but this amendment strikes the right balance—this doesn’t allow interested shareholders to vote at all and at the same time only gives simple majority right to non-related party shareholders thereby stopping them from blocking genuine RPTs. The Bill has borrowed a leaf from Sebi’s guidelines and mirrored the provision of omnibus approval by the audit committee to RPTs and of also exempting RPTs between holding company and its wholly-owned subsidiaries, provided the holding company consolidates the accounts of its subsidiary which are presented to the shareholders. Here again, the power has been delegated to MCA to prescribe conditions for the omnibus approval.

There are many contradictory news reports which suggest that all board resolutions filed with the RoC are restricted for public inspection. This is incorrect. Only those resolutions which have to be statutorily approved in a board’s meeting and which cannot be passed by circulation are restricted from public viewing. For instance, resolution for buy-back, borrowing and investment of funds, grant of loan and providing of guarantee / securities, diversification of business, merger, amalgamation or acquisition of companies will now not be available for public view. This will ensure confidentiality of important but very limited kinds of resolutions.

Another case of such reporting relates to the provision that supposedly “eases” the restrictions on the grant of bail. The fine print of amendment to Section 212 (6) reads contrary to what has been reported. What it does is to substitute the long list of sections mentioned therein which attract punishment for fraud under Section 447 by simply using the expression “offences covered under Section 447”. Therefore, this will have no effect at all. It is incorrect to say that it will ease the restrictions on the grant of bail.

In the definitions of ‘private company’ and ‘public company’, the figures of minimum paid-up share capital of R1 lakh and R5 lakh, respectively, are deleted but the expression “having a minimum paid-up share capital as may be prescribed” is retained. This means MCA will now prescribe minimum limit, albeit different from the earlier figures. This is not a major amendment as nobody had concerns on these limits. In fact, the Companies Act, 1956, had provided for these limits for a very long time. Let’s hope MCA prescribes a lower limit.

It is evident that other than for RPTs and reporting of fraud, the amendments cannot be said to be big reforms which will ease doing business. That will require substantial amendments. For instance, clarity on the status of a private company whose securities (like NCDs) are listed on stock exchanges is still needed. Sadly, it is treated as a full-fledged listed company requiring all compliance as prescribed for a listed company. Then, the meaning of “ordinary course of business” in Section 185 is still unclear; the ambiguity around Section 186 overriding Section 185 still persists (when the intent is not to override Section185, then why should the language be ambiguous?). Section 186 should completely exempt loans and investments by the holding company to its wholly-owned subsidiary; private and unlisted public companies should be exempted from provisions of insider trading.

It seems the hype and euphoria is much exaggerated. Many substantial amendments are needed if the ease of doing business is to be achieved in spirit, and not just in letter.

Lalit Kumar
The author is a partner with J Sagar Associates. Views are personal

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