By Arushi Sharma
The Companies (Amendment) Bill received the assent of both houses of Parliament during the monsoon session. The bill, which was introduced in the Lok Sabha in March 2016, had proposed more than 40 amendments in the Companies Act (2013) to boost corporate governance and ease of doing business. Thereafter, it had been referred to the Standing Committee on Finance in April 2016, following which the revised bill had been approved by the Cabinet and passed by the upper house on 27 July 2017. It was subsequently passed in the Rajya Sabha on 19 December 2017, through a voice vote.
A look at the amendments made
The passage of the Bill entails the removal of the limit on layers of subsidiaries and intermediaries since such restrictions hinder companies’ ability to raise funds. This was in line with the recommendations presented in the February 2016 report of the Company Law Committee (CLC), Ministry of Corporate Affairs.
Another amendment grants permission to Independent Directors to have a pecuniary relationship with the company up to 10% of their total income. The CLC was also of the view that their independence may not be compromised by minor transactions. Furthermore, the process private placement of shares has been made easier by doing away with the obligation of issuing offer letters to individuals. However, the provision of notifying the Registrar of return of allotment has been retained.
Steps to strengthen corporate governance include increased disclosure requirements. In addition to the revelation of beneficial interest in the company’s shares, which is required under the Act, the bill has further put the mandate of disclosing ‘beneficial control’ in the company of above 25 percent. This involved removing ambiguity from the definition of “significant beneficial interest.”
New provisions regarding qualification of technical members and composition of the selection committee of the National Company Law Tribunal and the Appellate Tribunal have also been brought in. Additionally, stringent penal provisions have been introduced for delayed filings of financial statements and annual returns.
Recommendations that were not adopted
According to the CLC report, Indian companies could access a larger global talent pool by relaxing the provisions mandating a residential requirement for foreign nationals to become full-time directors. It had also recommended that dormant companies be exempted from the requirement of constituting an audit committee as they may not have business activities or employees. These recommendations have not been adopted.
Certain classes of companies are required to spend 2% on Corporate Social Responsibility (CSR) as per Section 135 of the Act, failing which they have to provide reasons to the Ministry. However, non-compliance has remained an issue and there is no provision in the Act to enforce this. Replying to similar concerns raised by members in the Rajya Sabha, Minister of State for Corporate Affairs PP Chaudhary, said, “The government has already issued notices to many companies for not complying with CSR provisions under the Companies Act.” As regards initiating strict action against the defaulting companies, he added that the Special Fraud Investigation Office has been looking into the cases of 196 shell companies.
An Act in progress
The introduced amendments involve simplification of procedures and relaxation in structuring along with tightening the hold on disclosure and compliance. Most of the suggestions made by the CLC were incorporated in the Bill, envisioning greater clarity in the rules and improved transparency. However, the compliance provisions take the approach of an enhanced fee structure as opposed to providing sufficient time for filing. Ease of doing business means having a less tedious mechanism in place. So far as the CSR non-compliance is concerned, there is a need to prod more into why the defaulting companies are doing so in the first place.
Moreover, apprehensions remain around whether some of the introduced amendments could prove to be contrary to the objectives of the Bill. For instance, the provision regarding private placement could result in rampant misuse by companies; whereas, stricter compliance norms could become the government’s tool for extorting money from companies in order to increase departmental revenue.
Ultimately, the success of the Bill would be assessed only when it comes into force as an Act. It is dependent on all stakeholders whether the goal of a more flourishing economy would be realised through the changes envisaged in the Bill.
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