Accepting the corporate sector’s demand to streamline and improve the ease of doing business in India, the Union Cabinet last week approved 14 changes in the new Companies Act. The proposed amendments—listed in the Companies (Amendment) Bill, 2014, likely to be tabled in the winter session of Parliament ending December 23—include ones on related-party transactions, punishment for illegal deposits, enabling provisions to prescribe thresholds beyond which fraud will be reported by the auditors to the government, and companies filing their board resolutions with the Registrar of Companies, among others.

Through these changes, the corporate affairs ministry has also proposed to include prohibiting public inspection of board resolutions filed in the registry, including a provision for writing off past losses/depreciation before declaring dividend for a particular year, and disclosures of frauds reported to the audit committee in the board’s report.

Besides rationalising the requirement for transfer of certain equity shares to the Investor Education and Protection Fund (IEPF); aligning the requirements prescribed under the Act and Sebi and rationalising the copious approval process for certain related-party transactions would address some of the issues raised by industry bodies such as Ficci.

The government has further tried to restrict bails only for offences relating to fraud under section 447. The proposed amendments conclude with provisions stating that winding up cases will be heard by a two-member bench instead of a three-member bench and special courts to try only offences carrying a punishment of two-year imprisonment or more so that minor violations can be taken care of by magistrates.
These initiatives taken by the NDA government, to bring changes to the regulatory framework, will improve India’s global ranking for ease of doing business. These amendments will not only pave the way for a facilitative regulatory environment in the country, but also testify the government’s commitments to remove all barriers to growth, experts believe.
The Companies Act, 2013, which replaced the Companies Act, 1956, was notified in August last year, by the previous UPA government, and came into effect from April 1, 2014, but some provisions are yet to be enforced. Of the 470 sections in the new Act, 283 sections and 22 sets of rules corresponding to such sections have so far been implemented.

The proposed changes will make it easier for corporates to get shareholders’ nod for related-party transactions. To address the problems faced by large stakeholders who are related parties, it has been proposed to replace the requirement of a “special resolution” with an ordinary resolution for approval of related-party transactions by non-related shareholders.
Special resolutions require approval of at least 75% shareholders, while for ordinary resolutions, the requirement is a minimum of 50%. Besides, related-party transactions between holding companies and wholly-owned subsidiaries have been exempted from the requirement of approval of non-related shareholders.

The amendment exempting transactions with wholly-owned subsidiaries and allowing companies to obtain approvals from the audit committee for related-party transactions seeks to align the Act with similar changes introduced by the market regulator, Sebi.
Although experts feel that the proposed amendment shows the intent of the Narendra Modi-led government to correct the anomalies in the Companies Act 2013, they want further changes such as sparing of unlisted companies from the related-party transaction norms, and mandatory firm rotation to be limited to listed companies and public-interest entities that have taken money/deposits from public or borrowings from the banks or financial institutions. Even subsidiaries of foreign private companies should also be exempted as there is no public interest involved, they claim.

The move is being seen as a big step to ameliorate the hardship being faced by corporates who may not have been able to get minority shareholders’ approval on proposed transactions.
Another demand by industrialists relates to a ceiling on the number of audits per partner which is currently set at 20 companies, a difficult stand, experts feel, given the “constraint on availability of auditors”.
Even the curtailing of the scope of the definition of relatives to include only financially dependent relatives, guarantee on loans to subsidiary companies, etc, have been left out by the government. Corporates are also of the opinion that the new concept of having independent directors is a welcome step for corporate governance in India, yet the provisions on it lack clarity on many relevant issues. For example, the new law provides limited immunity making them liable only when wrongdoings have occurred with their knowledge because of the lack of due diligence on their part. Experts say proving due diligence or the lack of it can be a tricky issue.

indu.bhan@
expressindia.com