The Companies (Amendment) Bill removes ambiguities; all you want to know in 4 points

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New Delhi | April 7, 2017 3:54 AM

In the wake of the liberalisation of the Indian economy in 1991, several attempts were made to revamp and redesign the Companies Act, 1956, to keep pace with the changing rules of the financial world.

Finally, over 50 years later, and in the face of a vastly different world, the Companies Act, 2013, was enacted. (Reuters)

In the wake of the liberalisation of the Indian economy in 1991, several attempts were made to revamp and redesign the Companies Act, 1956, to keep pace with the changing rules of the financial world. Attempts were made but ultimately aborted in revamping the company law regime in 1993, 1997 and 2003. Finally, over 50 years later, and in the face of a vastly different world, the Companies Act, 2013, was enacted.

While this piece of legislation made significant inroads into a new era in corporate governance in India, there continued to be some stumbling blocks. As a response to calls from various stakeholders to further streamline the Act, the Companies (Amendment) Bill, 2016, was introduced in Parliament in March 2016. The Standing Committee on Finance carried out another review of the Bill and submitted its findings in December 2016.

Relaxing compliance norms

Moving away from the vestiges of the Licence Raj, and in the spirit of “ease of doing business,” the amendments proposed in the Bill are expected to simplify disclosure and compliance requirements for companies. An example of this is doing away with the requirement of government approval for managerial remuneration and replacing it with approval through a special resolution by shareholders in the general meeting. The Bill has suggested simplifying the format of the Board’s report and has recommended avoidance of repetitive information. Further, the requirement of filing an extract of the annual return as a part of the Board’s report has been removed. An exemption has been provided from uploading individual financial statements of step-down foreign subsidiaries by listed holding companies where consolidated financial statements have been prepared by the foreign subsidiaries in accordance with the laws of the relevant foreign country. In the interests of transparency and fairness, guiding principles for determination of penalties have been introduced, such as size of company, nature of business, injury to public interest, nature/gravity of default and repetition of default.

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Encouraging start-ups

The start-up ecosystem in India has seen an unprecedented boom. Taking note of this, the amendment Bill proposes several incentives to start-ups and small companies. The preconditions for a company to be considered “small” have been relaxed and so has the format of the Board’s report and annual return for one-person companies and small companies. The fine for non-filing of statutory annual filings has been significantly reduced for such companies. They have been provided more avenues to raise funds, by removing the embargo on companies to advance loans to subsidiaries with common directors.

Harmonising laws

Currently, compliance requirements for companies are spread across the Companies Act, 2013, and allied regulations such as the SEBI Act. The resultant ambiguities and overlaps not only dissuade companies from complying with the relevant laws, but also pose significant practical difficulties in giving effect to their provisions. The amendments are geared towards doing away with dual requirements, especially in the context of separate prescriptions for prospectus and the contents of the Board’s report. Provisions on prohibition on forward-dealing and insider-trading have been omitted since those are only relevant for listed entities and are already regulated by Sebi.

Easier management

Unlisted companies will now be allowed to convene annual general meetings at any place in India, as opposed to registered offices, provided approval of all shareholders is obtained in advance. The Bill has empowered the Centre to exempt any class of foreign companies from applicability of registration and other requirements provided in the Act. Foreign companies with merely incidental presence in India may get exemption from registration and other requirements, hopefully putting an end to speculation over this. The Bill attempts to address provisions that were criticised on the grounds of being onerous. Relaxing the restrictions on the number of layers of subsidiaries is a much-needed step towards giving companies greater freedom in the way they structure themselves. Changes for easier compliance, as recommended by the Companies Law Committee, have also been made through amendments in various “rules” notified under the 2013 Act.

The Companies (Amendment) Bill, 2016, is aimed at remedying several problems with the current set-up. Once implemented, it can remove many ambiguities from the current law and streamline its provisions with other relevant laws. With many countries moving towards a “comply or explain” model of corporate governance, giving greater autonomy to businesses in their running and making way for simple and non-burdensome compliance norms are welcome steps.

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