Report of
The Companies
Law Committee
February 2016
Ministry of Corporate Affairs
Government of India
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TABLE OF CONTENTS
Table of Contents ................................................................................................................................ 1
Acknowledgements ..................................................................................................................... 5
Background ................................................................................................................................. 7
1. Introduction ............................................................................................................................ 7
2. Working Process of the Committee ........................................................................................ 8
3. Structure And Overview of the Report ................................................................................. 11
PART I
Recommendations Proposing Amendments to the Act ................................................................ 14
1. Definitions ............................................................................................................................. 14
2. Incorporation of Companies ................................................................................................. 23
3. Prospectus and Allotment of Securities ................................................................................ 25
4. Share Capital and Debentures .............................................................................................. 29
5. Acceptance of Deposits by Companies ................................................................................. 30
6. Registration of Charges ......................................................................................................... 31
7. Management and Administration......................................................................................... 32
8. Declaration and Payment of Dividend .................................................................................. 38
9. Accounts Of Companies ........................................................................................................ 39
10. Audit and Auditors ................................................................................................................ 46
11. Appointment and Qualifications of Directors ....................................................................... 51
12. Meetings of Board and its Powers ........................................................................................ 56
13. Appointment and Remuneration of managerial personnel ................................................. 62
14. Inspection, Inquiry And Investigation ................................................................................... 66
15. Compromises, Arrangements and Amalgamations .............................................................. 66
16. Prevention Of Oppression And Mismanagement ................................................................. 67
17. Registered Valuers ................................................................................................................ 67
18. Removal Of Names Of Companies From The Register Of Companies .................................. 67
19. Companies Authorised to Register under this Act ................................................................ 67
20. Companies Incorporated outside India ................................................................................ 68
21. Government Companies ....................................................................................................... 68
22. Registration Offices And Fees ............................................................................................... 69
23. Companies To Furnish Information Or Statistics .................................................................. 70
24. Nidhis .................................................................................................................................... 70
25. National Company Law Tribunal and National Company Law Appellate Tribunal ............... 70
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26. Special Courts........................................................................................................................ 70
27. Miscellaneous ....................................................................................................................... 71
28. Penalties................................................................................................................................ 71
29. Revival & Rehabilitation, and Winding Up ............................................................................ 80
PART II
Recommendations Proposing Amendments to the Rules ............................................................ 81
1. Companies (Specifications of Definitions Details) Rules, 2014............................................. 81
2. Companies (Incorporation) Rules, 2014 ............................................................................... 81
3. Companies (Prospectus and Allotment of Securities) Rules, 2014 (PAS Rules) .................... 85
4. Companies (Share Capital And Debenture) Rules, 2014....................................................... 86
5. Companies (Acceptance Of Deposit) Rules, 2014 ................................................................. 89
6. Companies (Registration Of Charges) Rules, 2014 ............................................................... 91
7. Companies (Management And Administration) Rules, 2014 ............................................... 91
8. Companies (Declaration And Payment Of Dividend) Rules, 2014 ........................................ 95
9. Companies (Accounts) Rules, 2014 ....................................................................................... 96
10. Companies (Audit & Auditors) Rules, 2014 .......................................................................... 99
11. Companies (Appointment And Qualification Of Directors) Rules, 2014............................... 99
12. Companies (Meetings Of Board And Its Powers) Rules, 2014 ............................................ 101
13. Companies (Appointment And Remuneration Of Managerial Personnel) Rules, 2014 ..... 103
14. Companies (Authorised To Register) Rules, 2014............................................................... 103
15. Companies (Registration Of Foreign Companies) Rules, 2014 ........................................... 104
16. Companies (Registration Offices And Fees) Rules, 2014 .................................................... 105
17. NIDHI Rules, 2014 ............................................................................................................... 105
18. Companies (Miscellaneous) Rules, 2014 ............................................................................ 106
Annexures
Annexure I: Copy of Order Constituting the Companies Law Committee ................................... 107
Annexure II: Chapter wise break up of suggestions received ...................................................... 108
Annexure III: Summary of Proposed Changes .............................................................................. 111
List of Abbreviations ....................................................................................................................... 134
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ACKNOWLEDGEMENTS
The Committee takes this opportunity to thank all the stakeholders who have
contributed by way of responses/suggestions on the dedicated facility set up on the
MCA21 portal for inviting comments for assisting the Committee. The Committee
also acknowledges and places on record the valuable comments/suggestions made by
Industry Chambers, Professional Institutes, law firms, academicians and other experts.
The Committee expresses gratitude to the members of the six Groups set up by
the Committee who contributed immensely by participating in various meetings of the
Group and expressed insights on complex company law issues.
Vidhi Centre for Legal Policy (Vidhi) provided support through analysis of
various issues in the light of international best practices on the matter which proved to
be very useful to the Committee. The Committee appreciates the support provided by
Vidhi.
The Committee is grateful to MCA, ICAI and ICSI for providing logistic
support and space for the meetings of the Committee. The Committee would like to
make a special mention of the dedicated efforts put in by the team of officers of the
Policy Division of Ministry of Corporate Affairs for collating the suggestions
received, facilitating discussions in the meeting and providing administrative &
technical support.
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BACKGROUND
1. INTRODUCTION
1.1 The enactment of the Companies Act, 2013 (the "Companies Act, 2013" or the
"Act") was one of the most significant legal reforms in India in the recent past, aimed
at bringing Indian company law in tune with global standards. The Act incorporated
recommendations made by various committees, such as the Naresh Chandra
Committee, Dr. J J Irani Committee, Vepa Kamesan Committee, etc. It also went
through a rigorous review process in the Parliament after being first tabled as a Bill in
2009. The Parliamentary Standing Committee on Finance examined the Bill twice,
during which extensive public consultations were also held.
1.2 The notification of the provisions of the Companies Act, 2013 has been done in a
phased manner, with 283 of the 470 provisions enforced by 1st April, 2014. Most of
the remaining provisions are dependent on the establishment of the National
Company Law Tribunal (Tribunal), which is likely in the next few months.
1.3 The Act introduced significant changes in the company law in India, especially in
relation to accountability, disclosures, investor protection and corporate governance.
In view of the extent and scope of changes, the stakeholders took some time to come
to terms with the new regime with the new provisions, and encountered some
difficulties in the process. Several representations were made to the Government on
the practical difficulties faced during implementation.
1.4 Though a few immediate amendments were made in May, 2015, the Government
continued to receive representations that the Act needed further review. The Hon'ble
Minister of Corporate Affairs, at the time of consideration of the amendments in the
Rajya Sabha in May 2015, also underscored some of these concerns and committed to
constitute a `Committee in which we have the representatives of the Company
Secretary institute, the CA institute or some Chambers, plus somebody from the
Department, a broad-based Committee, will be constituted to go into this whole
question for the next few months as to where the shoe pinches'. In view thereof, the
Ministry of Corporate Affairs (the "MCA") constituted the Companies Law
Committee (the "CLC" or the "Committee") under the chairmanship of the
Secretary, Ministry of Corporate Affairs vide an office order dated 4th June, 2015.
1.5 The CLC was constituted with the mandate of (a) making recommendations on issues
arising from the implementation of the Companies Act, 2013, and (b) examining the
recommendations received from the Bankruptcy Law Reforms Committee, the High
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Level Committee on Corporate Social Responsibility, the Law Commission of India
and other agencies.
1.6 The CLC consisted of a former judge of the Delhi High Court, representatives of the
Institute of Chartered Accountants of India, the Institute of Cost Accountants of India,
the Institute of Company Secretaries of India and the industry. The CLC co-opted
representatives from RBI and SEBI as members. Copy of the constitution order of
CLC is at Annexure I.
1.7 During the course of its deliberations, the CLC studied recommendations and
suggestions received from various stakeholders as well as international best practices.
The Report prepared by the CLC recommends several changes to the Companies Act,
2013 which the CLC believes to be necessary for its proper and effective
implementation. While some of the changes suggested herein are for the purpose of
removing ambiguities in the provisions, other recommendations are more substantial
in nature.
2. WORKING PROCESS OF THE COMMITTEE
2.1 The CLC had its first meeting on 13th June, 2015. It had eight more meetings between
July, 2015 and January, 2016. The CLC invited suggestions from the public on an
online e-platform specifically created for this purpose, during the period 18th June,
2015 to 31st July, 2015. The Industry Chambers and Professional Institutes were
requested to collate suggestions from their constituents, and submit these on the
online platform after necessary vetting. The Secretary General of Supreme Court of
India and the Registrar Generals of all High Courts were also requested to bring it to
the notice of the Judges as well as the Bar Association to submit their suggestions on
the e-platform. Comptroller & Auditor General (C&AG) and various regulators, viz.
Competition Commission of India (CCI), Reserve Bank of India (RBI), Securities &
Exchange Board of India (SEBI), National Housing Bank (NHB), Telecom
Regulatory Authority of India (TRAI), Central Electricity Regulatory Commission
(CERC), and Insurance Regulatory Development Authority (IRDA) were also
approached to give their suggestions to the Committee.
2.2 As part of this consultation process, over two thousand comments were received from
industry chambers, professional bodies, companies and individuals. Of these 289, 196,
132, 113, 48 suggestions were received from Institute of Company Secretaries of
India (ICSI), Confederation of Indian Industry (CII), Institute of Cost Accountants of
India (ICoAI), Institute of Chartered Accountants of India (ICAI), Federation of
Indian Chambers of Commerce & Industry (FICCI) or persons affiliated with theses
bodies respectively. It is learnt that the various industry chambers and professional
institutes had detailed consultations with their constituents before submitting their
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suggestions. A chapter wise break up on the suggestions received is placed at
Annexure II.
2.3 Six groups were set up to review the suggestions received during the public
consultation. Each group was convened by a member of the CLC, and consisted of
subject-matter experts, industry representatives, lawyers, company secretaries, cost
accountants, chartered accountants and investors' representatives. The name of
members were drawn up in consultation with industry chambers and based on inputs
from professionals, etc. The groups were also given the option to co-opt additional
members. Almost all groups co-opted members, and had several meetings to discuss
the issues assigned to them.
2.4 The first group convened by Dr. A.S. Durga Prasad, a member of the CLC and
President of the Institute of Cost Accountants of India, studied the registry-related
issues, which included the provisions on the incorporation of companies, registration
of charges, registration offices and fees payable to the MCA/RoC. The members of
the group were (1) Mr. Harinderjit Singh, Partner, Pricewaterhouse Coopers, (2) Mr.
V. Sreedharan, Practising Company Secretary (3) Mr. Nishith Desai, of M/s Nisith
Desai & Associates, (4) Mr. B. Renganathan, Executive Vice-President - IB
Compliance, Edelweiss Financial Services Ltd. and (5) Mr. D. Bandyopadhyay,
Registrar of Companies, Delhi & Haryana.
2.5 The second group convened by Mr. Manoj Fadnis, a member of the CLC and
President of the Institute of Chartered Accountants of India, examined the issues
relating to the raising of funds, such as prospectus and allotment of securities,
acceptance of deposits by companies, share capital and debentures, declaration and
payment of dividend, and registered valuers. The group was composed of (1) Mr.
Cyril S. Shroff, Managing Partner, M/s. Cyril Amarchand Mangaldas, (2) Mr. Ashok
Gupta, Legal Counsel, Kumar Mangalam Birla Group, (3) Mr. Harish Vaid, Senior
President, J.P. Group, (4) Mr. Amit Tandon, Institutional Investor Advisory Services
India Limited, (5) Mr. N.S. Kannan, Executive Director, ICICI Bank, (6) Mr. N.
Sivaraman, L&T Finance Holdings, (7) Mr. K. Narasimha Murthy and (8) Dr. T.
Pandian, Registrar of Companies, Mumbai.
2.6 The third group considered issues relating to accounts, audit and enforcement,
including inspection, inquiry and investigation and NIDHIs. This group was convened
by Mr. Y.M. Deosthalee, a member of the CLC and nominee of the Federation of
Indian Chambers of Commerce and Industry (FICCI) in the Committee. The members
of the group were (1) Mr. Jaimin Bhatt, President & CFO, Kotak Mahindra Bank Ltd.,
(2) Mr. P.R. Ramesh, Chairman, Deloitte, (3) Mr. S. Santhanakrishnan, Central
Council Member, ICAI, (4) Dr. Prithvi Haldea, Prime Database, (5) Mr. J.K. Jolly,
Joint Director, Ministry of Corporate Affairs, and (6) Mr. Kamlesh Vikamsey, Central
Council Member and former President, ICAI.
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2.7 The fourth group studied issues relating to corporate governance, which included
including management and administration of companies, meetings of board and its
powers, appointment and qualifications of directors, and appointment and
remuneration of managerial personnel. The group was convened by Mr. Bharat
Vasani, a member of the CLC and nominee of the Confederation of Indian Industries
in the Committee. The members of the group consisted of (1) Ms. Vijaya Sampath, (2)
Mr. Amarjeet Chopra, Chairman, NACAS and former President, ICAI, (3) Dr. K. S.
Ravichandran, Company Secretary, KSR & Co., (4) Mr. J.N. Gupta, Stakeholders
Empowerment Services, (5) Ms. Zia Mody, AZB & Partners, (6) Mr. Benudhar
Mishra, Joint Director, O/o, RD (NR), (7) Ms. Bina Chandarana , Kotak Mahindra
Bank Limited, and (8) Mr Narayan Shankar, Mahindra & Mahindra Limited.
2.8 The fifth group convened by Mr. Atul H Mehta, President of the Institute of
Company Secretaries of India examined issues relating to the sections yet to be
notified owing to litigation on National Company Law Tribunal. They considered,
among others, issues related to compromises, arrangements and amalgamations,
prevention of oppression and mismanagement, revival and rehabilitation of sick
companies, winding up companies, and winding up of unregistered companies. The
members of the group were (1) Mr. Bahram Vakil, AZB & Partners, (2) Mr.
Gyanendra Kumar / Mr. Cyril Shroff, Cyril Amarchand Mangaldas and (3) Mr. P.K.
Malhotra, Secretary, Company Law Board.
2.9 The sixth group convened by Mrs. Reva Khetrapal, Judge (retd.), Delhi High Court
studied the penalty provisions in the Companies Act, 2013. The members of the group
were (1) Mr. Shardul Shroff, Managing Partner, M/s. Shardul Amarchand Mangaldas,
(2) Ms. Sandhya Kudtarkar, Vice President, Group Legal Services, Tata Services Ltd.,
(3) Mr. B.N. Harish, RD SER, (4) Mr. Pradip Kapadia, M/s. Vigil Juris, (5) M/s Vidhi
Centre for Legal Policy, New Delhi, (6) Ms Preeti Malhotra, former ICSI President,
(7) Mr Vijay Sanduja, (8) Mr. S. Santhanakrishnan, Central Council Member, ICAI
and (9) Mr. Sunil H Talati, past President ICAI.
2.10 During the course of their working, the groups examined the recommendations
received by the CLC through the public consultation process. The groups were
requested to keep in mind the following Guiding Principles/ Guidelines while
examining the suggestions received from stakeholders:-
a) Need to balance the interest of various stakeholders like companies, professionals,
investors, regulators, etc.
b) Need to simplify processes or doing away with unnecessary procedures.
c) Need for greater transparency and disclosures in view of lesser regulatory
interference and greater self-regulation.
d) Bringing greater clarity in language of the provisions of the Act, wherever
required.
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e) Pros and cons of addressing issues through subordinate legislation i.e. Rules
versus amendment in the Act.
f) Compliance requirements for various class of companies versus public interest.
g) Levels of punishment for non-compliance and the necessity to improve
compliance.
2.11 MCA engaged Vidhi Centre for Legal Policy for assisting the Committee in reaching
informed decisions by carrying out research, consulting businesses, practitioners and
corporate law academics, on the principles involved as well as international practices
in the areas of insolvency, raising of capital, penalties, related party transactions and
other areas.
2.12 The CLC, based on the inputs made available by the groups, Vidhi and in-house
inputs available with MCA and the professional institutions examined and analysed
every relevant issue. The CLC also received representations from regulators and
authorities, including the Securities and Exchange Board of India, and the Reserve
Bank of India. The CLC, while examining the inputs, recognised that many of these
relate to the new principles introduced in the Act. Many of the suggestions received
during the public consultation arise from the adjustments required due to change of
balance attained under the Companies Act, 1956 framework and the new principles,
and reflect views of the affected stakeholders. Some of the suggestions relate to
transitional problems due to adjustments required while the remaining are those that
need to be addressed due to inconsistencies or genuine difficulties that businesses are
facing. The Committee, while making the recommendations, kept in view the need to
maintain balance between accepted good practices, regulatory concerns and mitigation
of genuine difficulties being faced by stakeholders.
3. STRUCTURE AND OVERVIEW OF THE REPORT
3.1 The report is divided into two parts, namely Part I, dealing with the suggested
amendments in the Companies Act, 2013, and Part II, proposing changes to Rules
issued under the Act. The recommendations in Part I of the report have been divided
into sections, broadly sequenced as per the scheme of the Chapters in the Companies
Act, 2013. Summary of the changes proposed in the Act and the Rules as contained in
the report have been tabulated at Annexure III.
3.2 The Committee's recommendations would result in changes in 78 sections, and more
than one hundred changes in the Act. While the report proposes specific amendments
that need to be carried out, it may be noted that some amendments may also require
consequential changes to the Act, which may be addressed at the stage of legislative
drafting for ensuring consistency.
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3.3 In relation to definitions of certain terms used in the Act, the Committee recommends
changes/improvements to the following definitions among others: Associate
Company, Debentures, Financial Year, Holding Company, Interested Director, Key
managerial personnel, Net worth, Related Party, Small Company, Subsidiary
Company and Turnover. These modifications have been proposed to remove
ambiguities and make the definitions more objective. The amendments proposed to
the provisions relating to incorporation of companies relate to allowing unrestricted
object clause in the memorandum of association, and certain filing and registration
related requirements. These amendments have been proposed to make the process of
incorporation simpler and provide greater flexibility for carrying out business.
3.4 In so far as the chapters relating to raising of capital are concerned, the
recommendations of the Committee are aimed at simplifying the disclosure regime,
streamlining the private placement mechanism and synchronising the provisions of
the Act with the regulations issued by other sectoral regulators. While the changes
proposed in relation to these provisions are expected to help businesses in raising
capital, they also take into account the interests of all stakeholders by ensuring that
adequate disclosures and appropriate safeguards against misuse are retained. The
amendments relating to provisions dealing with registration of charges are aimed at
providing some relaxations so as to facilitate the ease of doing business.
3.5 The recommendations of the Committee relating to declaration and payment of
dividend are aimed at harmonising the provisions in the Act and Rules to provide
correct interpretation and for addressing some loopholes to ensure that businesses do
not misuse the provisions to pay out dividend out of the company's capital. The
Committee has also suggested changes to the provisions relating to accounts and audit
to improve transparency and the quality of information in relation to the financial
position of the company. These recommendations also address ambiguities in relation
to calculation of profits for determination of a company's `corporate social
responsibility' obligations.
3.6 The Committee's recommendations on corporate governance (Chapter VII-
`Management and Administration', Chapter XI- `Appointment and Qualifications of
Directors', Chapter XII- `Meetings of Board and Its Powers' and Chapter XIII-
`Appointment and Remuneration of Managerial Personnel') are aimed at striking the
right balance among objectives such as improving corporate governance, incentivising
individuals to take up positions of responsibility, and reducing the cost of compliance.
These recommendations touch upon a wide range of issues and concepts including
independent directors, nomination and remuneration committee, audit committee,
disclosure of interests, loans and investments, managerial remuneration, and insider
trading.
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3.7 The remaining recommendations proposing amendments to the Act deal with issues
relating to compromises and arrangements, registered valuers, companies
incorporated outside India, registration offices and fees, Nidhis, National Company
Law Tribunal, Special Courts and Penalties.
3.8 The Committee has also, as part of its deliberations recommended certain changes
specifically for encouraging start-ups. In addition, there are certain recommendations
which, though being changed/modified for other classes of companies, would create a
positive environment for start-ups. These recommendations relate to incorporation,
raising of capital, and certain compliances. Specifically, the recommendations have
been made for reducing compliance burden on account of the private placement
procedure (paragraph 3.3 to 3.12 of Part I of the report), excluding convertible notes
raised by start-ups from the definition of deposits (paragraph 5.5 of Part II of the
report), simplifying the procedure to convert an LLP into a company (paragraph 14.2
of Part II of the report), addressing concerns with regard to insider trading provisions
(paragraph 12.23 of Part I of the report), allowing start-ups to raise deposits for its
initial five years without any upper limits (paragraph 5.5 of Part I of the report),
allowing start-ups to issue ESOPs to promoters working as employees (paragraph
4.11 of Part I of the report), rules regarding availability of names are being made
liberal to allow for more innovative names (paragraph 2.13 to 2.15 of Part II of the
report), relaxing the requirement for foreign nationals to be managing directors/whole
time directors (paragraph 13.14 of Part I of the report), increasing the thresholds for
private companies to comply with having an Independent Director, Audit Committee,
Nomination & Remuneration Committee (paragraph 12.9 of Part I and 12.3 of Part II
of the report), doing away with the requirement for Government approval for
managerial remuneration (paragraph 13.5 of Part I of the report), and increasing the
limits with regard to sweat equity that can be issued by a company from 25% of paid
up capital to 50% (paragraph 4.10 of Part II of the report).
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PART I
RECOMMENDATIONS PROPOSING AMENDMENTS
TO THE ACT
1. DEFINITIONS
Associate Company
1.1 Section 2 (6) of the Companies Act, 2013 defines the term "associate company", in
relation to another company, to mean a company in which the other company has a
significant influence, but is not a subsidiary company of the company having such
influence, and also includes a joint venture company. The Explanation to Section 2(6)
defines the phrase "significant influence" to mean control of at least twenty per cent
of the total share capital, or of business decisions under an agreement. The term "total
share capital" has been defined in Rule 2(1) (r) of the Companies (Specification of
Definitions Details) Rules, 2014, to mean the aggregate of (a) paid-up equity share
capital; and (b) convertible preference share capital.
1.2 It was stated to the Committee that this definition and the definition in the Accounting
Standards (and the Listing Regulations, which also refers to the Accounting Standards
definition), which excludes joint ventures, etc. were not consistent. It was also noted
that the Accounting Standards defined joint ventures separately, and that the treatment
for consolidation, related party disclosures, etc. for associates and joint ventures made
the usage of the term in the Act at odds with the usage in the Accounting Standards.
The Committee felt that to the extent that the term `associate company' has been
linked to corporate governance requirements prescribed in the Act, such as for
determining interests in transactions, for ensuring independence in the appointments
of independent directors, auditors, etc., it may not require any change other than those
recommended in the following two paragraphs. Clarity would also be required in its
usage for the purpose of consolidation of accounts, which has been addressed in
paragraph 9.5 of Part I of this report.
1.3 The Committee further noted that the term "significant influence", in the Explanation
to Section 2(6), refers to `total share capital' which includes preference share capital.
Replacing `total share capital' with `total voting power' would be consistent with
accepted principles. The Committee, therefore, further recommended that the
Explanation to Section 2(6) should read as "For the purposes of this clause,
`significant influence' means control of at least twenty per cent of the total vo ting
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power, or control of or participation in taking business decisions under an
agreement."
1.4 Further, even though the Act makes references to the term "joint venture" as an
inclusive part in the definition of the term "associate company", it would be
appropriate to define the term. Definition of `joint venture' as contained in the Indian
Accounting Standard (IndAS) 28 was considered as a comprehensive definition for
the purpose. The Committee, therefore, recommended that the term "joint
venture" may be assigned the same meaning as under Indian Accounting
Standard (IndAS) 28 as part of the Explanation to Section 2(6) itself.
Charge
1.5 Section 2(16) defines "charge" to mean an interest or lien created on the property or
assets of a company or any of its undertakings or both as security and includes a
mortgage. Chapter VI of the Companies Act, 2013 ( Sections 77 to 87) contains
provisions dealing with registration of charges with Registrar, registration of
satisfaction of charges, intimation of appointment of receiver of property subject to a
charge, punishment for contraventions etc. It was suggested that in view of the
inclusive definition, difficulties are faced in complying with the requirement of
registration of pledges, etc. It was noted that the expression "charge" is used in
various provisions of Companies Act, 2013. Judicial precedents have also specified a
more inclusive definition of charge. The Committee, therefore, felt that amending
the definition of "charge" would not be desirable. Instead, an ame ndment to
exclude the registration/filing requirement for banker's lien, etc. under Chapter
VI is suggested (paragraph 6.2 of the Part I of the report).
Control
1.6 Section 2(27) of the Act defines the term "control" in inclusive terms and provides
for it to include "the right to appoint majority of the directors or to control the
management or policy decisions exercisable by a person or persons acting
individually or in concert, directly or indirectly, including by virtue of their
shareholding or management rights or shareholders agreements or voting agreements
or in any other manner." During the process of public consultation it was pointed out
that the phrase "in any other manner" appearing in the definition is ambiguous, and
open to more than one interpretation, and thus, an exception ought to be made for
customary minority rights. It was suggested that this phrase, could by implication
include veto rights given to any financial investors and therefore, a recommendation
for creating an exception for customary minority rights was put forward. A demand
was also made to bring the definition in consonance with the definition of control as
per Accounting Standard 110. The Committee noted that a similar definition of
control had been included by SEBI in its Securities Exchange Board of India
(Substantial Acquisition of Shares and Takeovers) Regulations, 2011. The Committee
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also took note of the case of Subhkam Ventures Private Limited v. SEBI. The
Committee felt that such an inclusive definition of `control' would be required in
view of the myriad of instruments and corporate structuring that are constantly
evolving and, therefore, the Committee by a majority view, did not recommend
any change in the definition of control.
Debenture
1.7 Section 2(30) defines the term "debenture" to include debenture stock, bonds "or any
other instrument of a company evidencing a debt", whether constituting a charge on
the assets of the company or not. It had been pointed out that the phrase "any other
instrument of a company evidencing a debt" appearing in the definition made it very
broad and included, by implication, instruments like commercial papers and other
money market instruments, which were often used as an important short-term fund
raising source by eligible companies; and were well regulated under RBI regulations.
It was put to the Committee, that treatment of money market instruments and such
other instruments as debentures would give rise to difficulties. In this regard, it was
also noted that through an amendment to Rule 18 of the Companies (Share Capital
and Debenture) Rules, 2014 in March 2015, it was clarified that the raising of monies
through commercial papers would not be governed by the Rules pertaining to the
issue of debentures. The Committee, however, felt that an exception be made for
instruments covered under Chapter III D of the RBI Act, 1934 in the term
`debenture' as defined in Section 2 (30) of the Companies Act, 2013. In addition,
an exception may also be made for deposits accepted by banking companies, and
flexibility be given to the Central Government, in consultation with RBI and
SEBI, as applicable, to carve out other instruments from the definition, as may
be required.
Deposit
1.8 The Committee considered the suggestion for making the definition of deposit
less restrictive, but felt that adequate prescriptive powers for excluding amounts
received by a company from the term `deposit' have been provided in the
definition and no change is, therefore, required.
Financial Year
1.9 Section 2 (41) of the Act provides that the financial year in relation to a company or a
body corporate shall mean the period ending on the 31st of March every year. It gives
the `National Company Law Tribunal' (NCLT) the authority to allow a company or a
body corporate, which is a subsidiary or a holding company of a company
incorporated outside India, to follow a different financial year, if it is required to do
so, for the consolidation of its accounts outside India. One of the suggestions received
during the public consultation process was that the NCLT should have similar powers
16
(to allow a different financial year) for associates and joint ventures of a company
incorporated outside India, since the financial statements of associates and joint
ventures were also taken into consideration in the preparation of `consolidated
financial statements' (CFS), if required. The Committee, therefore, recommended
that the first proviso to Section 2(41) be expanded to also allow associates and
joint ventures of a company incorporated outside India to apply for a different
financial year to the NCLT.
Foreign Company
1.10 Section 2(42) of the Act defines the term "foreign company". This is wider than the
definition provided in the Companies Act, 1956, and includes companies conducting
business in India through electronic and other manner, and through an agent. Rule
2(1) (c) of the Companies (Registration of Foreign Companies) Rules, 2014, further
expands on the term "electronic mode". The Committee noted that in view of the
expansion in the scope of coverage of a foreign company and the location of the
server being immaterial, even insignificant web/internet-based electronic transactions
of a company incorporated outside India, with no establishment in India, with Indian
customers could result in such a company falling within the ambit of Section 2(42).
The Committee observed that it would be impractical to cover companies
incorporated outside India that had a mere incidental presence through an electronic
mode, and had never intended to setup a place of business in India. The Committee
felt that even though no amendment needs to be carried out in the definition of
`foreign company', those foreign companies with incidental, insignificant
transactions may be exempted from the requirement for registration and other
requirements under Chapter XXII by providing for prescriptive powers under
section 379 (Paragraph 20.2 of the report may be referred to).
Holding company
1.11 Section 2 (46) of the Act defines a "holding company" in relation to other companies,
as a company of which such other companies are subsidiary companies. Section 2
(87) of the Act defines a "subsidiary company", and Explanation (c) to Section 2(87)
clarifies that the expression "company" includes a `body corporate'. It was suggested
that an Explanation similar to Explanation (c) to Section 2(87) be included in Section
2(46), so that a company incorporated outside India could be considered to be the
holding company of another company, for the purposes of the Act. The Committee
felt that this was a minor anomaly, but which could lead to uncertainties in
ascertaining the status of a company, in case of a foreign holding company; and also
in determining the applicability of the Act to such a company. The Committee,
therefore, recommended that an Explanation (on the lines of Explanation (c) to
Section 2(87)) be included in Section 2 (46).
17
Interested Director
1.12 Section 2 (49) of the Act defines an "interested director". Section 184 (2) provides
nature of interests to be disclosed by directors, but does not use the phrase `interested
director'. The provision in essence, defined an interested director. Further, the only
reference to the term `interested director' in the Act was in Section 174 (3), and an
Explanation to that provision clarified that the meaning of the term `interested
director' would be the same as for the purposes of Section 184 (2). The definition
provided in Section 2(49), though much wider, has not been used in the Act and is
redundant. The Committee felt that in view of the redundancy, the definition of
`interested director' may be omitted.
Listed Company
1.13 Section 2(52) of the Act defines a "listed company" as "a company which has any of
its securities listed on any recognised stock exchange". It was suggested by the
stakeholders that this definition be amended to exclude companies which were
private/closely held, but had listed their privately placed non-convertible debentures/
preference shares in accordance with the SEBI Regulations. It was noted by the
Committee that the Companies Act, 1956 had defined a "listed public company", as
opposed to the Companies Act, 2013, which defines a "listed company". In view of
this definition, private companies, which listed their privately placed
debentures/preference shares, had to comply with some of the corporate governance
requirements made applicable to listed companies under the new Act. In other cases,
these requirements are applicable to private companies owing to the thresholds
prescribed in the Rules under Companies Act, 2013. The Committee also noted that
the SEBI Regulations while having a similar definition, addressed the issue of
applicability of corporate governance requirements through differential treatments to
the companies which only had their debt instruments listed. The Committee felt that
while the definition of the term `listed company' need not be modified, the
thresholds prescribed for private companies for corporate governance
requirements may be reviewed. In addition, specific exemptions under section
462 of the Act could also be given to listed companies, other than the equity listed
companies, from certain corporate governance requirements prescribed in the
Act (paragraph 12.9 of Part I and 12.3 of Part II of the report may also be
referred to).
Managing Director
1.14 Section 2(54) of the Act defines the term "managing director" to mean a director
who, by virtue of the `Articles of Association' (AOA) of a company, or an agreement
with the company, or a resolution passed in its general meeting, or by its Board of
Directors, is entrusted with substantial powers of management of the affairs of the
company, and includes a director occupying the position of a managing director, by
whatever name called. In this regard, a suggestion was made to insert a proviso,
18
clarifying that the managing director should be allowed to exercise his powers,
subject to the superintendence, control and direction of the Board of Directors,
as was provided in the second proviso to Section 2(26) of the Companies Act,
1956. The Committee was of the opinion that it was implicit in the provision itself
and therefore, an amendment was not required in the Act.
Net worth
1.15 Section 2(57) of the Act defines the term "net worth", and specifies various amounts
that are to be taken into consideration while calculating it. The net worth of a
company reflects its intrinsic value. The definition does not include the phrase `debit
or credit balance of the profit and loss account'. In this regard, the Committee
recommended for the phrase `debit or credit balance of the profit and loss
account' to be included in the definition.
Officer who is in default
1.16 Section 2(60) of the Act defines the term "officer who is in default". This definition
is relevant for ascertaining the liability of the officers of the company, in relation to
several offences described in the Act. Sub-clause (vi) of the definition covers a
director who is aware of a contravention by virtue of the receipt by him of any
proceedings of the Board, or participation in such proceedings without objecting to
the same, or where such contravention had taken place with his consent or
connivance. The Committee deliberated on the concern raised that the mere receipt of
the proceedings of a Board, unless he had also attended the Board meeting, ought not
to make a Director liable for any contravention, and that imposing such responsibility
would deter individuals from taking up positions of directorships. However, it was felt
that diluting the requirement would not be appropriate, as a Director should raise an
issue of concern based on the agenda or proceedings received by him, irrespective of
whether he attends the meeting; and that it might make it convenient for directors to
skip inconvenient meetings and raise the defence of not having attended the meeting
to escape liability. The Committee felt that sufficient defences were already
provided for Independent and Non-Executive Directors under Section 149(12) of
the Act and as such no amendment was required in Section 2(60).
1.17 A reference was also made to some of the suggestions received in response to the
MCA circular dated 29th July, 2011, issued under the Companies Act, 1956. It was
clarified therein that the prosecutions against `officers in default' had to be initiated
primarily against the managing directors, whole time directors and the company
secretary, if any; and arraying of all the directors, regardless of their personal
involvement was discouraged. The Committee recommended that the circular
dated 29th July, 2011, issued under the Companies Act, 1956, conveyed
important guidelines to field offices and may be reissued, taking into account the
changes in Companies Act, 2013.
19
Public Company
1.18 Section 2(71) of the Act defines a "public company". The proviso to this definition
states that "a company which is a subsidiary of a company, not being a private
company, shall be deemed to be public company for the purposes of this Act even
where such subsidiary company continues to be a private company in its Articles."
During the process of public consultations, it was suggested that the said proviso may
be deleted to enable public companies to incorporate subsidiaries as private limited
companies, to take advantage of the benefits available to a private company. The
Committee noted that despite the restrictions on the number of members and
transferability of shares (which are the inherent features of a private company)
in a private company, the legislative intent was clear that such private companies
should also be subject to the additional obligations and restrictions which apply
to public companies under the Act. The Committee, therefore, felt that a
subsidiary of a public company needed to be regulated in the same manner as a
public company.
Public Financial Institution
1.19 Section 2(72) of the Act defines a "public financial institution", and covers
institutions like LIC, IDFC, SUUTI etc. It was suggested to the Committee that this
definition be amended to include the State Bank of India, its subsidiary banks, as well
as other nationalized banks, in order to extend the protection and facility available
under other provisions like Section 186(5) of the Act, to them. The Committee noted
that banks were not covered under the corresponding Section 4A of the
Companies Act, 1956, and felt that there is inadequate justification to classify
banks as PFIs. The Committee, therefore, recommended that there was no need
for an amendment.
Related Party
1.20 Suggestions were received by the Committee, pointing out that the term "related
party", as currently defined, used the word `company' in Section 2(76)(viii), meaning
thereby that those entities that were incorporated in India would come in the purview
of the definition. This resulted in the impression that companies incorporated outside
India (such as holding/ subsidiary/ associate / fellow subsidiary of an Indian
company) were excluded from the purview of related party of an Indian company. It
noted that this would be unintentional and would seriously affect the compliance
requirements of related parties under the Act. The Committee, therefore,
recommended that Section 2 (76) (viii) be amended to substitute `company' with
`body corporate' and should also include investing company or the venturer of a
company in sub-clause (viii)(A) thereof. In addition, the Committee also felt that
the fifth and sixth Removal of Difficulty Orders of 2014, issued to plug
unintentional loopholes be brought into the Act through an amendment.
20
Small Company
1.21 In Section 2(85) of the Act, the Committee recommended the replacement of the
words "last profit and loss account" with the words "last audited profit and loss
account", to take care of what seemed to be an inadvertent drafting error. It also
recommended the Removal of Difficulty Order to be given effect to through an
amendment to the Act itself. Further, it was noted that a review of the thresholds
for small companies would be done by MCA, at an appropriate time.
Subsidiary Company
1.22 Section 2(87) of the Act defines a "subsidiary company", in relation to another
company (that is to say a holding company), as a company in which the holding
company controls the composition of the Board of Directors, or exercises or controls
more than one-half of the total share capital. Further, Rule 2(1) (r) of the Companies
(Specification of Definitions Details) Rules, 2014, specifies that the `total share
capital' shall be the aggregate of the paid up equity share capital and the convertible
preference share capital.
1.23 During the deliberations, it was noted that by virtue of the present definition, a
company in which the preference share capital was greater than its equity share
capital, could become a subsidiary of an entity that holds the preference shares, even
though it might not have control, or any voting rights in such a company. Further,
inclusion of the preference share capital in the total share capital could create
confusion about ownership of the company. Further, such companies could be shown
as subsidiaries, but would not be considered for consolidation purposes, as per the
applicable Accounting Standards. It was pointed out that it was problematic to treat
preference shares on par with equity shares, and this could also affect raising of funds
for several industries, especially infrastructure and allied sectors. The Committee also
felt that there were sufficient checks in the Act to address matters relating to control
over a company. In order to address the practical problems, the Committee
recommended that the term "total share capital" be replaced with the term `total
voting power', as equity share capital should be the basis for determining
holding/subsidiary status. Consequential changes in the Rules may also be
required.
Layers of subsidiaries other than investment subsidiaries
1.24 Section 2 (87) of the Act also contains a proviso that prescribes the class/classes of
subsidiary companies that shall not have layers of subsidiaries beyond a prescribed
number. This provision has not been notified so far. Further, Section 186 (1) lays
down that a company, unless otherwise prescribed, shall not make any investment
through more than two layers of investment companies. The Committee noted that
this provision was included to address practices of creating subsidiaries aimed at
making it difficult to trace the source of funds and their ultimate use, and reduce the
21
usage of multiple layers of structuring for siphoning off of funds, and that the same
was incorporated in the Act in the wake of various scams in the country. However,
this could hit legitimate business structuring. In this regard, the Committee also noted
that the J. J. Irani Committee Report on Company Law recommended that the new
Companies Act should not impose severe restrictions on corporate structuring, as
these prescriptions would put Indian companies at a disadvantage vis-à-vis their
international counterparts. The report stated, "therefore, we are of the view that there
may not be any restriction to a company having any number of subsidiaries, or to
such subsidiaries having further subsidiaries." The J. J. Irani Report also noted that
proper disclosures accompanied by mandatory consolidation of financial statements
should address the concern attendant to the lack of transparency in holding-
subsidiary structure. The report had also recognized that siphoning off of funds could
take place through other routes, and therefore, imposing a blanket restriction on the
number of layers of subsidiaries may not be the best way to deal with the concern. A
perusal of the Parliamentary Standing Committee Report on the Companies Bill 2012
(Standing Committee Report) also reveals that stakeholders had represented before
the Committee that imposing restrictions on layers could be construed as restrictive
for conduct of businesses. In addition, at another place in the report, it is proposed to
introduce a register of beneficial owners of a company, which would address the need
to know the ultimate beneficial owners in complex corporate structures. The
Committee, therefore, felt that while the proviso to Section 2(87) has not yet been
notified, it was likely to have a substantial bearing on the functioning,
structuring and the ability of companies to raise funds when so notified and
hence recommended that the proviso be omitted.
Turnover
1.25 Section 2(91) of the Act defines the term "turnover" to mean the aggregate value of
the realisation from the sale, supply or distribution of goods, or on account of services
rendered, or both, by the company, during a financial year. It was suggested that
excise duty and other taxes might be specifically excluded from the purview of this
term. The Committee noted that the term has been used in the Act, mainly in the
provisions giving prescriptive power on the basis of the criteria of a company's
turnover. Accounting Standard 9 specifies gross turnover to be the amount of revenue
from sales transactions. It was suggested by the Institute of Chartered Accountants of
India (ICAI) that the definition of turnover should mean the amount of revenue
recognised as per the applicable Accounting Standards followed by the company. The
Committee, therefore, recommended that the definition of the term `turnover' be
revised to read `"turnover" means the gross amount of revenue recognized in the
profit and loss account from the sale, supply or distribution of goods or on
account of services rendered, or both, by the company during a financial year'.
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2. INCORPORATION OF COMPANIES
Memorandum
2.1 Section 4 of the Act requires a company to have a `Memorandum of Association'
(MOA), which has to be subscribed to by the persons incorporating a company. The
Companies Act, 2013 has done away with the bifurcation of objects into `main' and
`other' objects. Instead, Section 4(1)(c) and Schedule I require the MOA of every
company to state "the objects for which the company is proposed to be incorporated
and any matter considered necessary in furtherance thereof." While the new Act has
liberalised the manner of specifying the objects in the MoA, certain problems in
implementation were reported, such as, for the approval of name of a company, and
the allotment of Corporate Identity Number for a company with multiple objects. The
English Companies Act, 2006 provides that a company's objects will be unrestricted,
unless the articles specifically restrict them. With annual reporting on the major
activities undertaken by a company, there are adequate provisions for disclosures on
the current objects of a company. Sectoral regulators can always prescribe restrictive
criteria to suit their requirements. The Committee, therefore, recommended for a
more liberal operational regime for companies. To provide for this, the
Committee recommended that Section 4(1)(c) should be amended appropriately,
to allow companies the additional option to have a generic object clause, i.e., "to
engage in any lawful act or activity or business as per the law for the time being in
force" in the MOA.
2.2 Suggestions were received from the stakeholders that the period of currency of name
approved be sixty days from the date of approval and not from the date of application.
However, considering the ground realities, the fact that a changed process for
centralised processing of name reservation/approval has already been implemented, as
well as the fact that only one re-submission is allowed, the Committee felt that there is
a case for building in efficiency in the system and reduce misuse by reducing the
period of reservation to 20 days by amending Section 4(5)(i). The Committee,
therefore, recommended that the period of name reservation should be reduced
from 60 days to 20 days from the date of approval, and simultaneously, the fees
for such reservation be reduced to Rupees Five Hundred.
Incorporation of companies
2.3 Section 7 of the Act provides for requirements in relation to the incorporation of
companies. Section 7(1)(c) requires affidavits to be given by directors and the first
subscribers regarding their not being convicted of offences indicated therein. Section
7(1)(b) also requires a declaration to be given by a professional, and by the proposed
director, or manager, or secretary of the company, with respect to compliance with the
applicable provisions of the Act, regarding the incorporation of a company.
Suggestions received by the Committee had indicated that both of these requirements
caused additional documentary burden, and could, at times, lead to a delay in the
23
incorporation of companies. It was also suggested that certification under Section
7(1)(b) could be either from directors/managers/secretaries or from professionals, and
not from both. The Committee felt that the requirements with respect to affidavits
under Section 7(1)(c) could be replaced with self-declarations, as a wrong
declaration carries a stiff punishment under the Act. Regarding certification
under Section 7(1)(b), the Committee felt that a certificate by both the parties
stated therein ought to be retained as an additional check at the stage of
incorporation of the company.
Registered Office of Company
2.4 Section 12 of the Act governs the provisions relating to the registered office of a
company. Section 12(1) seems to require that a company shall, on and from the
fifteenth day of its incorporation, and at all times thereafter, have a registered office.
Technically, this interpretation would not allow a company to have its registered
office immediately on incorporation, or earlier than the fifteenth day of its
incorporation, whereas a company could have its office from the day of its
incorporation. The Committee felt that this sub-section may be amended to
provide for a company to have its registered office within thirty days of its
incorporation.
2.5 Section 12(4) provides for the recording of the change of the registered office of a
company by the Registrar, after being given notice of the same by the company within
fifteen days of such change. The Committee noted the concern expressed by
stakeholders that in respect of certain documents like lease deeds, rent agreements and
other related documents that are required to be submitted, the prescribed time period
of fifteen days is insufficient, especially where various approvals may have to be
obtained. The Committee recommended that the time limit for registering change
in registered office be increased to thirty days.
Authentication of documents, proceedings and contracts
2.6 Section 21 of the Act provides that a document requiring authentication by a
company, or contracts made by, or on behalf of a company, may be signed by any key
managerial personnel or an officer of the company duly authorized by the Board in
this behalf. It was stated before the Committee that since the definition of "officer"
under Section 2(59) included top level management persons in a company, it would
be practically very difficult for only such top level persons to sign the documents,
without providing for any other employee to sign, even with a board resolution.
Suggestions were made for such authentication to be allowed under the signature of
`any employee of the company duly authorised by the Board'. The Committee noted
that since any authorization for employees would be backed by a board resolution, it
would be expected of the Board to exercise due care while authorizing any such
employee. Accordingly, the Committee recommended an amendment to Section
24
21, to allow authorizations, on the signature of `any employee of the company
duly authorised by the Board'.
Effect of number of members falling below the minimum requirement
2.7 Section 3(1) of the Act provides for the minimum number of persons required for
formation of a company. However, the minimum number of persons required for
continuation of a company after it is formed and legal consequences of number of
members falling below the minimum number is not provided in section 3 of the Act.
The Committee felt that suitable provisions should be made in the Act/rules to
provide for consequences of number of members falling below the prescribed
minimum i.e. fastening the continuing members with the liability for all the debts
incurred by the company till the prescribed minimum is restored. Further,
provision may also be made for the maximum period of 6 months within which
the default shall be made good failing which the violation of the law is triggered.
Similar provision was there in Section 45 of the 1956 Act.
3. PROSPECTUS AND ALLOTMENT OF SECURITIES
Matters to be stated in the Prospectus
3.1 The Committee noted that SEBI is in the process of simplifying the contents of the
prospectus/offer document by amending the provisions of SEBI (ICDR) Regulations,
2009 so as to reduce the volume of disclosures following suggestions from the
stakeholders that those offer documents are becoming too long, too detailed, and
repetitive as also too difficult to understand. The Committee felt, however, that this
objective could be achieved only if Section 26(1) of the Companies Act, 2013 is
modified to empower SEBI to prescribe the contents in consultation with MCA.
Further, MCA and SEBI may workout the minimum disclosures to be included
in the prospectus so that the regulatory objectives of both the regulators are
achieved while achieving the end purpose of reduction in the size of the
prospectus.
Civil Liability for Mis-statements in Prospectus
3.2 Section 35 of the Act prescribes civil liability for directors, promoters and experts for
issuing misleading statements in a prospectus; and the defences available to them.
During the process of public consultation, the stakeholders suggested that directors
could not rely on the statements made by experts in a prospectus, as a defence for
civil liability, although such defence was available to them under Section 62(2)(d)(ii)
of the Companies Act, 1956. In the United States, under the Securities Exchange Act,
1934, named experts (including accountants, engineers and appraisers) who prepare or
certify a portion of the registration statement, or any report supporting the registration
statement, are subject to liability for the portions they prepare. The English
25
Companies Act, 2006 provides for director's liability in case of untrue or mi sleading
statements, but also provides for a safe harbour provision, such that the director is
only liable to compensate the company for the loss suffered by the company in
reimbursing an investor if the director knew, or was reckless in not checking whether
the statement was untrue or misleading or knew the omission to be dishonest
concealment of a material fact. The Committee acknowledged that it would be
appropriate to hold experts liable for statements prepared by them, and which
the directors relied upon (as long as such experts were identified in the
prospectus). Accordingly, an amendment in the provision was recommended.
Private Placement
3.3 Section 42 of the Act, in conjunction with Section 62, lays down the framework for
private placement of securities. Further, while Section 62 governs preferential
allotment; Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014,
cross-refers to the procedure under Section 42. A few of the issues raised were with
regard to the compliance with some of the requirements provided under Section 42 of
the Act, and Rule 14 of Companies (Prospectus and Allotment of Securities) Rules,
2014. These requirements, it was suggested, were cumbersome, time consuming;
requiring elaborate, sensitive and significant public disclosures. Difficulties had been
expressed with regard to the offer letter, opening of a separate account, time period
for allotment of shares, size of minimum investment, making of a fresh offer etc. The
Committee noted that changes had been made in the current provisions to check the
gross misuse of earlier provisions relating to private placement under the Companies
Act, 1956, and felt that such requirements, which were procedural in nature and did
not cause great difficulty, ought to be retained.
3.4 The Committee also deliberated on the contents of the `Private Placement Offer
Letter' (`PPOL') (PAS-4 form), which were required to be circulated, to identified
investors/persons, and filed with the Registrar. The Committee noted that the form
mandated disclosures of extensive information relating to the company, particulars of
the offer, details about directors, financial position of the company, declarations by
directors with respect to compliances under the Act, etc. The Committee felt that the
requirement under Section 42 and Rule 14 with regard to preparation and filing
of Private Placement Offer Letter (PPOL) should be done away with and Form
PAS-4 should be discontinued. In order to ensure that investor gets adequate
information about the company which is making private placement, the
disclosures made under Explanatory Statement referred to in Rule 13(2)(d) of
Companies (Share Capital and Debenture) Rules, 2014, should be embodied in
the Private Placement Application Form.
3.5 Important information presently provided in Form PAS-4 can be shifted as
disclosure requirement under the said Rule 13(2)(d). In case of private placement
of non-convertible debentures within the ceiling specified under Section
26
180(1)(c), the Board resolution under Section 179(3)(c) should provide for
reasonable details about the proposed offer which should be specified in the
application form in such cases.
3.6 The Committee also deliberated on Section 42(3), which prohibits the making of any
fresh offer or invitation, when there are allotments pending for an earlier offer or
invitation. It was pointed out that companies might be required to simultaneously
issue, different forms of instruments, such as preference shares or non-convertible
debentures, for meeting their financial requirements that had been clarified to an
extent under Explanation (ii) below sub-rule 14(2)(b). The Committee
recommended that, subject to the limit on the number of persons who could be
made the offer of securities as prescribed under Section 42(2), a company could,
at the same time keep open more than one issue of securities (that is, of equity
share or preference share or debenture) in a year to such classes of investors as
may be prescribed by Rules in order to provide greater flexibility in raising
capital/loans while not compromising on regulatory concerns. Section 42(3)
would also need to be made explicit about the simultaneous offering of securities
of different kinds, as currently prescribed in the Rules.
3.7 The Committee felt that Section 42(7) could be modified to require that all offers
covered under Section 42 shall be made only to such persons whose names,
father's names, addresses, phone numbers and email IDs, if any, or any other
information as may be prescribed by rules are duly recorded by the company
prior to the invitation to subscribe. These details need not, however, be filed with
the Registry. The said information, however, could be asked by ROC/Inspector
during any of the proceedings under Chapter XIV of the Act. However, in order
to ensure that companies are accountable and transparent during private
placement process, a new rule may be inserted in Chapter 3 Rules to the effect
that companies would initiate circulation of application form and collect monies
only after the relevant resolution (i.e. Special resolution or the Board resolution)
is filed with the Registry. Consequential change in Rule 14(3) could also be made.
Once the basic details like names, father's names, addresses, phone numbers and
email IDs, if any, are kept by the company, the requirement for PAS-5 can also
be omitted.
3.8 At the moment, in case of non-convertible debentures a prior special resolution only
once in a year has been prescribed. The Committee recommends that since Non-
Convertible Debentures are pure borrowings and do not form part of equity
capital, the proviso to Rule 14(2)(a) may be amended to prescribe that the
relevant board resolution under Section 179(3)(c) would be adequate in case the
offer under Section 42 is for debentures up to the borrowing limits permissible
for Board under section 180(1)(c) of the Act. This would also align the
requirements with that of section 180(1)(c). It was, however, felt that the said
Board resolution should clearly mention (in the body of the resolution) that the
27
offer of debentures being approved by Board is through private placement under
Section 42 and certain other minimum details as may be prescribed in the rules
be provided in the Board resolution. Private companies (who have been given
exemption from Section 117(3)(g) through section 462 notification) should either
be required to file board resolutions under Section 179(3)(c) or pass a special
resolution.
3.9 The Committee also felt that since the requirement for filing of PPOL and
list/details of proposed offerees (i.e. PAS-5) with Registry within 30 days of
circulation of PPOL is being dispensed with, companies should be required to
file return of allotment (PAS-3) within the prescribed timeline, and should be
liable for penalties under Section 42 in case of non-compliance. Further, it could
be provided in the Act/Rules that companies would not be allowed to utilise the
monies raised through private placement unless such return of allotment is filed.
The underlying objective is to ensure that private placement process is
completed within a finite period of 90 days.
3.10 The Committee further recommended that Section 42(1) may clearly provide
that provisions of Section 42 and rules made thereunder shall also apply to offer
of convertible securities referred to in Section 62(1)(c) read with Rule 13 of the
Companies (Share Capital and Debenture) Rules, 2014.
3.11 Regarding valuation of convertible securities, the Committee felt that while the
company should be mandated to get valuation done (in respect of equity and
convertible securities), the report of the valuer should be made available to
investors, and may not be filed/circulated. The company should retain the report
with itself for making it available for regulatory purposes, as and when required.
Further, Section 62(1)(c) and Rule 13(3) requiring price of securities to be
decided in advance should be modified and provisions allowing pricing as per a
formula (on the lines of RBI Regulation/FDI Policy) may be considered.
3.12 The Committee also felt that in case of equity or mandatorily convertible
securities the minimum investment size can be twenty thousand rupees with no
linkage to face value so that it can include premium amount as well. However,
for private placement of non-convertible preference shares or non-convertible
debentures the minimum investment size could be one lakh rupees with no
linkage to face value.
3.13 It has been brought to notice that renunciation of rights is being used as a way to
bypass the provisions of preferential allotment/private placement. The Committee,
therefore, recommended that an accountable way of use of renunciation rights
by shareholders needs to be prescribed. Reference was made to the principles
contained in sections 755-756 of the English Companies Act, 2006, which could
be used for regulation of private placement and preferential allotment under
28
Companies Act, 2013 while making changes in Section 42/62 and rules made
thereunder.
3.14 The suggestions to limit the scope of Section 23 to shares instead of securities,
limiting the exit option under Section 27(2) to dissenting shareholders, who had
expressed specific dissent; linking the requirement of obtaining minimum
subscription in a public issue to the date on which the issue opened, increasing the
time limit to forty-five days under Section 39(3), and increasing the time limit of sixty
days for the allotment of securities to one hundred and eighty days under Section 42
were also considered by the Committee. However, as the suggestions made were not
in tune with the underlying principles and/or out-of-sync with the greater
efficiencies or speed of businesses on date, the Committee did not recommend for
any change to these sections.
4. SHARE CAPITAL AND DEBENTURES
Prohibition on Issue of Shares at Discount
4.1 Sub-section (1) of Section 53 of the Act prohibits issue of shares at a discount. Sub-
section (2) makes the issue of shares at a discounted price void. The Committee noted
that the use of the words "discounted price" could be interpreted to mean a price
lower than the market value of shares, and not lower than its nominal value, as
intended in sub-section (1). To remove the ambiguity, it recommended that the
word `discount', may replace the words "discounted price" in the provision.
4.2 It was noted that Companies Act 1956 allowed companies to issue shares at a discount
with the prior approval of the Company Law Board (CLB) though this facility was
hardly used. The Committee felt that to enable restructuring of a distressed
company, when the debt of such a company is converted into shares in
accordance with any debt restructuring guidelines specified by Reserve Bank of
India (Strategic Debt Restructuring Scheme issued by RBI vide Circular dated
8.06.2015), a company may issue shares at a discount to a creditor referred to in,
and as per the guidelines.
Further Issue of Share Capital
4.3 Section 62 of the Act deals with the further issue of share capital. Sub-section (2)
requires the notice with regard to offers on rights basis to be despatched through
registered post, or speed post, or an electronic mode. The stakeholders had suggested
additionally allowing courier and hand delivery as a mode. The Committee felt that
with multiple modes of delivery being allowed, companies would be able to leverage
these, without undermining the requirement of ensuring delivery. Thus, it was
recommended that any mode of delivery that would provide irrefutable/certain
proof of delivery, be allowed.
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5. ACCEPTANCE OF DEPOSITS BY COMPANIES
Prohibition on Acceptance of Deposits by Companies
5.1 Companies accepting deposits from their members or the public, are required to
comply with the requirements of Section 73(2)(c) and 73(5), that is, of keeping an
amount not less than fifteen percent of the amount of its deposits maturing during a
financial year and the next financial year, deposited and kept in a scheduled bank in a
separate bank account to be called as the deposit repayment reserve account. This
account is not to be used by the company for any purpose other than the repayment of
deposits. Private companies accepting deposits from their members are already
exempted from this requirement. The Committee felt that though the provision was
a safeguard for depositors, it would increase the cost of borrowing for the
company as well as lock-up a high percentage of the borrowed sums.
Accordingly, the requirement for the amount to be deposited and kept in a
scheduled bank in a financial year should be changed to not less than twenty
percent of the amount of deposits maturing during that financial year, which
would mitigate the difficulties of companies, while continuing with reasonable
safeguards for the depositors who have to receive money on maturity of their
deposits.
5.2 The Committee has also noted that Section 73(2)(d) mandates a company accepting
deposits to provide for deposit insurance in the manner and extent as is prescribed in
Part 5 of the Companies (Acceptance of Deposits) Rules,2014. However, as
insurance companies are not offering any products for covering company deposit
default risks, this requirement was relaxed till 31/03/2016. MCA had also taken up
this issue with Department of Financial Services (DFS) which stated that though an
insurance company is not prevented by IRDA from devising an insurance policy to
cover default risks, it is difficult to assess the risk and its likely exposure to liability as
companies are not as tightly regulated as banks with particular reference to their
financial efficiency and delivery of commitments. It was also noted by the
Committee that as on date none of the insurance companies is offering such
insurance products. Considering the above situation, the Committee felt that the
provisions of Section 73(2)(d) along with relevant Rules be omitted.
5.3 On a related note, Section 73(2)(e) requires a certification from the company that no
default has been committed in the repayment of deposits, accepted either before or
after the commencement of the Act, or the payment of interest on such deposits. It
was stated that this requirement was harsh on companies which might have defaulted
due to reasons beyond their control, such as industry conditions at some point of time
in the past, but repaid such deposits with earnest efforts thereafter. The Committee
noted that imposing a lifelong ban for a default anytime in the past would be harsh.
Therefore, it was recommended that the prohibition on accepting further
deposits should apply indefinitely only to a company that had not rectified/made
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good earlier defaults. However, in case a company had made good an earlier
default in the repayment of deposits and the payment of interest due thereon,
then it should be allowed to accept further deposits after a period of five years
from the date it repaid the earlier defaulting amounts with full disclosures.
5.4 The suggestion to allow private companies engaged in the infrastructure sector to take
deposits from their individual members without any upper limit was considered. In
this regard, the Committee agreed to recommend for allowing exemptions to
such private companies from the upper limit, as promoters or their relatives or
`Qualified Institutional Buyers' (QIB), who had invested in the risk capital
would already be aware of the business prospects of the company.
5.5 At present, private companies are permitted to accept deposits from their members'
deposits which amount shall not exceed 100% of their paid up capital and free
reserves with relaxed compliance requirements. With a view to ease raising of funds
for start-ups without additional compliance costs, the Committee recommended
that limits with regard to raising of deposits from members for `Start-ups' which
are private companies may be removed for the first five years from their
incorporation by using section 462 of the Act.
Repayment of deposits accepted before commencement of this Act
5.6 The Committee also deliberated upon the suggestion to incorporate, in the Act itself,
provisions of Rule 19 of the Companies (Acceptance of Deposit) Rules, 2014, which
allowed for deposits accepted under the Companies Act, 1956 to be repaid as per the
original terms and conditions. The Committee recommended that the provisions of
Rule 19 be provided in the Act.
Punishment for Contravention of Section 73 or Section 76
5.7 The Committee also deliberated on the suggestion for revisiting the provisions of
Section 76A which provided that the defaulting company should, in addition to the
repayment of the amount of deposit and the interest due, be punishable with fine
which should not be less than Rupees One Crore, but which could extend to Rupees
Ten Crore. The Committee recommended that the minimum fine be modified to
Rupees One Crore, or twice the deposit accepted, whichever is lower, and the
maximum amount be as already prescribed.
6. REGISTRATION OF CHARGES
Duty to Register Charges, etc.
6.1 Section 77 of the Act mandates registration of charges with the Registrar. During the
process of public consultation, it was pointed out that unlike the Companies Act,
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1956, a specific list of charges to be so registered had not been included in the new
Act or the Rules. Thus, in the absence of a specific list of charges to be registered, and
the wide definition of the word "charge", `pledges' and `liens' were also required to
be registered. These were earlier exempted from registration requirements under the
previous Act. It was stated before the Committee that registration of pledges and liens
created various practical difficulties, relating to the quantum and frequency of
registrations required, etc. for example members of the `Clearing Corporation' (CC)
deposited cash, bank guarantees, FDRs, approved securities etc. with the Corporation
towards meeting the margin and security deposit requirements would require
registration of charges, creating operational difficulties.
6.2 In this regard, the Committee felt that there was no need for the definition of the
term `charge' to be changed, since relevant judicial precedents specified that
charges included pledges. However, Section 77(3) may provide for prescriptive
powers to allow certain liens or securities or pledges to be exempted from filing.
This would address the practical problems in case of transactions by NBFCs engaged
in financing of assets, and for members/agents of the Clearing Corporation, etc.
Company to report satisfaction of charge
6.3 Section 82 of the Act provides that a company shall give intimation to the Registrar of
the payment or satisfaction in full, of any registered charge so registered within thirty
days from the date of such payment or satisfaction. Further, sub-section (1) of Section
77 shall, as far as may be, apply to an intimation given under this Section. It has been
suggested to the Committee that similar time limits, as provided for under Section 77
for registration of charge, ought to be allowed for reporting satisfaction of charges
under Section 82 too. The Committee felt that, as it would generally be in a
company's interest to report satisfaction of charges, there should not be any
regulatory concern in allowing similar timelines as allowed for registering a
charge and, therefore, recommended for the same.
7. MANAGEMENT AND ADMINISTRATION
Beneficial Interest in Shares, Register of Beneficial Owners of a Company
7.1 Misuse of corporate vehicles for the purpose of evading tax or laundering money for
corrupt or illegal purposes, including for terrorist activities has been a concern
worldwide. Complex structures and chains of corporate vehicles are used to hide the
real owner behind the transactions made using these structures. Realizing this,
jurisdictions world over have been putting in place mechanisms to identify the natural
person controlling a corporate entity. Following recommendations of Financial Action
Task Force (FATF), India has also tightened the concepts of beneficial interest and
beneficial owner as contained in the Prevention of Money Laundering Act as well as
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introduced a comprehensive definition through SEBI guidelines. The SEBI guidelines
issued in 2010 are aimed at identifying beneficial owners of security accounts held by
various intermediaries. However, since then, jurisdictions world over have taken
significant steps on beneficial ownership provisions. Changes have been made by
many jurisdictions, for example Russian Union and UK in their laws to bring in
transparency in company ownership and control. The English Companies Act, 2006
was amended in 2015 to require certain companies and LLPs to create and maintain a
`Persons with Significant Control' Register and make it available to public, as well as
file the information with the UK Companies House. A publicly accessible central
registry of UK company beneficial ownership information has also been established.
Regulatory concerns have been raised in India also, drawing on examples set by these
jurisdictions. The Ministry of Finance has suggested to introduce a Register of
Beneficial Owners by mandating it in the Companies Act.
7.2 Section 89 of the Companies Act, 2013 deals with the concept of beneficial interest in
a share which obligates every person acquiring/holding beneficial interest in a share
as well as the legal owner to make a declaration to the company in respect of such
beneficial interest. In view of the absence of a definition of beneficial interest in a
share in a company, absence of any obligation on a company to collect information on
beneficial ownership, the absence of the concept of beneficial ownership in a
company, no enabling provisions to maintain a separate register on beneficial
ownership, in the Act, the existing provisions are considered inadequate for the
purpose of mandating a register of beneficial owners of the company. The
Committee, therefore, recommended to amend the Act to mandate the following:
a) Provide a definition of beneficial interest in a share, and beneficial ownership
in a company. The existing definition under SEBI Circular/Guidelines and
the Prevention of Money Laundering Act may be used as a basis for the
definition in the Companies Act, 2013. The rules issued under the United
States Securities Exchange Act of 1934 define beneficial ownership in a
security, which can be used as a basis for the definition of beneficial interest
in a share.
b) Companies and individuals may be obligated to obtain information on
beneficial ownership. In this regard, companies may be empowered to seek
information from members and in case of failure to supply the required
information, apply sanctions in the form of suspension of rights against the
beneficial interests subject to adequate safeguards.
c) Companies would also be mandated to maintain registers of beneficial
owners and provide the information to the registry (MCA21). Periodic
updating may also be mandated. Data privacy concerns may be addressed by
making only part of the filed information available to the public.
d) Companies not complying with the requirements may be liable to fine and
criminal prosecution.
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Annual Return
7.3 Section 92 of the Act, read with Rule 11 of the Companies (Management and
Administration) Rules, 2014, provides for the filing of annual return of a company in
the prescribed form.
7.4 The Ministry of Corporate Affairs, through the Companies (Second) (Removal of
Difficulties) Order, 2014, replaced the words "paid up capital and turnover" with the
words "paid up capital or turnover" for the purposes of prescribing thresholds for
companies other than listed ones that were required to get their annual return certified
by a practising company secretary. The Committee took the view that such a
change brought about by way of a Removal of Difficulties Order may be
included in the Act by way of an amendment. The Committee further
recommended that prescriptive powers for separate Annual Return format for
small companies and one person companies, with lesser details be included in the
Section.
7.5 Section 92(3) mandates the filing of an extract of the annual return as a part of the
Board's report. This requirement is leading to duplication of information being
reported to the shareholders under other provisions of the Act or mandated to be made
available on the website of the companies. The Committee recommended that this
requirement may be omitted, and instead the web address/link of the Annual
Return filed by the company and hosted on its website, if any, should be
provided in the Board's Report and information with regard to shareholding
pattern be provided as part of section 134 requirements. The matter has been
further dealt with in paragraph 9.11 of Part I of this report.
Filings in case promoters' stake changes
7.6 Section 93 of the Act, as worded presently, requires filing of a return by a listed
company with the Registrar, in a prescribed form with respect to changes in the
number of shares held by promoters, and top ten shareholders. The Committee noted
that as the information was also required to be filed with Stock Exchanges/SEBI, it
would lead to duplication of reporting. Moreover, the present prescription required
filings on changes in individual holding, and not the changes that are linked to the
paid up share capital. This has led to an increase in the amount of filings being made
under the Act. The Committee recommended that the requirement be omitted
altogether.
Place of keeping and inspection of registers, returns etc.
7.7 Section 94 of the Act pertains to the place of keeping of registers, required to be
maintained by a company under Section 88. The register of members contained
various personal details of shareholders, like their PAN card details, E-Mail ID,
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address of members, which ought not to be used for commercial purposes.
Accordingly, the Committee suggested that such personal information, as may be
prescribed in the Rules, may not be made available publicly.
7.8 The proviso to Section 94(1) deals with the place of keeping and inspection of
registers, returns, etc. at any place in India other than the registered office of a
company. The Committee noted that greater flexibility had been provided to
companies in the Companies Act, 2013, vis-à-vis the Companies Act, 1956, with
respect to the changing of the place for keeping the registers. In this regard, the
Committee recommended that the requirement of providing the Registrar with
an advance copy of a proposed special resolution as required under Section 94(1)
be done away with, since it did not serve any purpose, particularly because the
special resolution was in any case to be filed as per the requirements of Section
117(3)(a).
Holding of Annual General Meeting
7.9 Section 96(2) requires holding of Annual General Meeting at the registered office of
the company or at some other place within the city, town or village in which the
registered office of the company is situate. The Committee did not agree with the
suggestions to allow AGMs to be convened abroad if 75% or more of members of
the company reside abroad on the ground that the companies incorporated in
India hold at least the annual general meeting in India to establish territorial
nexus. Further, the suggestion to dispense with AGMs of wholly owned subsidiary
companies was not agreed to as both i.e. WOS and holding company were separate
legal entities. However, the suggestions to allow private limited companies and
wholly owned subsidiaries of unlisted companies to convene the AGMs at any
place in India provided approval of 100% shareholders is obtained in advance, is
recommended by the Committee with a view to ease doing business. This would
require amendment to Section 96(2) so that exemption can be provided to such
class of companies.
Notice of meeting
7.10 The proviso to Section 101 (1) of the Act allows for the convening of a general
meeting of a company by giving a shorter notice than the required twenty-one days,
provided that consent is given by not less than ninety-five percent of the members
entitled to vote at such a meeting. Private companies have been given flexibility to
make suitable provisions through their AOA. The Committee was of the opinion that
obtaining the approval of ninety-five percent members entitled to vote at a meeting,
especially at a short notice, could be difficult. The Committee also referred to a
similar provision under the Companies Act, 1956 and recommended for the
requirement of ninety-five percent of the votes exercisable at such a meeting to
be applicable in the case of extraordinary general meetings only. The Committee
while considering the suggestion to allow acceptance of proxy till the beginning
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of the general meeting referred to the Standing Committee's recommendations
(2009) on proxies, and did not agree to the suggestions because of apprehensions
about their possible misuse.
Calling of extraordinary general meeting
7.11 Section 100 read with Explanation to Rule 18 deals with the provisions relating to
calling of extraordinary general meeting within India. The Committee noted that the
explanation to Rule 18(3) requires that an EGM shall be held only in India. This is an
appropriate prescription. Relaxation can be provided for wholly owned subsidiaries of
companies incorporated outside India and certain other cases. For these cases,
authority may be given to prescribe exemptions through Rules. Such a mandatory
provision may be preferably prescribed in the substantive section (section 100) and
not in the Rule. Hence, the Committee recommended that the explanation to Rule
18(3) be deleted and an explanation be incorporated at the end of Section 100
mandating that EGM shall be held only in India, as well as provide for
exemptions to wholly owned subsidiaries of companies incorporated outside
India.
Postal Ballot
7.12 Section 110(1)(a) prescribes for mandatorily transacting certain items through postal
ballot. The mandatory requirement of a postal ballot was no longer relevant for
companies which are required to conduct voting using electronic means, as this mode
equally provides for that no shareholder is deprived of his right to vote on resolutions
in case he cannot attend the AGM/general meeting. The Committee, therefore,
decided to amend Section 110 of the Act, such that Rule 22(16) of the Companies
(Management and Administration) Rules, 2014 would provide that if a company
is required to provide for electronic voting, then the same items could be covered
in its General Meetings too.
Filing of resolutions and agreements
7.13 Section 117 of the Act makes it mandatory for companies to file resolutions with the
Registrar in respect of several matters. A concern was raised that the filing of Board
resolutions as required under Section 117(3)(g), often involved disclosing confidential
and commercially sensitive information such as business strategies, financing plans,
investments, amalgamation, reconstruction exercises etc. Therefore, this requirement
ought to be done away with. However, the Committee was of the opinion that such
filings ensured that sensitive documents were not tampered with, and the original
version of the documents filed with the Registrar could be used to ensure correctness
of the documents. While acknowledging that sensitive information like business
strategies, budgets, financing plans etc. if available publicly could hamper the
business interest and that an amendment had already been made to ensure that these
filings were not available for public inspection, the Committee recommended that
while the filing requirement ought to continue, MCA may address the concerns
36
of companies by adequately publicising the provisions in the MCA21 system to
ensure confidentiality of such filed information.
7.14 Sub-section (3) of Section 117 lays down the matters in respect of which such filings
need to be made. Section 117(3)(a) provides that special resolutions need to be filed
by the company, and Section 117 (3)(e) imposes such filing obligations, where
resolutions are passed under Section 180 (1) (a) and Section 180 (1) (c). The
Committee, during deliberations, held that Section 180 (1) required the passing
of a special resolution, and that the filing requirements were triggered under
Section 117(3)(a) itself. Since clause (e) of Section 117(3) appeared to be
repetitive, it was recommended for deletion.
7.15 The proviso to Section 117(1) requires that every resolution that has an effect of
altering the Articles of Association of a company be embodied or annexed to the
AOA of a company. The Committee, while holding the view that the manner of
inclusion of the amendment of the Articles of Association be left to the discretion of
each company, recommended that the resolution altering the Articles need not be
embodied in, or annexed to the Articles of Association in cases where the
amendment, with references, in the form of a footnote, to the resolutions made, is
incorporated in the Articles of Association itself. The Committee recommended
that a clarification to this effect be issued.
7.16 In terms of Section 117 (3) (g) read with Section 179 (3)(f), companies are required to
file copies of resolutions passed to grant loans or give guarantees or provide security
in respect of loans. In this regard, the Committee considered the suggestion that
providing such information by banks may violate their confidentiality
obligations towards their customers, and recommended that an exemption be
considered for banks.
Secretarial Standards
7.17 The Committee had received a number of representations querying the requirement,
scope and content of the Secretarial Standards issued by the Institute of Company
Secretaries of India (ICSI) in accordance with the requirements laid down in Section
118 (10) of the Act. The Committee recommended that ICSI should re-examine
and revise the Secretarial Standards in consultation with all the stakeholders.
The issues received from stakeholders by the Committee should also be taken
into account during the re-examination. Further, the Committee felt that as it is
a new concept, this requirement may be reviewed after 1-2 years.
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8. DECLARATION AND PAYMENT OF DIVIDEND
Declaration of Dividend
8.1 Sub-section (3) of Section 123 of the Act, allows the Board of Directors to declare
interim dividend during any financial year out of the surplus in the profit and loss
account, and out of the profits of the financial year in which such dividend is sought
to be declared. The sub-section could be interpreted to mean that the interim dividend
for a particular financial year could only be declared during that particular financial
year period; restricting the ability of companies to declare interim dividend after the
close of the financial year but before the Annual General Meeting (AGM). Such an
interpretation could not have been the intent of the Act and would cause difficulties
for companies, as declaration of interim dividend after the close of financial year is an
accepted practice.
8.2 Further, the use of the word "and" after the words "surplus in the profit and loss
account", and before the words "out of the profits of the financial year" in sub-
section (3) of Section 123 appears at disharmony with the provisions of sub-section
(1)(a), which provides for the declaration of dividend out of the profits of the
company for that financial year, or the profits of the company from any previous
financial year(s) (subject to deduction of depreciation and other conditions), or both
the amounts. The Committee also felt that, as a measure of good corporate
governance, a company should not declare interim dividend out of the projected
profits for the full year.
8.3 The Committee, after examining the above issues, recommended that the
provisions of section 123(3) be amended in such a way as to allow declaration of
interim dividend from out of the profits of the current financial year, generated
till the date of declaration, including brought forward surplus in the Profit &
Loss Account, and the same could be declared anytime up to convening of AGM
for the said financial year.
Unpaid Dividend Account transfer of securities to IEPF in certain cases
8.4 The suggestion made by stakeholders to omit those provisions of Section 124(6), that
required a transfer of all shares in respect of which dividend is not claimed or paid for
seven consecutive years to IEPF, was rejected by the Committee. The Committee felt
that since the provisions allowed the return of securities to the claimants after
these were transferred to IEPF; the provisions could be retained as provided.
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9. ACCOUNTS OF COMPANIES
Consolidated Financial Statements
9.1 Section 129(3) of the Act requires a company having a subsidiary, a joint venture, or
an associate company, to prepare a `Consolidated Financial Statement' (CFS), in
addition to its stand-alone financial statements. The requirement for a CFS under the
Act had been introduced for the first time in the Companies Act, 2013. Before 1st
April 2014, such a requirement existed only for listed companies, which were
required to prepare consolidated financial statements in terms of the listing
agreements with stock exchanges. A number of comments received by the Committee
during the consultation process related to the preparation of a CFS and associated
matters, and were accordingly dealt with. The proposed changes have been noted in
the following paragraphs.
9.2 General Instruction Number 4 for the preparation of a CFS, as prescribed in Schedule
III of the Act, requires that the entity shall disclose a list of subsidiaries, associates or
joint ventures which have not been consolidated in the CFS, along with the reasons
for not consolidating. Comments received by the Committee suggested that the
Instruction indicated a lack of clarity on the kind of entities to be so disclosed. The
Committee noted that the Accounting Standard indicated instances where
accounts of subsidiaries, associates or joint ventures was not required to be
consolidated; and the recommendations in Paragraph 9.5 would resolve the
issue/bring clarity.
9.3 The first proviso to Section 129 (3) of the Act requires that a statement showing
salient features of the financial statements of subsidiaries are to be attached with the
financial statement of a holding company. It was suggested to the Committee that in
case of companies having overseas subsidiaries, the underlying subsidiaries of such
subsidiaries not be statutorily required to prepare separate financials and also be
exempted from having audited financial statements. The Committee recommended
that in such cases, where a CFS was statutorily required to be prepared as per
the law of the jurisdiction in which the overseas subsidiary is established and is
placed on the website in the statutory format, there should be no requirement for
standalone financial statements of the step down subsidiaries to be placed on the
website as per 4th proviso to Section 136(1) and included in the salient features
that are required to be attached. There should be no exemption in other cases.
9.4 A clarification was also sought during the consultation process, as to whether the
financial statements of such overseas subsidiaries, which may have been prepared in
accordance with the local GAAP, needed to be prepared as per the Indian GAAP, for
the purpose of placing on the website /attachment to the Indian holding company's
financial statement to be filed with the Registrar. The Committee felt that such
subsidiaries submit/attach the financial statements as per the statutory/GAAP
39
requirements of the local jurisdiction. No change in the provision is required on
this account.
9.5 The Explanation to Section 129(3) provides that "for the purposes of this sub-section,
the word "subsidiary" shall include associate company, and joint venture." The
suggestions received stated that some difficulties arose on account of the differences
in the definition of a subsidiary under Section 2(87) of the Companies Act, 2013, and
the Accounting Standards. In this regard, the Committee noted that revisions in
Accounting Standards, to bring them in alignment with the Companies Act, 2013,
were already under consideration. It was noted that the treatment in the IndAS would
also differ. The Committee, however, felt, that to ensure the same treatment for
the consolidation of accounts under the Accounting Standards and the Act, the
reference to `associates' and `joint ventures' under Section 129 ought to be
amplified/clarified, to be in accordance with the applicable Accounting
Standards.
9.6 Suggestions received by the Committee had referred to the provisions of Section
129(4), which provides that the provisions of the Act, applicable to the preparation,
adoption and audit of the financial statements of a holding company shall, mutatis
mutandis, apply to the consolidated financial statements. It had been stated that a
combined reading of Sections 129(3), 129(4), and Sections 143(2) and 143(3) of the
Act prescribe the same reporting requirements for the auditors of both the standalone
and consolidated financial statements, and that the application of such provisions with
respect to the auditor's reporting requirements under Section 143(3) might not be
practical. The Committee felt that the use of phrase "mutatis mutandis" provided
sufficient flexibility, and that only applicable reporting for the CFS needs to be
done by the auditor. As such, no change was required in Section 129(4). The
Committee, however, felt that providing some clarity on the auditors ' reporting
requirement (with respect to reporting on the Internal Financial Controls and
CARO, and for overseas subsidiaries), for the convenience of stakeholders, in the
form of guidance from ICAI to its members should be helpful. This matter has
also been dealt with in Paragraph 10.12 of Part I of this report.
Re-opening of accounts
9.7 Section 130 of the Act provides for the re-opening of accounts, after due approval
from a court or a Tribunal. The Proviso to Section 130(1) provides that the court or
the Tribunal shall give notice to the Central Government, the Income-tax authorities,
SEBI or any other statutory regulatory body or authority concerned and shall take into
consideration any representations made by them before passing any order under this
Section. A suggestion was made during the consultation process that in the interest of
the principle of natural justice, other concerned parties, like a company or the
Auditor/Chartered Accountant of the company should also be given an opportunity to
present their point of view. The Committee deliberated and felt that while a
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court/Tribunal always had the inherent power to call/give notice to any
concerned party in the process, it would be appropriate if a provision was
specifically made in the Section enabling the Court/Tribunal to give notice to any
other party/person concerned, in addition to those specifically referred to in the
provisions.
9.8 A concern was also raised on the absence of any mention about the period up to which
the accounts could be re-opened under Section 130. It would be a heavy burden on
companies if they have to maintain their accounts forever, or beyond a reasonable
time limit because of this provision of re-opening of accounts. The Committee noted
that Section 128 of the Act required a company to keep its accounts for a minimum
period of eight years, unless a direction was issued under a proviso to Section 128(5)
by the Central Government. Thus, it was decided that the applicability of
provisions of Section 130 for the re-opening of accounts could be restricted to
eight years, unless a longer period is required through a specific direction issued
by Central Government, under Section 128(5).
National Financial Reporting Authority
9.9 The Committee noted that ICAI has submitted a letter dated 18th August 2015,
wherein ICAI had raised concerns with respect to constitution of National Financial
Reporting Authority (NFRA). It was stated that the ICAI is already discharging its
regulatory functions with regard to discipline through a robust mechanism wherein a
Board of Discipline and Disciplinary Committee with Government nominees has been
entrusted with the responsibility, the Chartered Accountants profession sees
constitution of NFRA as an interference in the functioning of the profession, multiple
layers of regulation would lead to delay/duplication of work and therefore suggested
for omission of Section 132. The Committee deliberated in detail on the matter
and felt that in view of the critical nature of responsibilities wherein lapses have
been seen to cause serious repercussions, the need for an independent body to
oversee the profession is a requirement of the day. Major economies of the world
have already established such regulatory bodies. The Committee by a majority
view recommended that NFRA should be established early. Consultation may,
however, be carried out with ICAI with regard to the jurisdiction of NFRA and
the ICAI representation on NFRA.
Board's Reports, etc.
9.10 Section 134(1) of the Act states that the financial statement, including the CFS, is to
be signed by the chairperson of the company, where he is so authorised by the Board,
or by two directors, out of which one has to be the Managing Director, and the Chief
Executive Officer, if he is a director in the company, the Chief Financial Officer and
the Company Secretary of the company, wherever they are appointed. It was noted
by the Committee that in case a company did not have a managing director, the
41
Chief Executive Officer, irrespective of whether he was a director or not, being a
KMP, and responsible for the overall management of the company; should be
mandated to sign the financial statements. The Committee also noted that since
the appointment of a managing director was not mandatory for all companies,
the words "if any", may be inserted after the words "managing director".
9.11 Several suggestions pointed out that due to the numerous disclosures in the Board's
Report, the Report had become lengthier, and more expensive to produce. The
Committee felt that while some of the disclosures in the Board's Report under
the Companies Act, 1956 was insufficient and had become redundant, there was
a need to fine-tune the current requirements, without reducing the information
content of the Report. Form MGT-9 be omitted with details regarding
shareholding, etc. to be specifically prescribed under section 134(3). Salient
points of the CSR Policy, Remuneration Policy may be included in the Report
and the detailed documents/policies provided on the website of the company, if
any, and web address or link of these documents/policies provided. Changes in
the policies should be specifically highlighted in the salient points. Disclosures
with regard to loans or investments under section 186 and particulars of
contracts with related parties under section 188, if provided in the financial
statements, may be only referred, and salient points discussed, in the Board's
Report. Disclosure requirements under Companies (Appointment and
Remuneration of Managerial Personnel) Rules, 2014 may be pruned (refer para
13.2 of Part II the report). For small companies, separate format for the Board's
Report may be prescribed.
9.12 The Committee also noted that the Board's Report and the Financial Statement s
and the Corporate Governance reporting requirements of SEBI, which together
are also called the Annual Report of the company, have duplication in
disclosures. It recommended that these need to be harmonized so that the Report
is structured, repetition is avoided and made more readable.
9.13 The Committee deliberated on the suggestion of replacing the specific requirement for
disclosure, pursuant to the provisions of Section 197(12), of the ratio of the
remuneration of each director to the median employee's remuneration, with a
comparison of the director's remuneration with the weighted average of all the
employees, since big companies had a large numbers of workers. The Committee
decided to retain this requirement, and not affect any changes. The matter has
been also dealt with in Paragraph 13.2 of Part I of this report.
Reporting on Internal Financial Controls
9.14 Section 134(5)(e) of the Act provides that the Board's Responsibility Statement shall
state that the directors of the company, in the case of a listed company, had laid down
the internal financial controls to be followed by the company, and that such controls
were adequate, and operating effectively. Suggestions received by the Committee
42
stated that directors were facing difficulties in certifying that the directors had laid
down the internal financial controls to be followed by the company, and that it should
be sufficient for the managing/executive directors to confirm that the company had a
mechanism in place for internal financial controls. However, the Committee
observed that it was essential to cast this responsibility on the Board in
consonance with the fiduciary responsibilities bestowed on the Directors under
the Act, and hence, these provisions needed to be retained.
Corporate Social Responsibility
9.15 The Committee, during discussions on the suggestions made with respect to Section
135 of the Act, also considered the recommendations relating to changes in the
Act/Corporate Social Responsibility Policy Rules (CSRP Rules) made by the High
Level Committee, to suggest measures for improved monitoring of the
implementation of the `Corporate Social Responsibility Policies' (High Level CSR
Committee), constituted by the MCA.
9.16 Section 135 (1) requires every company having a net worth of Rupees Five Hundred
Crore or more; or a turnover of Rupees One Thousand Crore or more; or a net profit
of Rupees Five Crore or more, during any financial year, to constitute a `Corporate
Social Responsibility Committee' of the Board, consisting of three or more directors,
out of which at least one director has to be an independent director. Rule 5(1) of CSR
Policy Rules, 2014, allows unlisted companies, private companies, and foreign
companies, to have the Committee with less than three directors, and without
Independent Directors, where they were not required to be appointed. In this regard,
the Committee recommended that, the composition of CSR Committee for
companies not required to appoint Independent Directors be prescribed as
`having two or more Directors'.
9.17 The High Level CSR Committee, in its recommendation at para number 4.17 of the
report have suggested clarity to be brought in with regard to `any financial year' as
used in Section 135(1) for determining whether the threshold of specified net worth or
turnover or net profit is met to constitute the CSR Committee. The Committee
recommended that the words "any financial year" be replaced by the words
`preceding financial year'.
9.18 Rule 2(1)(f) of CSRP Rules, 2014, requires dividend income, etc. to be excluded
while calculating the net profit for the purposes of CSR spending. This would lead to
an incongruous situation, wherein companies which were not required to spend on
CSR, would nevertheless, be required to constitute CSR Committees. Thus, the
Committee recommended for this inconsistency to be removed by providing
prescriptive powers to exclude certain sums from net profit in Section 135(1)
itself.
43
9.19 Rule 3 of the CSR Policy Rules, 2014 clarifies that foreign companies are also
required to comply with the provisions of CSR. The Committee agreed with the
principle that the CSR provisions should be applicable to foreign companies, as
provided in the Rules. The High Level CSR Committee had also recommended vide
its recommendation at para number 4.15 of its Report that clarity be provided on the
applicability of the section to foreign companies. The Committee, therefore,
recommended that Section 384 of the Act may specifically include this
requirement.
9.20 Section 135(3)(a) requires that the CSR Policy shall indicate `the activities to be
undertaken by the company as specified in Schedule VII'. Schedule VII indicates
broad areas, which have been further explained to be interpreted liberally in circular
no. 21/2014 issued by MCA. The Committee felt that it would be appropriate for
the said clause to be modified to refer to subjects in Schedule VII within which
CSR activities could be taken up by an eligible company.
9.21 The Explanation below Section 135(5) provides that for the purpose of this provision,
the `average net profit' shall be calculated in accordance with Section 198. The High
Level CSR Committee has recommended in para 4.16 of the report for the term
"average net profit" to be replaced with the words "net profit", to remove any
ambiguity. The Committee also agreed with the recommendation. Further,
prescriptive powers were also recommended to be introduced for specifying the
manner of calculation of `net profits' of a foreign company, through Rules, while
referring to Section 381.
9.22 The High Level CSR Committee, in paragraph 4.10 of its report, had recommended
for allowing a carry forward of unspent amounts, from a particular year; and for
transfer of any unspent balance, after a period of five-years, to one of the funds listed
in Schedule VII of the Act. The Committee felt that while a carry forward might
be desirable, the requirement of mandatorily transferring the unspent amount at
the end of five-years would go against the principle of `comply or explain' and
would not be appropriate. In view of this, the Committee recommended the
continuance of the current provisions, where the actual expenditure was
reported with no obligation to carry over.
9.23 The suggestion to allow CSR spends in kind was not agreed to by the High Level
Committee on CSR (as specified in para 3.13.2 of its report), in view of various issues
(including the valuation issue) involved. The Committee concurred with the
aforementioned observation and did not recommend any amendment.
9.24 Section 135 (5) provides that a company has to give preference to the local area, and
areas around its areas of operations, for spending the amount earmarked for CSR
activities. It had been suggested that government companies be allowed to deposit
44
CSR funds into state coffers/ any CSR Authority established by the State
Government, so that it could channelize these according to its priorities. The
Committee felt that this would defeat the intent behind the provision and take
away the flexibility available with the company. Further, the Committee felt that
the requirement with respect to CSR are new provisions, and as such, all
companies should be given the required flexibility for a reasonable period, say
five-years, to experience the implementation of this provision. Accordingly, no
amendment was recommended.
9.25 The High level CSR Committee had recommended for Section 8 companies to be
exempted from the provisions on CSR. It had been noted by the said Committee that
"Section 8 companies are `not for profit' companies registered under Section 8 of the
Companies Act, 2013 (Section 25 of Companies Act, 1956) with the basic object of
working in social and developmental sector. Their involvement in charitable and
philanthropic activities is already 100 percent. These companies prepare income and
expenditure statements which reflect the surplus/deficit of an organization and not the
profit of the company. The surplus accrued to such company is not distributed
amongst members, but is ploughed back to the expenditure of the company, that in-
turn is spent on social welfare activities already included in Schedule VII. Therefore,
it may be not necessary for these companies to undertake CSR activities outside the
ambit of their normal course of business." The Committee, however, felt that it
would not be appropriate to give differential treatment to section 8 companies in
the matter of providing exemptions from compliance of CSR provisions, as there
are certain areas where examples could be found of section 8 and other
companies co-existing, for example, companies in microfinance business.
Further, there should not be a difficulty in section 8 companies using the
prescribed percentage of its surplus for CSR activities. Thus, it was decided not
to recommend for exemption of Section 8 companies from the CSR provisions of
the Act.
Right of member to copies of audited financial statement
9.26 Section 101 of the Act provides for a twenty-one day notice period to call for a
general meeting, and also provides for a meeting to be called for at a shorter notice,
provided at least ninety-five percent of the voting power consented to such shorter
notice. However, under Section 136, for the circulation of annual accounts to the
members, the Section requires twenty-one days' notice, and does not provide for a
shorter notice period to circulate the annual accounts. In this regard, the Ministry of
Corporate Affairs had issued a circular dated 21st July 2015, in which it had clarified
that the shorter notice period would also apply to the circulation of annual accounts.
The Committee felt that it would be appropriate that clarity allowing financial
statements to be circulated at a shorter period in accordance with the provision
for shorter notice meeting under Section 101 be provided in Section 136.
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9.27 Item (a) of the 4th proviso to Section 136 (1), provides that every company having a
subsidiary or subsidiaries, shall place separate audited accounts in respect of each of
its subsidiaries on its website, if any. The Committee considered the suggestion to
exempt unlisted companies from the requirement of uploading financial statements of
all subsidiaries on the website of the holding company. In this regard, the
Committee recommended that requirement should be limited to listed companies
in view of their dispersed shareholding and the need for greater regulatory
oversight as compared to unlisted companies. However, the Committee did not
agree to the suggestion that for listed companies, item (a) would apply only in
respect of its Indian subsidiaries. Further, the Committee felt that the
requirements under item (b) of the 4th proviso to Section 136 ought to continue
to be applicable to all companies, including unlisted companies.
10. AUDIT AND AUDITORS
Appointment of Auditors
10.1 Section 139(1) provides that the shareholders at the `Annual General Meeting'
(AGM) shall appoint an auditor of a company, for a consecutive period of five years,
and that his appointment shall be ratified every year at the AGM. The first proviso to
the said sub-section requires the company to place the matter relating to such
appointment, for ratification by the members in each AGM. During the consultation,
clarity was sought for cases where the shareholders choose not to ratify the auditor's
appointment as per Section 139 (1). A clarification was also sought for cases where
the auditor was unwilling to continue at any stage before the completion of his five-
year term; whether this would be treated as a casual vacancy.
10.2 The Committee felt that the objective of Section 139(1) is to ensure independence of
auditors and any decision taken by the shareholders not to ratify any appointment
during the period of five-years would be akin to removal of the auditor and provisions
of Section 140(1) should come into play. Explanation to Rule 3 of Companies (Audit
and Auditors) Rules, 2014, provides for such a situation and requires that the Board
shall appoint another individual or firm as the auditor (s) after following the
procedure laid down in this behalf under the Act. There is an inconsistency due to
the two provisions, wherein removal would require a special resolution and
approval of the Central Government while removal through non-ratification
would need a resolution. The Committee felt that it would be advisable to omit
the provisions with respect to ratification, as it defeats the objective of giving five
year term to the auditors. This would also remove the inconsistency in the Act.
10.3 The Committee felt that if the auditor was unwilling to continue at any stage
before completion of his five-year term, it should be treated as a case of
resignation, and the provisions of Section 139(8) for the filling up such casual
46
vacancy arising due to resignation should apply. This may be made explicit in
the section itself.
Rotation of auditors
10.4 Section 139 (2) provides for the rotation of auditors, and requires such rotation after
five consecutive years, in case of individual, and ten consecutive years, in case of a
firm. The third proviso to Section 139 (1) requires for the compliance of the
provisions of rotation within three years from the commencement of the Act. Rule
6(2) of the Companies (Audit and Auditors) Rules, 2014, provides that the period for
which the auditor has held office prior to the commencement of this Act shall be
taken into account for the calculation of the period of five, or ten years, as the case
may be. It was suggested to the Committee, that the earlier tenure held by the auditor
should not be considered for the purposes of determining the cutoff point for rotation
of auditors.
10.5 There was strong representation from some of the affected auditors to either omit the
provisions or increase the transition period to five years in view of implementation of
Indian Accounting Standards. It was pointed out that the new requirements have been
largely accepted by the auditors. The Committee noted that the three years'
transitional period provided to companies was reasonable and required no
modification. Further, the intention of the legislation had been accurately
translated in the Rules, and for this purpose, a transitional time period of three
years had already been given. Hence, the Committee felt that there was no need
for any change. However, the Committee, felt that Rule 6 ought to provide
clarity that the three years' transition period would be counted from AGM to
AGM, and not from the commencement of the Act.
10.6 It was also suggested to the Committee that private companies ought to be exempted
from the provisions governing the rotation of auditors. The Committee noted that only
large private companies with a paid up capital of Rupees Twenty Crore or more were
required to follow this provision. The threshold has been prescribed keeping in view
the importance of such a provision for the purposes of good corporate governance and
larger public interest. The Committee, therefore, decided against increasing this
threshold to reduce the coverage of private companies.
Disqualification of Auditors
10.7 Section 141 (3) (d) of the Act, inter alia, provides that a person shall not be eligible
for appointment as an auditor of a company, if he, or his relative, or partner, holds any
security, or gives a guarantee, or is indebted to the company for specified amounts,
etc. Suggestions received by the Committee expressed difficulty in the application of
these provisions, as an auditor did not have any control over the financial decisions of
his relatives who were not financially dependent on the auditor, like brother, married
47
sister, or married daughter. It was suggested that, for the purposes of Section
141(3)(d), the term "relative" be restricted only to financially dependent relatives.
10.8 The Committee deliberated on the suggestion and noted that the definition of the term
`relative' had been significantly changed and the coverage reduced to only eight
relatives. It was also noted that restricting the coverage to `financially dependent
relatives' in the Indian context would impair the principle of ensuring independence
of the auditor. It was deliberated whether the difficulties expressed would be
addressed if the thresholds with respect to holding securities, or giving loans etc.
under Section 141(3)(d)(i) & (ii), read with Rule 10(2) & (3), are linked to a certain
percentage (say two percent) of the total share capital of a company. The Committee,
however, felt that revision in the thresholds would not adequately address the
difficulties and instead, for the purpose of section 141(3)(d), the term relative
should be suitably modified.
10.9 Section 141 (3) (i) provides that any person whose subsidiary, or associate company,
or any other form of entity is engaged on the date of appointment, in the services
prohibited under Section 144, shall be disqualified from being appointed as an
auditor. It was suggested during the public consultation that the language of Section
141(3) (i) was such that a firm which was engaged in any of the activities mentioned
in Section 144 anywhere in the world, and was rendering any such service to
companies other than the auditee company, could not be appointed as an auditor of a
company in India, even if such services were rendered to an entity which was totally
unconnected with the auditee company. It was requested to provide clarification that
the restriction under Section 141(3)(i) would apply, only if the services were rendered
to the company that proposed to appoint the auditor. The Committee noted that any
relaxation to section 141(3)(i) read with Section 144 would compromise
independence of auditors. However, clarity needs to be provided by suitably
amending the clause.
Powers and duties of auditors and auditing standards
10.10 The first proviso to Section 143 (1) of the Act provides that the auditor of a holding
company shall also have the right to access the books of accounts of subsidiary
companies, in connection to the consolidation of accounts. In view of this, it was
suggested that the auditor of the holding company should also have the right of access
to accounts and records of a joint venture/ associate company, also in connection with
the consolidation of accounts of such entities with the holding company. The
Committee recommended a change in the first proviso to Section 143 (1) to
provide that the auditor of a holding company to have a right of access to the
accounts and records of the associate company and joint venture company,
whose accounts are required to be consolidated.
10.11 Section 143 (3) (i) requires the auditor to state in his report whether the company has
adequate internal financial controls system in place and the operating effectiveness of
48
such controls. This has to be read with Section 134 (5) (e) on the Directors'
Responsibility Statement which also defines internal financial controls, and Rule
8(5)(viii) of Companies (Accounts) Rules, 2014. Rule 10A of the Company (Audit
and Auditors) Rules, 2014, makes the requirement under Section 143(3)(i) optional
for FY 14-15 and is mandatory from FY 15-16 onwards. It has been expressed that
auditing internal financial control systems by auditors would be an onerous
responsibility. It was also expressed that their responsibility should be limited to the
auditing of the systems with respect to financial statements only, and that this cannot
be compared with responsibility of directors which is wider and can be discharged as
they have other resources like internal auditors, etc. who can be used for this purpose.
In this regard, the Committee recommended that the reporting obligations of
auditors should be with reference to the financial statements.
10.12 It was brought before the Committee that a combined reading of the requirements of
Section 129(3), 129(4) as well as Sections 143(2) and 143(3) of the Companies Act,
2013, suggests that the Act prescribes the same reporting requirements for the
auditors for both the standalone and consolidated financial statements. The
application of the auditor's specific reporting requirements under Section 143(3) of
the Act for consolidated financial statements may result in practical issues around
implementation, particularly in relation to foreign subsidiaries/JVs/associates of
Indian Companies to which the Act would not apply and accordingly these provisions
shall not be applicable to them. Specific reporting requirements under Section 143(3)
of the Act such as "whether proper books of accounts as required by law are being
kept"; "consideration of the report of branch auditors"; "disqualification of directors
under Section 164(2)"; "any other matter that may be prescribed such as the current
report on CARO" may not be practicable for the audit of the consolidated financial
statements. In the case of Indian subsidiary, associate and joint venture companies,
such reporting requirements would also be covered by the auditor's report on the
financial statements of those Indian entities. Further, the requirement to report on
internal financial controls is quite exhaustive and application of the same to the
consolidated financial statements would significantly enlarge the scope of audit of
consolidated financial statements. In view of this, the Committee felt that it would
be sufficient if the auditor expressed a true and fair opinion on the consolidated
financial statements and reported on the relevant and significant matters
concerning subsidiaries/associates requiring attention of shareholders rather
than the entire reporting requirements of Section 143(3) of the Act. The
Committee suggested that ICAI may issue a guidance note, consistent with
international practices.
10.13 Section 143(5) provides that in case of a Government company, the `Comptroller and
Auditor General' (C&AG) shall appoint the auditor and direct such auditor on the
manner in which the accounts are required to be audited and thereupon the auditor so
appointed shall submit a copy of the audit report to the C&AG which, among other
things, include the directions, if any, issued by the C&AG, the action taken thereon
and its impact on the accounts and financial statement of the company. It was
suggested that since the directions issued by C&AG involved voluminous
49
data/information, this ought to be allowed to be filed separately as annexures with the
C&AG and need not be made part of a public documents such as an auditor's report.
C&AG was consulted in this matter and it was noted that the directions issued
does not entail voluminous information. The Committee, therefore,
recommended that no change is required.
Reporting of Fraud by auditor u/s 143(12)
10.14 Section 143 (12) provides that if an auditor of a company in the course of the
performance of his duties as auditor, has reason to believe that an offence of fraud
involving such amount or amounts as may be prescribed, is being or has been
committed in the company by its officers or employees, the auditor shall report the
matter to the Central Government within such time and in such manner as may be
prescribed. After due consideration, the Committee concluded that the words "is
being committed" appearing in the sub-section should be retained, as auditors
were responsible for reporting not only frauds that had been committed and had
been acted upon by the company, but also frauds that were continuing, but were
either not known, or had not been acted upon. The Committee also noted that
the Form ADT-4, which specified the manner of reporting fraud, should be
modified to allow an auditor to explain his comments.
Protection to the Auditor
10.15 Suggestion was made during the consultative process that protection should be
given to auditors for liabilities arising on account of reporting on fraud u/s 143
(12). The Committee noted that Section 143 (13) already provided for adequate
protection.
Auditor not to render certain services
10.16 Section 144 prohibits rendering of certain non-audit services directly or indirectly to
the auditee company or its holding company or subsidiary company. Clarity was
sought on the term `management services' used in Section 144(h). It was also
suggested that restrictions under Section 144(h) and (i) should apply to listed
companies and public interest entities only. A view was also given that such services
could be allowed subject to certain percentage of audit fees being received by the
auditor. In this regard, ICAI had undertaken an exercise to list out such management
services. The Committee felt that the nature of the suggestions and issues being
raised are broadly aimed at opening a window for the auditor to have a
relationship other than that of an auditor and auditee, and thus may impinge on
the independence of the auditor. It, therefore, recommended no change in the
provision, or for providing any exemption to any class of companies. However, it
was recommended that ICAI, after consulting the Ministry of Corporate Affairs,
should come up with a guidance note for auditors.
50
Punishment for contravention
10.17 Section 147(5) provides that where an audit is conducted by an audit firm, and it is
proved that the partner or partners of the audit firm have acted in a fraudulent manner
or abetted or colluded in any fraud, the liability, whether civil or criminal for such act
shall be of the partner or partners concerned of the audit firm and of the firm jointly
and severally. Rule 9 of the Companies (Audit and Auditors) Rules, 2014, provides
that in case of criminal liability of any audit firm, the liability other than fine shall
devolve only on the concerned partners, who acted in a fraudulent manner or abetted
or colluded in any fraud. The Committee recommended that the provisions of Rule
9 should be introduced in the Act.
10.18 With regard to the liability of `any other persons' in Section 147(3)(ii), the section on
`Penalties' in the report has dealt with this issue in detail (Paragraph 28.17 and 28.18
of Part I of the report).
Audit of items of cost in respect of certain companies
10.19 Attention of the Committee was drawn to the definition of the term `cost accountant'
appearing in Section 2(28) of the Act. It was suggested that this covered only a cost
accountant in employment, and not a cost accountant in practice. It was pointed out
that as the term cost accountant in practice has also been used, the same might also be
defined. The Committee recommended for change in the existing definition to
allow for a cost accountant in practice too.
10.20 It was pointed out that there is no provision under Section 148 to ensure/check
whether a company required to maintain cost records is complying with relevant
provisions or not. The disclosures under CARO 2015, it was pointed out, is from the
auditor. It was suggested that a disclosure in this regard may be provided in the
Board's report. The Committee suggested that Section 134(3) may provide for
such disclosure of compliance.
10.21 A suggestion was also made to correct the name of the Institute of Cost Accountants
of India, which was appearing as the `Institute of Cost and Works Accountants of
India' in Section 148. The Committee recommended that the change in the name
of ICAI in the Act may be made.
11. APPOINTMENT AND QUALIFICATIONS OF DIRECTORS
Residence requirement for Directors
11.1 Section 149(3) requires a company to have at least one Director to have stayed in
India for a total period of not less than one hundred and eighty-two days in the
previous calendar year. The Committee felt that it would be more appropriate that
51
such a requirement is in relation to the director's stay in India during the
financial year and not the calendar year, with the requirement effective after a
period of six months from incorporation. It was also pointed out that the
requirements for residency in the previous year forces a new subsidiary of a company
incorporated outside India to appoint an individual/professional unconnected with the
company as Director, which did not aid in any way in Board decision making and
many a time leads to unnecessary disputes. The Committee recommended that it
would be more appropriate that the residence requirement is for the current
financial year. On the suggestion to align the requirements of residency with that
of the Income Tax Act, 1961, the Committee felt that it may not be appropriate
as its requirements are more expansive rather than restrictive and would defeat
the purpose of prescribing the residency criteria.
Independent Directors
11.2 The Committee noted that the requirement for a company to have Independent
Directors, as prescribed in Section 149, has been included in the Companies Act, 2013
for the first time, though listed companies were required to appoint Independent
Directors in accordance with SEBI Regulations since 2000. Section 149(6) prescribed
certain qualifications and criteria for the selection of an Independent Director with the
sole purpose of securing his independence. Clause (c) of sub-section (6) prescribes
that an independent director must not have or had any pecuniary relationship with the
company, its holding, subsidiary or associate company, or their promoters or
directors, during the two immediately preceding financial years or during the current
financial year. The Committee observed that even minor pecuniary relationships are
covered within this clause (c) even though such transactions may not compromise the
independence of the directors, whereas, Regulation 16 of the SEBI (Listing
Obligations & Disclosure Requirements) Regulations, 2015 prohibits only `material'
pecuniary relationships for disqualifying appointment of persons as Independent
Directors. In this regard, the Committee also noted that Dr. J.J. Irani Committee in its
report, used the word `material pecuniary relationships or transactions' and also
explained what the term `material transaction' should mean. International best
practices also indicate adoption of such a test. The Committee also noted that the
2010 Standing Committee Report on the Companies Bill also recommended that
Independent Directors should not have any kind of pecuniary relationship at all with
the company. It was also noted that the Standing Committee Report, 2012 had,
however, suggested regulatory harmonization between the Companies Act, 2013 and
SEBI's listing agreement. After deliberations, the Committee recommended that,
in view of the difficulties being faced, the test of materiality for the purpose of
determining whether pecuniary relationships could impact the independence of
an individual to be an independent director may be introduced.
11.3 Section 149(6)(d) further prescribes that a director can be appointed as an
Independent Director only if none of his relatives has or had a pecuniary relationship
52
or transaction of a prescribed value with the company, its holding, subsidiary or
associate company or their promoters or directors during the two immediately
preceding financial years, or during the current financial year. In this regard, the
Committee felt that the scope of the restriction on "pecuniary relationship or
transaction" entered into by a relative be made more specific by clearly
categorising the types of transactions as provided under Section 141(3)(d).
11.4 While deliberating on the suggestion to allow professional fee not exceeding ten
percent of the gross total income from a company in the case of a firm of auditors or
company secretaries in practice or cost auditors, on the lines of the provisions in
Section 149(6)(e)(ii)(B) for employees, proprietors or partners of legal or consulting
firms, if appointed as an Independent Director, the Committee did not agree to the
suggestion since in the case of other professionals as specified in Section
149(6)(e)(ii)(A), it could impact the independence of the professionals.
11.5 Clauses 149(6)(e) (i), inter-alia, restricts the appointment of an individual as an
Independent Director in case his relative is or was a KMP or an employee in the
company, its holding, subsidiary or associate company during any of the preceding
three financial years. In this regard, the Committee recommended that the scope
of the restriction be modified. At the point of time when a director's
independence is under consideration, it is likely to be impacted where his / her
relative has held a significant position such as a director or key managerial
personnel, and not at lower levels during the preceding years. For the preceding
years, the restriction should, therefore, be for relatives holding Board or
KMP/one level below Board position similar to that contained in Section
141(3)(f). However, it would be possible to influence an Independent Director in
case his relative is also working in the situations referred to in the section
irrespective of the position he holds. This scope of restriction after appointment
should, therefore, be retained as prescribed.
Nominee Directors
11.6 The Committee noted that whilst provisions relating to "nominee director" are
provided under Sections 161(3) and 149(7), the term `nominee director' has been
defined only in the explanation to Section 149(7) with specific reference to
Independent Directors. The Committee felt that a definition of `Nominee Director'
should be specifically included as a definition clause.
Rights of persons other than retiring directors to stand for directorships
11.7 Section 160 provides that an individual (who is not a retiring director under Section
152) shall be eligible to be appointed as a director, if he or some member proposing
him as a director, leaves a written notice of candidature at the registered office of the
company, at least fourteen days prior to the date of the general meeting along with a
deposit of Rupees One Lakh, or such higher amount, as may be prescribed. In this
53
regard, the Committee noted that the exemptions/modifications have already been
notified for wholly owned Government companies, Section 8 companies and Nidhis.
11.8 The Committee noted that, under Section 149(10), an independent director is eligible
for appointment for a term of five consecutive years. As per the present provisions, on
completion of the tenure, for his re-appointment also, the requirements under Section
160 will need to be complied with, which is unreasonable as such appointments will
be recommended by the Board. Similar will be the case for other persons
recommended by the Nomination and Remuneration Committee, as also by the Board,
to be considered for appointment. As there are considered recommendations of the
Board, NRC, the requirement for a deposit etc. should not be applicable. The
Committee, therefore, recommends that in case of appointment of Independent
Directors and Directors recommended by the Nomination and Remuneration
Committee, the requirements of Section 160 ought to be dispensed with.
Appointment of additional, alternate and nominee directors
11.9 Section 161(2) deals with the appointment of a person as an alternate director by the
Board. The Committee noted that this Section does not prohibit the appointment of an
existing director as an alternate director and that same individual acting as a director
and alternate director for some other director of the same company leads to conflict of
interest and also ambiguity in the calculation of quorum. The Committee
recommended that there should be a prohibition in the Act for appointing a
director of a company as an alternate director in the same company.
11.10 Section 161(4) authorises the Board of a public company to fill a vacancy caused by
vacation of the office of any director before the expiry of his term, however subject to
the AOA of the company. The Committee was of the view that this right should be
available to the Boards of private companies as well.
Number of directorships
11.11 Section 165 prescribes the maximum number of companies in which a person may
hold office as a director, including any alternate directorship, that is, not more than 20
companies. While comments were received during the public consultation process
that directorship in a subsidiary by a director of the holding company should not be
counted while calculating the maximum number prescribed, the Committee felt that
the prescription of maximum number of directorships should not be diluted as
the subsidiary would also be as important as the holding company for the time
and attention of the Director.
11.12 The Committee also deliberated on the suggestion for excluding directorship in a
dormant company for the purposes of the limit under Section 165 and felt that
dormant companies can be excluded from the ceiling. Such companies would be
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inactive and having insignificant transactions and therefore not impacting on the
temporal resources of the Director and that in case such an exemption is not given,
persons would be dis-incentivised from accepting the position of a director in such
companies. The Committee, therefore, recommended for excluding the
directorship in a dormant company for reckoning the limit.
Disqualifications from appointment as, and vacation of office of director
11.13 Section 167(1)(a) dealing with vacation of office by a director triggers an automatic
vacation of office of the director if he incurs any of the disqualifications stipulated
under Section 164. Section 164(1) provides for disqualifications which are incurred
by a director in his personal capacity such as being an undischarged bankrupt, of
unsound mind, convicted of an offence etc., and Section 164(2) lists out
disqualifications related to the company such as non-compliance of annual filing
requirements, etc. The Committee acknowledged that this Section created a
paradoxical situation, as the office of all the directors in a Board would become
vacant where they are disqualified under Section 164(2), and a new person could not
be appointed as a director as they would also attract such a disqualification. In this
regard, the Committee recommended that the vacancy of an office should be
triggered only where a disqualification is incurred in a personal capacity and
therefore, the scope of Section 167(1)(a) should be limited to only
disqualifications under Section 164(1).
11.14 The Committee also recommended that a disqualification under Section 164(2)
be only applicable to a person who was a director at the time of the non-
compliance, and in case of a continuing non-compliance, there should be a period
of six months' time allowed for a new Director to make the company compliant.
11.15 The Committee felt that the proviso to Section 164 (appearing under sub-section (3)
of the section) creates an inconsistent situation when read with the proviso to Section
167(1)(f), as these provide for a person to be appointed as a Director if he has been
convicted/disqualified by a Court but has an appeal preferred in a Court whereas for a
sitting Director, it does not allow such consideration and he has to vacate office on
conviction, even if an appeal had been preferred against such conviction and sentence.
The Committee, therefore, recommended that such inconsistency be corrected
and in case of requirement for vacation of office of a Director, it should not take
effect until the appeals are disposed off, while in case of disqualification, it is not
required to provide for period of pendency of appeal.
11.16 The Committee considered and did not agree to the suggestion to amend Section
167(1)(h), because in the Committee's opinion, the provision was clear, and referred
to an automatic vacation of the office of a Director where a person was appointed as
such a Director, by virtue of his holding any office, or other employment in the
holding, subsidiary or associate company.
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Resignation of Director
11.17 The proviso to Section 168(1) requires that a resigning Director should file a copy of
his resignation along with the reasons for resignation with the Registrar, within thirty
days. The intent is to address likely misuse by some companies of the Director's name
after his resignation. However, since majority of the companies will not fall in this
category, the Committee felt that it would be appropriate if an option of
intimating such resignation to the Registrar was given to the Director instead of
making it mandatory. The requirement of mandatory filing by the company in
the prescribed Form should continue. This would also facilitate foreign
Directors.
11.18 The Committee considered and recommended that necessary flexibility may be
provided in the Act to do away with the requirement of DIN or provide an option
to shift to AADHAAR or any other universally accepted identification number at
a future date.
12. MEETINGS OF BOARD AND ITS POWERS
Participation through video-conferencing
12.1 The participation of directors, through video-conferencing, is governed by Section
173(2). The proviso to the sub-section also delegates the authority to prescribe matters
that may not be dealt with through video conferencing to the Central Government.
Accordingly, Rule 4 of the Companies (Meetings of Board and its Powers) Rules,
2014 specifies matters which shall not be dealt with in any meeting held through
video conferencing or other audio-visual means. The Committee was of the view that
the requirement completely bars participation in these specified matters of the Board
meetings through video conferencing, which unnecessarily restricts wider
participation even if the necessary quorum as specified in Section 174 is physically
present. The Committee, therefore, recommended that flexibility be provided to
allow participation of Directors through video conferencing, subject to such
participation not being counted for the purpose of quorum. However, such
Directors, though not counted for the purposes of quorum, may be entitled to
sitting fees.
Interested directors: exemptions from section 174(3) to private companies
12.2 Private companies have been exempted from the prescription under Section 184(2)
barring participation of interested directors in Board meetings. The Committee
recommended that since Section 184(2) and Section 174(3) are related sections
with respect to interested directors, related exemption under Section 174(3) to
enable such participating interested Directors for the purposes of quorum,
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should be given to private companies using the power to exempt under Section
462 of the Act.
Audit Committee
12.3 The audit committee under Section 177(4)(iv) is required to approve or modify
transactions of the company with related parties. The suggestions received appear to
imply a lack of clarity among stakeholders on the extent of responsibility entrusted to
the Audit Committee including on whether it had independent approving powers or
has to pre-approve and give its recommendations to the Board. The Committee
observed that the Audit Committee has been specifically mandated to approve or
modify all related party transactions. This has to be, however, read harmoniously with
the provisions of Section 188, which entrust the Board and the shareholders with the
responsibility of approving specified related party transactions. The Committee
further observed that while some of these transactions, which are not related party
transactions, they would be within the purview of the management/executive, and
some would also fall within the responsibilities of Board. The Committee also
referred to the recommendations of the J J Irani Committee that "all matters relating
to appointment of auditors, examination of the auditor's report along with financial
statements prior to consideration and approval by the Board, related party
transactions, valuations and other matters involving conflicts of interest should also
be referred to the Board only through the audit committee", and the provisions
specifically requiring the prior approval of the Audit Committee under SEBI
Regulations. Internationally also, the trend is to assign approval of such transactions
to Committees consisting of disinterested members of the Board, etc. The
Committee recommended that the existing requirement for the Audit Committee
to pre approve all related party transactions, subject to approval by Board or
shareholders as required under Section 188 should continue. For transactions
not covered under Section 188, the Audit Committee may give its
recommendation to the Board in case it is not approving a particular
transaction.
12.4 The Committee received a suggestion to allow ratification by the Audit Committee
within three months from the date on which such transaction was entered into, without
obtaining the prior approval of the Audit Committee, inadvertently. The Committee
observed that subject to safeguards, it would be similar to the flexibility provided
under Section 188 to the Board and the shareholders. However, concerns of
possible misuse of this flexibility would need to be suitably addressed by
prescribing an upper threshold of Rupees One Crore on such transactions.
12.5 In addition, the Committee recommended that, as provided in the SEBI (Listing
Obligations and Disclosure Requirements) Regulations, 2015 related party
transactions between a holding company and its wholly owned subsidiaries need
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not require the approval of the Audit Committee for transactions not requiring
Board approval under section 188, and Section 177 be amended accordingly.
12.6 The Committee also discussed the applicability of corporate governance requirements
such as Section 177, 178, etc. to dormant companies having no business activities or
employees. In this regard, the Committee observed that whilst it is unlikely that
these provisions are applicable to dormant companies, a clarification be issued
stating that dormant companies are exempt from the requirement to constitute
Audit Committee.
Nomination and Remuneration Committee
12.7 As per the current provisions of Section 178(2), the Nomination & Remuneration
Committee (NRC) is required to carry out evaluation of every director's performance.
It is felt that, as Independent Directors are required to carry out review of
performance of non-Independent Directors and the Board as a whole separately as per
Schedule IV requirements, the Board is also required to carry out its evaluation (refer
Section 134(3)(p)), carrying out another set of performance evaluations by the
Nomination and Remuneration Committee is avoidable. The Committee
recommends that the NRC should instead `prescribe a methodology to carry out
evaluation of performance of individual Directors, Committee(s) of the Board
and the Board as a whole', and the Board should carry out the performance
evaluation as per the methodology either by itself, by the NRC or by an external
party as laid down in the methodology. The performance review by the
Independent Directors, as presently required in Schedule IV, may also form part
of the methodology. Schedule IV may be amended accordingly. The provision
may be reviewed after three years.
12.8 The proviso to Section 178(4) prescribes that the remuneration policy should be
disclosed in the report of the Board. In this regard, the Committee felt that it
would be sufficient for the company to place the remuneration policy on the
website of the company, if any, and to disclose only the salient features of the
policy in the Board's report along with the web link/address.
12.9 The Committee also considered the suggestion to modify Section 177 and 178 to
provide exemptions to private companies, which have listed their debt instruments as
per SEBI Debt Listing Regulations. The Committee recommended review of the
existing thresholds, and thereafter consider granting exemptions under Section
462, if required.
Filing of board resolutions
12.10 Section 179(3) read with Section 117 prescribe filing of board resolutions with the
ROC in the prescribed form MGT 14. Section 117(3)(g) has already been amended to
restrict availability of such documents for public inspection and provides that private
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companies are exempted from this filing requirement. The comments received in the
public consultation process suggest that the requirements of filing MGT-14 need to be
relaxed on account of confidential Board resolutions becoming public which has
already been addressed by the Amendment. The Committee felt that adequate
publicity of the steps taken within MCA21 to ensure that these documents are
not freely accessible would allay the concerns of stakeholders.
Restrictions on powers of Board
12.11 The Committee while dealing with the powers of the Board to borrow money under
Section 180(1)(c) also referred to Section 293(1)(d) of the Companies Act, 1956.
After due deliberation, it recommended that `securities premium' be also
included for the purpose of recognising the borrowing limits, along with the
company's paid-up share capital and free reserves, since it was a part of the
capital of a company.
Prohibitions and restrictions regarding political contributions
12.12 The Committee deliberated on the recommendations made by Law
Commission of India in its 255th Report for amending section 182 of the Act
(Prohibitions and restrictions regarding political Contributions) to empower a
larger group of people, such as the company's shareholders, in deciding how to
use the funds of a company for political purposes. The Committee felt that a
wider consultation with industry chambers, political parties and other
stakeholders should be taken up by the Ministry before taking a final
decision on changes recommended in the 255th Report.
Disclosure of Interest by Director
12.13 The Committee while deliberating on the suggestions to prescribe a limit of
thirty days under Section 184(1) for a Director to disclose any change in his
interest, instead of at the first Board meeting after such change, did not agree to
the suggestion, as in its opinion it could lead to gaps and hence, might not be
desirable. It also observed that the requirement for disclosure in body corporates
under Section 184(2) of holdings by one or more Directors, was the same as in the
Companies Act, 1956; and that the suggestion to change this provision due to
difficulties in implementation was not acceptable. The Committee further
recommended that `body corporates' be included under the ambit of the
provision of 184(5), to align it to Section 184(2), where the words `body
corporate' have been used to evaluate the interest of a Director.
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Loans to Directors, etc.
12.14 The Committee acknowledged that there are difficulties being faced in genuine
transactions due to the complete embargo on providing loans to subsidiaries with
common directors, but at the same time there is no doubt that the route has been
misused in the past for siphoning of funds by controlling shareholders. The
Committee noted that limited relaxation has already been provided to private
companies not having other body corporates invested in them and therefore any
further relaxation should be subject to greater safeguards. The Committee,
therefore, recommended, that it may be considered to allow companies to
advance a loan to any other person in whom director is interested subject to
prior approval of the company by a special resolution. Further, loans extended
to persons, including subsidiaries, falling within the restrictive purview of
Section 185 should be used by the subsidiary for its principal business activity
only, and not for further investment or grant of loan.
12.15 The Committee also felt that there was no rationale as to why the interest rate
prescribed in the proviso (b) to Section 185(1) should not be aligned with the rate
prescribed under Section 186(7). Thus, it recommended that this be aligned,
keeping in mind further changes suggested to the provision, in the succeeding
paragraphs dealing with other issues in Section 186.
Loan and Investment by Company
12.16 The Committee felt that the layering restrictions on investment companies under
Section 186(1) may become too obtrusive and impractical in the modern business
world. Regulatory concerns arising out of earlier scams were also noted. The
Committee noted that while companies that became a subsidiary of another
investment company due to any corporate action such as the non-subscription of a
rights issue from the layering requirements, etc. could be exempted, it would not
address the core issue that there may be several legitimate business justifications for
use of a multi layered structure, and such restriction hampers the ability of a company
to structure its business. The Committee felt that sufficient safeguards have been
built into the oversight mechanism of SEBI and Stock Exchanges, and the
recommendations on Beneficial Ownership register requirements should dispel
the regulatory concerns. Keeping this in mind, the Committee recommended that
the restrictions on layering as contained in the section be omitted. Further,
`principal business' of an investment company may be clarified in the
Explanation below sub-section (13) of Section 186 on the lines of RBI's
stipulations.
12.17 The Committee further recommended that the provisions of Rule 13(1) of the
Companies (Meetings of Board and its Powers) Rules, 2013 relating to
aggregation of loans and investments for the purpose of calculating the limits
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under Section 186(2) might be provided in the Act itself and consequential
changes in the Rules may also be made.
12.18 The Committee felt that the occurrence of the word `person' in sub-section (2) of
Section 186 unwittingly seems to cover employees, and suggests that it would be
appropriate to clarify the usage of the word `person' in that sub-section, and that the
employees given loans as a part of conditions of service or pursuant to any approved
scheme for all employees by the company, should not, unwittingly, be covered under
this Section, as this Section was meant to cover inter-corporate loans. The
Committee, therefore, recommended for the insertion of an `explanation' to
clarify the exclusion of employees from the requirement of the sub-
section/clause.
12.19 The Committee also deliberated on the suggestion to exempt the application of
Section 186, except sub-Section (1), to wholly owned subsidiaries and suggests that
the provisions of Rule 11 with regard to wholly owned subsidiaries may be
brought into the Act. Further, consequential changes in the Rules may also be
made in this regard. However, the Committee did not agree to the suggestions
that interest free loans may be specifically allowed to wholly owned subsidiaries.
12.20 The Committee considered the suggestion that it may not be appropriate to apply
Indian interest rates bench marks prescribed under Section 186(7) to loans given by
companies to foreign entities. It felt that the company should be looking at the
effective yield against the loan given by it and such yield, irrespective of whether
a loan is given to a company incorporated outside India, should not be less than
the prescribed rate under Section 186(7).
12.21 The Committee noted that while Section 186(11)(b)(iii) provides exemption to
investment in shares allotted in pursuance to rights issues by Indian companies under
Section 62(1)(a) of the Act, similar exemption be also extended to investments in
rights issues made by body corporates (companies incorporated outside India).
The exemption provision may be aligned with Section 372A(8) of the Companies
Act, 1956 in this regard. Further, the Committee recommended that the
Removal of Difficulty Order for Section 186(11) with regard to Insurance and
Housing finance Companies, etc. issued in January 2015, subject to legal
clarification, may be included in the sub-section itself through an amendment.
Language of Section 372A(8) of the Companies Act, 1956 may be used.
Related party transactions
12.22 The Committee noted that the circular no. 30/2014 issued by the MCA, clarifying
requirements of second proviso to Section 188(1) had been misinterpreted, and
hence, should be withdrawn. Further, as all parties in case of joint ventures and
closely held public companies may be related parties, not allowing them to vote
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may be impractical and such cases may be specifically excluded from the
requirements of the second proviso.
Prohibition on forward dealing and Insider trading of securities
12.23 The Companies Act 2013 vide Sections 194 and 195 restrict forward dealing by
directors and KMPs and insider trading by any person including directors and KMPs
respectively. The aforesaid provisions are seemingly applicable in respect of both
private and public companies. Prima facie, Section 195 seems to be applicable to
private companies and restricts insider trading. However, it can be argued that since
the securities in private companies would not be marketable, as a market in securities
in the absence of an alternative market platform would mean a stock market on which
securities of different companies are listed for the purpose of trade, they would not
qualify as securities within the meaning of Section 195, and thus would exclude
private companies from the ambit of the said provision. On the same basis, it would
be unjustified to apply the insider trading regulations to private companies. It can also
be argued, on the basis of legislation in some jurisdictions, that there are valid reasons
for including the insider trading prohibitions in company law in addition to securities
law, and these flow from the fiduciary responsibilities of the directors who may abuse
their position and use confidential information, which have come to them through
their position, for personal profit and not act in the best interests of the company.
However, insider trading prohibitions can be problematic in the context of the rights
of first refusal that are frequently contained in the shareholders' agreements of private
companies. The Committee deliberated on the issues involved and noted that
SEBI regulations are comprehensive in the matter (and also apply to companies
intending to get listed), and in view of the practical difficulties expressed by
stakeholders, sections 194 and 195 may be omitted from the Act.
13. APPOINTMENT AND REMUNERATION OF MANAGERIAL PERSONNEL
Disclosure of remuneration of directors
13.1 The J.J. Irani Committee had recommended comprehensive revision of the provisions
of the Companies Act, 1956, relating to the payment of managerial remuneration,
emphasising more on disclosures (both on quality and quantity), rather than providing
limits or ceilings on managerial remuneration. SEBI, in its `Consultative Paper on
Corporate Governance Norms in India', noted that the remuneration paid to
managerial personnel of companies in India, in certain cases, was much higher than
the remuneration paid to their foreign counterparts. The paper also recommended the
inclusion of disclosure requirements mandated under the Companies Act to be
incorporated in the Listing Agreement.
13.2 The disclosure requirements under the Act include the obligation under Section
197(12), on a listed company, to disclose in the Board's report, the ratio of the
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remuneration of each director to the median employee's remuneration. In the process
of public consultation, stakeholders termed this requirement to be tedious, and an
incorrect comparison, especially in companies having a large workforce. Accordingly,
it was suggested that this requirement be changed to either one of weighted average,
or a comparison limited to the top three layers of the employees. However, it was felt
that any change to an alternative will go against the rationale behind the disclosure
requirement. There was no difficulty in reporting the number by itself; and it being an
effective tool of measuring the spread between the highest and the lowest paid
employees, it would serve a purpose of ensuring some check on managerial
remuneration through debate. The Committee, therefore, recommended that the
disclosure requirement may not be diluted.
Limits on remuneration
13.3 Section 197 prescribes that the total managerial remuneration payable by a public
company shall not exceed eleven per cent of the net profits of that company and such
limits may be exceeded with the approval of the shareholders and the Central
Government. Section 197(3) provides that if a company has no profit or inadequate
profits, the company shall not pay remuneration (excluding any sitting fees or other
fees decided by the Board, to a prescribed limit) to its directors except in accordance
with Schedule V, and in case it is not able to comply with the requirements, prior
approval of the Central Government is required.
13.4 The Committee noted that the limits on remuneration payable by companies having
inadequate/no profits prescribed in Schedule V to the Act, though increased as
compared to the Companies Act, 1956, were still very low and insufficient to attract
good managerial talent for turning around of such companies. Further, a restrictive
regime of seeking Central Government and shareholders' approval (by way of special
resolution) for the payment of remuneration to Managerial Personnel by companies
having inadequate/no profits would, apart from causing delays, also result in talented
professionals moving away from such companies in search of higher assured
compensation.
13.5 Currently, the law in countries like the US, the UK and Switzerland, does not require
the company to approach government authorities for approving remuneration payable
to their managerial personnel, even in a scenario where they have losses or inadequate
profits and empowers the Board of the companies to decide the remuneration payable
to Directors. The Committee, therefore, recommended that the Schedule may be
amended to substitute the requirement to pass a special resolution by
shareholders with an ordinary resolution, in cases where the managerial person
was not a promoter, and a professional with domain knowledge / relevant
experience; and was not related to any director or promoter of the company and
did not hold more than two per cent of the paid-up equity share capital of the
company or its holding company. In other cases, however, the requirement for
special resolution of the shareholders should be retained. The Committee further
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recommended that the limits of yearly remuneration prescribed in the Schedule
be enhanced. Further, the Committee also recommended that the requirement
for government approval may be omitted altogether, and necessary safeguards in
the form of additional disclosures, audit, higher penalties, etc. may be prescribed
instead.
13.6 The Committee did not agree with the suggestion for changing the provision
relating to deduction of remuneration of `directors' to remuneration of
`managerial personnel' under Section 197(1) and Section 198(4)(b) of the Act .
The principle has not undergone any change from the Companies Act, 1956, and such
change might not be desirable.
Calculation of profits
13.7 The Committee examined Section 198 as to whether it has outlived its utility in
current times where the Accounting Standards prescribe a robust framework for the
determination of yearly profit or loss for the company, and the possibility of using the
net profit before tax as presented in the financial statements, for basing the
determination of managerial remuneration. Alternative formulations were considered,
but found to be more complex, and further the present formulation is well accepted.
Therefore, no change, other than on account of requirement of IndAS, was
recommended.
13.8 Section 198(4)(l) mandates the deduction of `brought forward losses' of the company
while calculating the net profit, for the purpose of computing managerial
remuneration in the subsequent years. However, the clause did not provide for the
deduction of brought forward losses of the years prior to the commencement of the
Act, which may be an inadvertent omission. The Committee agreed with the
suggestion, and recommended the amendment of Section 198(4)(l), to include
brought forward losses of the years subsequent to the enactment of the
Companies (Amendment) Act, 1960.
13.9 Section 198(4) requires that while calculating profits for managerial remuneration, the
profits on sale of investments be deducted. The Committee agreed to the argument
that Investment Companies, whose principal business was sale and purchase of
investments, would not be using the correct profit figures, and may need to comply
with the requirements of Schedule V to pay remuneration to its managerial personnel.
It was recommended, that specific provisions for such companies be
incorporated in the Act.
Key Managerial Personnel
13.10 The J.J. Irani Committee observed that "stakeholders / Board look towards certain
key managerial personnel for formulation and execution of policies." It felt that such
key managerial personnel must be recognised by the law, along with their liability, in
appropriate aspects of the legislation. Section 203, read with the corresponding Rule
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requires every listed company, and every other public company having a share capital
of Rupees Ten Crore or more, to have a whole time managing director or CEO or a
manager, Chief Financial Officer and Company Secretary (companies having a share
capital of Rupees Five Crore or more), who all have been named as `key managerial
personnel'. The Committee opined that while the current provisions limit the
officers who can be designated as key managerial personnel, flexibility would be
desirable for companies to designate other whole time officers of the company as
key managerial personnel. The Committee further recommended that the Board
can be empowered to designate other whole time officers of the company as key
managerial personnel and that the definition of key managerial personnel in
Section 2(51) may also be accordingly modified.
13.11 At the same time, the Committee also recommended enabling a whole time key
managerial personnel, holding necessary qualifications, to hold more than one
position in the same company at the same time, so as to reduce the cost of
compliance for such companies, and also to utilise the capacities of these officers to
the optimum level.
13.12 It was suggested during the public consultation process, that an enabling provision for
a company secretary, Chief Financial Officer, Chief Executive Officer to file his
resignation with the Registrar, on lines similar to that for a Director under Section
168, may be provided for. As information about the appointment of these key
managerial personnel is required to be filed with the Registrar, it may be argued
that the registry and the public should be updated through filing of change due
to resignation. The Committee, therefore, recommended that a company should
also file information (similar to that for auditors) on the resignation of any of the
KMPs in the Registry.
13.13 Section 203(3) provides that whole-time key managerial personnel shall not hold
office in more than one company except in its subsidiary company at the same time.
The Committee noted that Section 13 of the General Clauses Act, 1897 provides that
`singular' shall include the `plural', unless there is anything repugnant in the subject
or the context. Thus, whole-time key managerial personnel may hold office in more
than one subsidiary company as per the present law. Accordingly, the Committee
recommended no change in this regard.
13.14 Presently Schedule V requires that a Managing Director/Whole Time Director should
have been resident in India for previous one year. The requirement prevents a foreign
national to be a Managing Director/Whole Time Director unless he has stayed in the
country for a year. The Committee recommends that, in order to draw on the
larger pool of resources and increasing mobility of professionals/talent
worldwide, this requirement may be done away with subject to satisfaction of
other applicable regulatory clearances.
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14. INSPECTION, INQUIRY AND INVESTIGATION
14.1 Chapter XIV of the Act provides for the requirements with respect to enquiry or
inspection of books of accounts by the Registrar/Inspector and with respect to an
investigation by the Inspector. The Committee examined the suggestion pertaining to
Section 223, which provides for an Inspectors' report, and noted that the legislative
intent under Section 223 is to cover reports with respect to an investigation of
companies only and no other reports. Sub-Section (3) of this Section provides that a
copy of the report made under sub-section (1) may be obtained by making an
application in this regard to the Central Government. Therefore, as per these
provisions, any person can obtain a copy of the report referred to in Section 223. The
concern expressed in the suggestions that enquiry and inspection reports must not be
made available on application; was also looked into by the Committee. It was noted
that the intention of the provision was to cover both the interim and final
reports. The interim reports also contain conclusive findings. The reports are
made available to the members of the company and other body corporate, and
also to any other person, whose interests as a creditor of the company and other
body corporate appear to the Central Government to be affected (in line with
Section 241 of the Companies Act, 1956), and therefore, it would not be
justifiable to deny them access to these reports.
15. COMPROMISES, ARRANGEMENTS AND AMALGAMATIONS
Purchase of Minority Shareholding
15.1 Section 236 of the Act deals with the purchase of minority shareholding. This
provision refers to the acquisition of shares of a company and contemplates a situation
where an acquirer, or a person acting in concert with such an acquirer, becomes a
registered holder of ninety percent or more of the issued equity share capital of a
company. This provision prescribes that such an acquirer shall notify the company of
his intention of buying the remaining equity shares. While Sections 236 (4), 236 (5)
and 236 (6) make a reference to a "transferor company", the term `transferor
company' has not been defined in the section itself. The Committee felt that the use of
the term `transferor company' in the said Section 236 without providing for a context
may ostensibly include even transfer of assets by a company, thereby including
amalgamations and mergers within the ambit of this provision, which did not appear
to be the intention. Accordingly, the Committee recommended that the references
to the phrase `transferor company' in Section 236, may be modified to a
`company whose shares are being transferred' or alternatively, an explanation
be provided in the provision clarifying that Section 236 only applies to the
acquisition of shares.
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16. PREVENTION OF OPPRESSION AND MISMANAGEMENT
16.1 The Committee did not recommend any changes to Chapter XVI of the Act.
17. REGISTERED VALUERS
17.1 Many of the suggestions on Chapter XVII (which contains only 1 Section viz. Section
247) related to the commencement of the Chapter/Section along with the relevant
Rules. The Committee felt that the provisions have far reaching ramifications
and the Government may decide on the framework after taking into account
views of all stakeholders.
17.2 Attention of the Committee was also drawn to Section 247 (2) (d) of the Act, which
provides that the valuer shall not undertake valuation of any assets in which he has a
direct or indirect interest, or becomes so interested at any time during or after the
valuation of assets. The Committee agreed that it was not fair to presume that the
valuer would be interested for an indefinite period after the completion of the
valuation of the assets. The Committee deliberated on the matter and felt that a
valuer ought to be disqualified for valuing any asset, if he had any interest in
such an asset, at any time during three years prior to his appointment, and three
years after his cessation as a valuer.
18. REMOVAL OF NAMES OF COMPANIES FROM THE REGISTER OF
COMPANIES
18.1 The Committee did not recommend any changes to Chapter XVIII of the Act.
19. COMPANIES AUTHORISED TO REGISTER UNDER THIS ACT
Companies Authorised to Register
19.1 Section 366 of the Act provides for entities such as partnership firms, limited liability
partnerships, cooperative societies, or other business entities formed under any other
law, to be registered as a company under the Act, provided, inter alia, that such an
entity has seven or more members. It was suggested to the Committee that since
various entities referred to in the Section (which can be registered under the Act)
could be formed even with less than seven persons, the above referred restriction for
the entities to consist of seven or more members would need to be reviewed to allow
registration of such entities, consisting of two or more members. Comparable
provisions were also found in the English Companies Act, 2006, allowing for the
formation of companies with less than seven members. The Committee
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recommended for amending Section 366(2) of the Act, to allow for such
conversions to companies from partnership firms, etc. with `two or more
members', provided that in case of less than seven members, the conversion
would be to a private company.
19.2 It was also pointed out that the existing Rules framed under Section 366 do not allow
registration of partnership firms (registered under Partnership Act, 1932) as
companies. It was pointed out that this was permitted under the earlier Act and should
be allowed under new Act also. The Committee recommended for changes to be
made in the Rules to allow for registration of partnership firms (dealt with in
Part II of this report), as no change in the Act was needed.
20. COMPANIES INCORPORATED OUTSIDE INDIA
Application of Act to Foreign Companies
20.1 Section 379 of the Act provides that where not less than fifty percent of the paid-up
share capital of a foreign company is held by one or more citizens of India, or
companies/body corporates incorporated in India, such companies shall comply with
the provisions of Chapter XII, and other provisions of the Act, as may be prescribed,
with regard to the business carried on by it in India, as if it were a company
incorporated in India. It was put to the Committee to clarify the position on the
applicability of the provisions of Chapter XXII, to those body corporates that were
covered within the definition of Section 2(42), but did not fall within the category
indicated in Section 379 of the Act.
20.2 The Committee felt that as was clearly provided under Section 591(1) of the
Companies Act, 1956, it may be specifically provided that the remaining body
corporates as covered within the definition of foreign company, would need to
comply with the provisions of Chapter XXII, as applicable. In this regard,
necessary amendment in Section 379 was also recommended with respect to the
threshold on transactions, etc. conducted by such companies, to be prescribed in
the relevant Rules (refer paragraph 1.10 of Part I of the report also).
21. GOVERNMENT COMPANIES
21.1 The Committee did not recommend any changes to the provisions of Chapter
XXIII.
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22. REGISTRATION OFFICES AND FEES
22.1 The Committee noted that most of the suggestions received under Chapter XXIV
related to matters on the filing of various forms etc. in the Registry. These were
recommended to be addressed through modifications in the Rules/forms etc.
Fee for filing etc.
22.2 Section 403(1) allows a company to file documents belatedly up to two hundred and
seventy days from the date on which such document becomes overdue for filing (i.e.
after providing for the prescribed period for filing as per the concerned provision) by
paying additional fee and without attracting liability for prosecution/penal action.
Delayed filings beyond two hundred and seventy days can still be done with the
maximum additional fee but the company is also liable for prosecution/penal action.
This framework has been specifically mentioned for filings under Section 89 (filing of
declaration of beneficial interest), Section 92 (filing of Annual Return), Section 117
(filing of resolutions and agreements), Section 121 (AGM report for listed
companies), Section 137 (filing of financial statements) and Section 157 (company to
inform DIN of directors to ROC). It is, therefore, being viewed that in respect of delay
in filings under any other section (other than the six mentioned above), the company
will have to obtain condonation of delay under Section 460(b) and is not eligible for
immunity from prosecution/penal action for any delay if condonation is not obtained.
It is observed that the provision, coupled with low filing fees, has resulted in a low
level of annual statutory filings as compared to previous years. The Committee,
therefore, recommended for necessary changes to be made in the Act to bring
clarity that the requirement of filing with additional fee for 270 days under first
proviso to section 403 is applicable only to the six sections. Further, additional
fees should be enhanced substantially (by up to 10 times of current prescribed
amount) to deter non-compliance, and if a company files a document within the
original period, not including the period allowed with additional fees, should be
reduced to zero. A separate requirement for additional fees for the sections other
than six sections may also be prescribed (refer paragraph 28.10 of Part I of the
report also).
22.3 The Committee also felt that it may be clarified (in the Rules) that, irrespective
of the delay, obtaining condonation of delay is not a pre-requisite to filing a
document. It is a separate process under section 460 in respect of all belated
filings (refer paragraph 18.2 of Part II of the report also).
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23. COMPANIES TO FURNISH INFORMATION OR STATISTICS
Power of Central Government to direct Companies to Furnish Information or
Statistics
23.1 The Committee noted that this chapter contained only one provision, viz., Section
405. The suggestions made under this Section/Chapter related to requiring companies
to file returns in respect of credits taken by them from unsecured creditors, and
salaries paid by companies to each of its employees. The Committee felt that this
issue had already been dealt with, and as such, no changes were warranted in the
Act/Rules.
24. NIDHIS
24.1 The Committee did not receive any suggestion for change in the provisions of Section
406 of the Act, under which Nidhis are regulated under the Act. However, the
Committee felt that the earlier provisions under the Companies Act, 1956, which
required the approval of the Central Government for declaration of a company as
`Nidhi', were more appropriate since they provided a centralized and more restrictive
framework for regulation of such entities. It was also noted that since the nature of
business of Nidhis were similar to those of NBFCs, it was more appropriate to
regulate them at a central level in the Ministry, or through one or more Regional
Directors.
25. NATIONAL COMPANY LAW TRIBUNAL AND NATIONAL COMPANY LAW
APPELLATE TRIBUNAL
25.1 The Committee noted that after the Honourable Supreme Court's Order of May, 2015,
the Government had initiated the process of constituting the `National Company Law
Tribunal' and the `National Company Law Appellate Tribunal'. The Committee felt
that changes in the Companies Act, 2013, in Sections 409(3)(a) & (e), 411(3) and
412(2), as directed by the Honourable Supreme Court, should be included in the
Act.
26. SPECIAL COURTS
26.1 The Committee noted that the establishment/designation of Special Courts under the
Act would result in faster prosecution of defaulting companies. The changes made
through the Companies (Amendment) Act, 2015 have also been noted by the
Committee. The Committee recommended the early establishment/designation of
the Special Courts. It may also be considered whether Special Courts at the
subordinate level may also be established, in addition to the Sessions Judge or
Additional Sessions Judge.
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Offences to be non-cognizable (Section 439)
26.2 Section 439 (2) of the Act provides that "No court shall take cognizance of any
offence under this Act which is alleged to have been committed by any company or
any officer thereof, except on the complaint in writing of the Registrar, a shareholder
of the company, or of a person authorised by the Central Government in that behalf."
The Committee observed that sub-section (2) does not have a provision for
complaints to be filed by a person who is a member of a company without any
share capital. Therefore, to include such persons within the ambit of Section 439,
the words `or member' should be inserted after the term `shareholder' in sub -
section 2.
Special Courts
26.3 The amendment in Section 435, through the Companies (Amendment) Act, 2015,
empowered the Special Courts to adjudicate offences punishable with imprisonment
of two years or more only. The Committee recommended, that a consequential
change in Section 441(6) ought to be made to refer to Special Courts, as well as
other courts with whose permission the compounding may be allowed.
27. MISCELLANEOUS
Protection of Action taken in Good Faith
27.1 Suggestions were received for amending Section 456 of the Act, to allow for
rectification of mistakes by companies, especially during the filing of various forms.
It was noted by the Committee that the provision is for protecting action taken
by government servants in administration of the Act.
28. PENALTIES
28.1 The Act aims to provide for a regime of offences and penalties which is
commensurate to the gravity of the offence. During the public consultation, concerns
were raised in respect of the punishments for certain sections under the Act being
disproportionate, and thus, the Committee has attempted to resolve the anomalies by
following principles of law, analysing international best practices and by also taking
guidance from the previous committees on this aspect.
28.2 The Committee noted that J.J. Irani Committee Report had recommended that "the
Companies Act may lay down the maximum as well as minimum quantum of penalty
for a particular offence, however the Act should also provide that while levying a
particular quantum of penalty, the levying authority should also take into
consideration the size of company, nature of business, injury to public interest, nature
and gravity of default, repetition of default, etc.". The Standing Committee on the
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Companies Bill, 2009 in its twenty first report had also stated that "transgressions,
purely procedural or technical in nature, should be viewed in a broader
perspective, while serious non-compliance or violations including fraudulent
conduct should invite stringent /deterrent provisions like imprisonment". There is a
varied experience internationally, where a separate and a more liberal penalty and
compliance regime has been laid down for companies which are small in size in terms
of their business though a differentiated treatment with a higher liability for statutory
annual filings is also seen in some jurisdictions, for example UK, presumably to
ensure a high rate of compliance.
28.3 The Committee observed that small businesses need to be encouraged by laying down
a more liberal regime and wherever disproportionate punishments are proposed these
need to be reduced. Further, the Committee felt that the procedural and technical non-
compliances should attract less stringent punishments as compared with violations for
substantive requirements. The Committee noted that the Act provides a duration of up
to 300 days for companies to comply without the fear of prosecution in as many as six
major compliance requirements. The Committee has given its recommendations on
the suggestions received keeping these principles in mind but also keeping in mind
the requirement for improving the low compliance levels, especially amongst private
companies.
28.4 The Committee further observed that the extension of the liberal regime to
private companies with no significant public interest would be ideal. However, it
is difficult to define public interest for this purpose in a holistic manner and
limiting it to private companies having debt above a threshold may leave out a
large number of companies. Also the Act provides for various other
requirements (like appointment of IDs, vigil mechanism, auditor rotation etc.)
which are applicable to companies depending upon their paid-up capital,
turnover, debts etc. Recognition of the concept of public interest entity may
require review of such thresholds/requirements and it may, therefore not be
appropriate to provide a specific definition for public interest entities. However,
in case of penal provisions which provide discretion to courts on imposing
fines/imprisonment (e.g. in cases where the penal provisions provide for fine or
imprisonment up to certain amount/term) the Courts/Tribunal could be
empowered to consider certain factors before determining the
fine/imprisonment. These factors could be size of the company, nature of
business, injury to public interest, nature/gravity of default and repetition of
default. Such a general provision could be inserted in the Act in the
Miscellaneous Chapter.
Annual Returns (Section 92) and Financial Statements (Section 137)
28.5 Section 92 of the Act prescribes that a company is to file a copy of its annual return
within sixty days from the date of the annual general meeting, with the Registrar. Sub-
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section (5) prescribes the punishment for not filing the annual returns within the
period prescribed under Section 403 (i.e. three hundred thirty days from the date of
the annual general meeting). The punishment prescribed is fine of not less than
Rupees Fifty Thousand but which may extend to Rupees Five Lakh for the company,
and imprisonment for a term which may extend to six months or fine not less than
Rupees Fifty Thousand and up to Rupees Five Lakh or both for the officer in default.
Similarly, under Section 137 of the Act, for non-filing of financial statements, the
punishment prescribed is fine of Rupees One Thousand per day for the period during
which the failure continues, but which shall not exceed Rupees Ten Lakh for the
company, and imprisonment for a term which may extend to six months or fine not
less than Rupees One Lakh but which may extend to Rupees Five Lakh or both for the
officer in default.
28.6 As the two statutory annual filings for a company are of critical importance to the
Registry and all stakeholders, and as prosecution is possible only after a period of
330/300 days, the imprisonment or fine prescribed has to be seen in this context.
Further, an upper limit on imprisonment term provides the required flexibility to a
Court to weigh the punishment against the size of the company, etc. Hence no
reduction in quantum of punishment is proposed. However, the fines under sub-
section (5) of Section 92 and sub-section (3) of Section 137 have been viewed as
excessive for one person companies and small companies. The Committee
recommends that such class of companies should be subject to a fine, which is
half of what is applicable under the provisions of Section 92(5) and Section
137(3).
Adjudication of penalties
28.7 Section 454 of the Act provides for an in-house framework for prompt administration
of penalties on detection of an offence by Registrar of Companies. The Committee
while examining suggestions to reduce penalties under the mechanism noted that
there are twenty sections in the Act, which are subject to the adjudication mechanism
prescribed under Section 454. The said sections have a maximum penalty of rupees
one lakh, and in most cases, the penalty is a fixed amount linked to number of days of
default (for example, rupees one thousand per day of non-compliance) etc., thus not
providing much discretion to the adjudicating officers. In the case of section 42, the
penalty provided is very high and it is being dealt with separately. Further, in most of
the cases, the sections deal with rights of shareholders like maintenance of registered
office, maintenance of register of members, etc. In view of this, the Committee felt
that it would not be prudent to reduce the prescribed penalties for the
adjudicating authority, who is not given any discretion on the quantum of
penalty to ROC. Further, the Committee also felt the role of appellate body
under section 454 would need to be clearly brought out as the appellate body
may not be able to levy a lesser penalty than that was levied by adjudicating
authority (i.e. ROC).
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Fee for filing (Section 403)
28.8 Section 403 of the Act permits the submission, filing, registration or recording of any
document required to be submitted, filed, registered or recorded under the Act within
a period of two hundred and seventy days from the date on which it should have been
submitted on payment of prescribed additional fees. After the expiry of the
abovementioned period, the second proviso of sub-section (1) permits the filing of
such documents on payment of further additional fees, which has been prescribed in
the Table of Fees pursuant to Rule 12 of the Companies (Registration of Offices and
Fees) Rules, 2014. The Committee recommended that a clarification be issued
under Note 3 of Table B, that on a combined reading of the second proviso of
sub-section (1) of Section 403 along with Table B, documents are permitted to be
submitted, filed, registered or recorded under the provisions of the Act even
after a delay of two hundred and seventy days from the date on which it should
have been filed, on a payment of additional fee as prescribed. Paragraph 22.2 of
Part I of report may also be referred to.
28.9 The Committee is of the view that a more liberal regime for fees/ additional fees be
laid down for one person companies and small companies, it is recommended that the
fees prescribed in Table A pursuant to Rule 12 of the Companies (Registration of
Offices and Fees) Rules, 2014 should be halved for such companies.
28.10 At the same time, the Committee noted with concern the dip in annual statutory
filings as compared to last year, indicating laxity owing to the additional time
and the low filing fees, which need to be addressed. As the hands of the Registrar
are tied with regard to filing of prosecution before the prescribed 270 days
during which filing can be done with additional fees in case of the six identified
filings where section 403 is applicable, the Committee felt that fees for timely
filing may be reduced to zero, additional fees may be increased to up to 10 times
of the current additional fees with steep slabs after the first slab. Repeated non-
compliance should result in deprival of the moratorium from prosecution as
specified under Section 403 and attract higher level of additional fees.
Audit Committee and Nomination & Remuneration Committee and Stakeholders
Relationship Committee (Section 177 and 178)
28.11 Section 177 of the Act lays down the constitution and functions of the Audit
Committee and Section 178 lays down the constitution and functions of the
Nomination & Remuneration Committee and Stakeholders Relationship Committee.
Sub-section (8) of Section 178 of the Act states that for any contravention of the
provisions of Section 177 or 178, the company shall be punishable with fine not less
than rupees one lakh but which may extend to Rupees Five Lakh, and every officer in
default shall be punishable with imprisonment for a term which may extend to one
year or with fine which shall not be less than rupees twenty five thousand but which
74
may extend to rupees one lakh, or with both. The Committee observed that provisions
of section 177 and 178 are applicable to listed and bigger public companies and most
of the requirements under these sections are of substantive nature. Section 292A of
the Companies Act, 1956 which provided for the requirements on Audit
Committee provided that in case of contravention of such section the officer in
default shall be punishable with imprisonment which could extend up to one
year or with fine up to Rupees fifty thousand or both. The committee feels that
punishment for officer in default under section 178(8) may be aligned with the
punishment provided under section 292A (11) of the Companies Act, 1956.
Disclosure of interest by director (Section 184)
28.12 Section 184 of the Act requires two kinds of disclosures from the director (i) under
sub-section (1), his concern or interest in any company or companies or bodies
corporates or firms or other association of individuals which shall include the
shareholding, at the first board meeting in which he participates as a director post his
appointment and thereafter at the first meeting of the board in every financial year or
whenever there is a change, in the first board meeting held after such change; and (ii)
under sub-section (2), his concern or interest in a contract or arrangement or proposed
contract or arrangement. Any contravention of either of the sub-sections results in the
imposition of punishment under sub-section (4) i.e. imprisonment for a term which
may extend to one year or with fine which shall not be less than Rupees Fifty
thousand but which may extent to Rupees One Lakh or with both, on the director. The
public comments suggested that the punishment for non-disclosure of every infraction
of sub-section (1), even if insignificant, results in the imposition of a minimum fine of
Rupees Fifty Thousand extendable to Rupees One Lakh or imprisonment up to a year
or both, which is disproportionate and onerous. The Committee observed that it is
essential for a director to disclose every concern or interest as required under
sub-section (1), or any change thereto, so that the company is aware of such
concerns or interests of the director. However, the Committee felt that the
minimum fine of Rupees Fifty Thousand was on the higher side, and thus
recommended deletion of the provision for minimum fine.
Conditions to be fulfilled for the appointment of certain directors (Schedule V)
28.13 Part I of Schedule V of the Act lays down the conditions to be fulfilled for the
appointment of a managing or whole time director or a manager, one of them being
that he should not have been sentenced to imprisonment for any period or to a fine
exceeding rupees one thousand, for the conviction of an offence under sixteen acts,
one of them being the Act. The Committee observed that the threshold of the fine
needs revision, as the penalties throughout the Act have undergone upward
revision. It was decided to recommend for revision of the disqualifying fine in
Part I of Schedule V to Rupees Fifty Thousand in respect of conviction of
offences under the Act.
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Punishment for fraud (Section 447)
28.14 Section 447 of the Act lays down the punishment for any person found guilty of fraud
to imprisonment not less than six months but which may extend to ten years and fine
not less than the amount involved in fraud but which may extend to three time the
amount involved. Further, in case the fraud involves public interest, the minimum
imprisonment shall be not less than three years.
28.15 The Committee received suggestions that the ambit of Section 447 was too broad and
would result in minor infractions being punished with severe penalties, which are
non-compoundable. However, it was also suggested during the discussions that once
the offence of fraud is established, it would not be tenable to provide for a threshold
for it to be punishable under Section 447. The Committee observed that the
provision has a potential of being misused and may also have a negative impact
on attracting professionals in the post of directors etc. and, therefore,
recommends that only frauds, which involve at least an amount of rupees ten
lakh or one percent of the turnover of the company, whichever is lower, may be
punishable under Section 447 (and non-compoundable). Frauds below the limits,
which do not involve public interest, may be given a differential treatment and
compoundable since the cost of prosecution may exceed the quantum involved.
Compounding of certain offences (Section 441)
28.16 As per Section 441 of the Act, any offence punishable under the Act with fine only is
compoundable by the Tribunal. Other offences punishable with imprisonment or fine
or both are compoundable only by the special court. Previously, in the Companies
Act, 1956, offences punishable with fine as well as offences punishable with
imprisonment or fine or both were compoundable by the Tribunal. The compounding
provision was inserted by the Companies Amendment Act, 1988 on the
recommendation of the Sachar Committee, as it was felt that leniency is required in
the administration of the provisions of the Act particularly penal provisions because a
large number of defaults are of technical nature and arise out of ignorance on account
of bewildering complexity of the provisions. The Committee observed that as per
the scheme of the Act, most of the offences which are punishable with fine or
imprisonment or both are technical / procedural in nature, and thus, for the
leniency and ease in administration of the Act, the old provisions relating to
compounding may be re-instated. Therefore, under sub-section (1), the Tribunal
should have the power to compound offences punishable with fine as well as
offences punishable with imprisonment or fine or both.
Punishment for contravention by auditors (Section 147)
28.17 Under sub-section (2) of Section 147 of the Act, if an auditor of a company
contravenes any of the provisions of the specified sections therein, he shall be
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punishable with fine not less than rupees twenty-five thousand but which may extend
to rupees five lakh. However, as per the proviso, if the contravention by the auditor is
done knowingly or wilfully with an intention to deceive the company or its
shareholders or creditors or tax authorities, the penalty is significantly enhanced to
imprisonment for a term which may extend to one year and with fine not less than
rupees one lakh but which may extend to rupees twenty-five lakh. Additionally, under
sub-section (3), where an auditor has been convicted under sub-section (2), the auditor
shall be liable to refund the remuneration received by him and pay for damages to the
company, statutory bodies or authorities or to any other persons for loss arising out of
incorrect or misleading statements of particulars made in the audit report.
28.18 The Committee observed that the punishment under sub-section (3) is linked to
conviction under sub-section (2). Therefore, to align the scope of both the sub-
sections, the term `any other persons' in sub-section (3) be replaced with the
phrase `shareholder or creditor'. Further, the minimum fine under sub-section
(2) of Section 147 is harsh, and should be rationalised and the maximum fine
should be a multiple of the audit fees. The Committee recommends that under
sub-section (2), minimum fine as specified may be retained and maximum fine
may extend to rupees five lakh or four times the audit fees, whichever is less, and
under the proviso to sub-section (2), the minimum fine should be rupees fifty
thousand and which may extend to rupees twenty-five lakh or eight times the
audit fees, whichever is less.
National Financial Reporting Authority (Section 132)
28.19 Section 132 of the Act provides for the setting up of a National Financial Reporting
Authority for matters relating to accounting and auditing standards. As per sub-
section 4(c)(A), where professional or other misconduct is proved on the part of the
auditor, the NFRA shall have the power to make an order for imposing penalty, in
case of individuals, not less than rupees one lakh but which may extend to five times
of the fees received; and in case of firms, not less than rupees ten lakh but which may
extend to ten times of the fees received. The Committee is of the view that the
minimum fine on the firm may be rationalised to rupees five lakh.
Removal, Resignation of Auditor
28.20 Section 140(3) prescribes a minimum fine of Rupees fifty thousand in case the auditor
does not file the statement with regard to his resignation. This fine was considered as
onerous for auditors of small companies. The Committee recommended that the
minimum fine may be reduced to Rupees fifty thousand or the audit fees,
whichever is lesser.
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Punishment under Section 172
28.21 Section 172 of the Act is a residuary penalty section where under if a company
contravenes any of the provisions of Chapter II (relating to appointment and
qualification of directors), the company and every officer of the company who is in
default shall be punishable with fine not less than rupees fifty thousand but which
may extend to rupees five lakh. It was suggested during the public consultation, that
since the appointment of directors in government companies is made by the relevant
ministry, such companies should be subject to lesser penalty. The Committee did not
agree with the suggestion, and observed that adequate internal procedures exist
within the Government for addressing the concerns raised and for prosecution of
government companies in such cases.
Offer or invitation for subscription of securities on private placement (Section 42)
28.22 As per sub-section (10) of Section 42 of the Act, if a company makes an offer or
accepts monies in contravention of this section, its promoters and directors shall be
liable for a penalty which may extend to the amount involved in the offer or invitation
or rupees two crore, whichever is higher. Additionally, the company is required to
refund all monies to subscribers within a period of thirty days of the order imposing
the penalty. The Committee deliberated that in situations where the offer size is lesser
than Rupees Two Crore, the minimum penalty of Rupees Two Crore may be
unreasonable. Further, the Committee noted that the contraventions under Section 42
could either be procedural or substantive, and the punishments for the two need to be
differentiated. The Committee remarked that a comprehensive relook of Section
42 has been undertaken, and subject to changes recommended therein, the
following recommendations are made
Contravention of sub-section (7) and (9) of Section 42 is a procedural
violation, hence it shall be subject to a penalty (adjudicated under Section
454) of rupees one thousand per day of default, not exceeding rupees twenty
lakh, commencing from the expiry of the time period within which the filings
have to be made under the said sub-sections. It was felt that Section 403
should not be applicable to such contraventions;
Other contraventions under Section 42 shall result in the company, its
promoters and directors being punishable with penalty which may extend to
the amount involved in the offer or invitation, or Rupees Two Crore,
whichever is lower. Refund of all monies, as prescribed, may continue in both
the sub-sections.
Resolutions and agreements to be filed (Section 117)
28.23 As per sub-section (2) of Section 117 of the Act, if a company fails to file any
resolution which is required to be filed as per the said section before the expiry of the
period specified under section 403 i.e. within two hundred and seventy days from the
date by which it should have been submitted, the company shall be punishable with a
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fine not less than rupees five lakh but which may extend to rupees twenty five lakh;
and every officer in default shall be punishable with fine not less than rupees one lakh
but which may extend to rupees five lakh. The Committee viewed the non-filing of
resolutions as a procedural default and the current penalty being on the higher
side. Thus, the Committee recommends that the minimum fine for both company
and officer in default be reduced to rupees one Lakh and rupees fifty thousand
respectively, and a proviso be inserted in sub-section (2) of Section 117, wherein
the punishment prescribed for one person companies and small companies may
be halved to that under sub-section (2).
Condonation of delay (Section 460)
28.24 Section 460 of the Act provides for condonation of delay by the central government,
however the circumstances in which delay may be condoned has not been spelled out
clearly in the Act or the rules. The public comments suggested that the MCA should
lay down clear guidelines enumerating the circumstances in which delay may be
condoned under Section 460 of the Act. The Committee noted that appropriate
guidelines may be put in place.
Loan to Directors (Section 185) and Loan and investment by company (Section 186)
28.25 As per Section 185 of the Act, no company shall advance any loan to any of its
directors etc., except in a few cases as provided therein. Sub-section (2) provides that
any loan advanced in contravention of Section 185 shall result in the company being
punishable with fine which shall not be less than rupees five lakh but which may
extend to rupees twenty-five lakh, and the director etc. shall be punishable with
imprisonment which may extend to six months or with fine which shall not be less
than rupees five lakh but which may extend to rupees twenty-five lakh or both. As per
Section 186 lays down the manner and conditions in respect of loans and investments
by a company. Sub-section (13) states that a contravention of Section 186 shall result
in the company being punishable with fine which shall not be less than rupees twenty-
five thousand but which may extend to rupees five lakh, and the officer in default
shall be punishable with imprisonment which may extend to two years or with fine
which shall not be less than rupees twenty-five thousand but which may extend to
rupees one lakh or both.
28.26 The public comments suggested that the punishment under Section 185 and 186
was very high as compared to Companies Act, 1956 and should be reduced. The
Committee did not accept the recommendation as the enhancement of
punishment was undertaken to address the large number of violations of the said
section as well as the need to deter diversion of funds by companies.
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29. REVIVAL & REHABILITATION, AND WINDING UP
29.1 As part of its mandate, the CLC also considered the recommendations made in the
Interim Report of the Bankruptcy Law Reforms Committee (BLRC) that had
suggested amendments to Chapters XIX (Revival and Rehabilitation of Sick
Companies) and XX (Winding up) of the Companies Act, 2013 in February, 2015.
Although the CLC reviewed and deliberated on those recommendations in detail, the
BLRC came out with its final report very recently, in November, 2015,
recommending a Bankruptcy Code for India. Based on the recommendations of the
BLRC, the Government has recently introduced a Bill in the Lok Sabha, titled as the
Insolvency and Bankruptcy Code, 2015. The Code proposes to repeal all provisions of
Chapter XIX of the Act and those relating to winding up on the ground of insolvency
in Chapter XX. It also proposes certain consequential amendments to the Act. After
the Code is enacted, all insolvency related matters for companies will be covered
under the Code. Consequently, the CLC does not recommend any other changes
in the Act for this purpose.
29.2 The Committee noted that the provisions relating to winding of a company on
grounds other than insolvency have been retained in the Companies Act, 2013, and
the winding up proceedings relating to such grounds are to be carried out in
accordance with the provisions of the Act. Given that the adjudicating authority for
liquidation under the Bankruptcy Code and winding up under the Act is the same (i.e.,
the NCLT), winding of companies on non-insolvency related grounds should also be
carried out in accordance with the procedure prescribed in the Bankruptcy Code (the
winding up will not involve the Insolvency Resolution Process). The Committee
recommended appropriate amendments to the Act to facilitate this, which could
be carried out at the time of enactment of the Bankruptcy Code or soon
thereafter.
End of Part I
*****
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PART II
RECOMMENDATIONS PROPOSING AMENDMENTS
TO THE RULES
1. COMPANIES (SPECIFICATIONS OF DEFINITIONS DETAILS) RULES, 2014
1.1 In order to address changes recommended by the Committee in the definition of
term subsidiary and associate company, Rule 2(1)(r) defining the term "total
share capital" may be omitted.
2. COMPANIES (INCORPORATION) RULES, 2014
INC-29
2.1 The Committee felt that the option to use the integrated incorporation E-Form
INC-29 in case name approval is separately obtained using INC-1 should be
allowed, the option of giving more than one name as alternatives be permitted,
and the number of allowed re-submissions should be increased from two to three
times.
2.2 The Committee felt that certain improvements in e-form INC-29 may be
implemented.
In point no. 6(e), wherein registration number of a company incorporated
outside India is required to be specified, alpha-numeric registration numbers
may be accepted.
In point no. 6(e), wherein the particulars of the authorized person of the
company incorporated outside India are required to be specified, PAN or
Passport number of the authorized person may be accepted. Also, the form
may be enabled to accept the foreign address of the said authorized person in
the field `present address of the authorized person'.
In point nos. 9 and 10 in relation to PAN, TAN and ESIC applications, it is
mentioned that "this facility is available at the e-Biz portal only as per
separate procedure prescribed by e-Biz portal". The facility for PAN, TAN
and ESIC should be enabled as part of the integrated application form, and
incorporation form INC-7, available on the MCA21 portal.
2.3 It was suggested that two chances may be given for resubmission/clarification for
submitting any form to ROC as it was alleged that in case forms are marked as
`Invalid and not to be taken on record', the refund process is lengthy. The Committee
did not agree with the above proposal to increase the number of resubmissions as
provided in Rule 10(6) of the Companies (Registration Offices and Fees) Rules,
2014 as the earlier experience with this has not been very encouraging, and it also
encourages slackness on the part of the professionals involved in filing of forms.
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Rule 16: Removal of references to the word `partnership firm'
2.4 Rule 16 requires specified particulars of every subscriber to the memorandum to be
filed with the Registrar. It was pointed out that a reference to partnership firm as
provided under Rule 16(2)(g), when the subscriber is a body corporate, is
inappropriate. The Committee agreed with the view and suggested for removal of
references to the word `partnership firm' in Rule no.16 (2)(g).
Rule 16: Authentication of documents
2.5 Rule 16(2)(f) mandates only an authorized person/officer of body corporate subscriber
to subscribe to the memorandum, based on the resolution passed by the body
corporate conferring authority to sign the memorandum. The Committee did not
agree to expand the scope to allow outsiders such as legal counsel to represent
the company, as it would be necessary and prudent to be able to clearly know
and to track the original subscribers.
Removal of duplication of information in forms
2.6 It was pointed out that various incorporation related forms like INC-7 and DIR-12
require information such as address proof, PAN Card, Utility Bill, Electricity Bill etc.
whereas the system had already captured these particulars in the DIN of a director and
the same ought not to be asked again. The suggestion was agreed to. Changes in the
MCA21 system/E-Forms may be made to ensure that in case of a person holding
DIN, the form requiring such information should get prefilled and additional
documentation would not be required.
2.7 Similarly, it was also suggested to remove the requirement of Form INC-10 altogether
(i.e. verification of signature of subscribers). The Committee observed that the
subscriber sheet of the MOA has the photographs of the subscribers and further, there
is an attestation by a witness to the effect that the subscriber/first director has signed
in his presence. In the light of the same, Rule 16(1)(q) be omitted along with
Form INC-10.
Formation of one person company (Section 3(1) read with Rule 3(2))
2.8 It was pointed out that the wordings in Rule 3(2) gives an impression that a natural
person can incorporate only one OPC or be a nominee of one OPC in his lifetime
while the spirit of the provision is that a person can be a member of only one OPC at
any point of time and that the person can also be a nominee of another OPC. The
Committee recommended to suitably rephrase Rule 3(2), especially in view of
Rule 3(3) which entails an obligation on a member holding membership in one
OPC and a nominee-ship in another OPC, to opt for one of the OPCs in case he
becomes a member of another OPC due to operation of the law.
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Registered office of company
2.9 In view of the fact that the place of businesses of a large number of companies is
also on the web/internet, the Committee felt that companies that have a website,
for conducting online business or otherwise, should be required to provide the
registered office and other details as required in section 12(3) on the
landing/home page of the website(s). The Rule may be accordingly amended.
Similar changes may also be carried out for foreign companies in Rule 6 of
Companies (Registration of foreign companies) Rules, 2014.
Rule 29: Alteration of memorandum
2.10 The present Rule 29 does not allow change in the memorandum even after
default in filing of statutory returns or payment of deposits, etc. is made good.
Change in memorandum should be allowed after defaults are made good.
Rule 28 and Rule 30: Shifting of registered office
2.11 Rule 28 read with Section 12 provides that shifting of registered office within the
same State is not to be allowed if any inquiry, inspection or investigation has been
initiated against the company or any prosecution is pending and rule 30(10) (proviso)
also prescribes similar conditions in case of shifting of registered office from one
State or Union Territory to another. The Committee felt, with a view to provide a
finite timeframe for such restriction, that an explanatory note should be
provided in both rules to the effect that `further provided that on completion of
such inquiry, inspection or investigation as a consequence of which no
prosecution is envisaged or no prosecution is pending, shifting of registered office
shall be allowed'. Further, it may be provided that in case of a pending
prosecution, on submission of an undertaking that the company would not seek
any change in jurisdiction on account of shift in office, such shifting may be
allowed.
2.12 It was suggested that the requirements in Section 13(5) for the satisfaction of the
Regional Director (RD), who is the delegated authority, that the alteration of situation
of the registered office has the consent of the creditors and other persons concerned
with the company be done away with as Rules already provide for a newspaper
publication of proposed shifting and calling for objections within a specified time
period to expedite the process. Hence, the RD should not ask NOCs from creditors
and other connected persons. The Committee felt that the suggestion does not
merit consideration since the shifting of registered office from one state to
another may jeopardise the creditors' interest vis-à-vis the applicant company.
On the contrary, the Committee agreed with the suggestion that in the case of
relocation of registered NBFCs, a NoC from RBI may be made necessary. Also,
as requested by SEBI, requirement of serving a copy of the notice to SEBI (Rule
30(6)(c) may be dispensed with. Moreover, the company should not have difficulty
in getting NOCs from major creditors to enable RDs to form an opinion on the
bonafides of the company on the proposed shifting, if it is having proper business
relations with the creditors. Further, suggestions to allow shifting based on special
resolutions for private limited companies and providing deemed approval in case
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of non-disposal of the petition by the RD within 60 days were also considered
undesirable.
Rule 8: Undesirable names
2.13 Rule 8 (2) (a) (ii) provides that `it includes the name of a registered trade mark or a
trade mark which is subject of an application for registration, unless the consent of
the owner or applicant for registration, of the trade mark, as the case may be, has
been obtained and produced by the promoters'. The Committee recommends that
this requirement should be changed and Rule should be modified to read as `it
includes the name of a `trade mark registered or a trade mark which is subject of
an application for registration under the Trade Marks Act, 1999 and the rules
framed thereunder', unless the consent of the owner or applicant for registration,
of the trade mark, as the case may be, has been obtained and produced by the
promoters.
2.14 Rule 8(5) provides that `The applicant shall declare in affirmative or negative (to
affirm or deny ) whether they are using or have been using in the last five years the
name applied for incorporation of company or LLP in any other business constitution
like Sole proprietor or Partnership or any other incorporated or unincorporated
entity and if, yes, details thereof and No Objection Certificate from other partners and
associates for use of such name by the proposed Company or LLP, as the case may
be, and also a declaration as to whether such other business shall be taken over by
the proposed company or LLP or not'. The Committee felt that the said rule is
prescribed to prevent disputes on availing names, which were already being used
in other forms of business organizations and hence, does not recommend any
change.
2.15 Suggestions were received from stakeholders that the name availability process
should be automated and centralized. The Committee noted that this step had
already been initiated.
2.16 Rule 13(1) and 13(2) prescribes that the subscriber sheet of a MOA and AOA shall be
handwritten by the respective subscribers. Suggestions were received to allow even
typewritten subscriber sheets as the subscriber is signing the same by hand in the
presence of a witness. The Committee recommended that this Rule should be
suitably modified to allow typewritten subscriber sheets as the signing
subscribers could not go back on the contents of the subscriber sheets after
affixing their signatures. Similar modifications be carried out in Rule 13(2) with
respect to entering of particulars of an illiterate subscriber electronically.
2.17 Rule 13(4) prescribes that where a subscriber is a body corporate, the MOA and the
director shall sign the AOA, officer or employee of the said body corporate duly
authorised in that behalf by a resolution of the directors of the body corporate.
However, this sub-rule does not envisage the eventuality of an LLP being a
subscriber. Accordingly, this sub-rule should be redrafted keeping in view that
an LLP can also be a subscriber to the MOA.
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3. COMPANIES (PROSPECTUS AND ALLOTMENT OF SECURITIES) RULES, 2014 (PAS
RULES)
Rule 3(6): Disclosures of Sources of Promoters' Contribution
3.1 Section 26(1)(a)(xiv) provides every prospectus to state disclosures in such manner as
may be prescribed about sources of promoter's contribution. Rule 3(6) of the PAS
Rules further provides for the disclosures to be made. It has been suggested that
obtaining such a detailed level of disclosures from promoters invested in the shares of
the Company since the beginning of the operations of companies having a long period
of existence would be very difficult and, therefore, this provision should be done
away with. The Committee noted that as it has recommended for modification of
Section 26 to allow prescription powers to SEBI (refer paragraph 3.1 of Part I of
the report), consequential changes would result in omission/modification of the
Rules and these requirements.
Refund of Share Application Money
3.2 Rule 11(2) of the PAS Rules lays down the requirement that in case the stated
minimum amount has not been subscribed, the application money to be refunded shall
be credited only to the bank account from which the subscription was remitted. The
Committee did not agree with the contention that the company is dependent on
the depository for investor related details and the account details are not
available making it difficult for the subscription amount to be remitted, and does
not recommend any change.
Private Placement of Securities
3.3 The private placement requirements have been comprehensively dealt with in
paragraphs 3.3 to 3.13 of Part I of the report. The Committee recommended that
consequential changes to Rules as identified in those paragraphs would need to
be addressed in the Rules.
3.4 It was indicated that as per the second proviso to Section 67(3) of the Companies Act,
1956, the limit of a maximum of forty-nine persons, to whom securities could be
issued, by way of private placement, was not made applicable to the Public Financial
institutions (PFIs), as defined under Section 4A of the said Act. However, Section 42
of the Companies Act, 2013, read with Rule 14 of the Companies (Prospectus and
Allotment of Securities) Rules, 2014 does not provide such relaxation to PFIs. The
Committee felt that exemption, as in the case of NBFCs, from the Rule 14 can be
extended to PFIs.
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4. COMPANIES (SHARE CAPITAL AND DEBENTURE) RULES, 2014
Shares with Differential voting Rights
4.1 As per Rule 4(1) (g) of the Companies (Share Capital and Debentures) Rules, 2014, a
company would be prohibited from issuing any shares with differential voting rights,
if it has defaulted on the repayment of loans from banks and public financial
institutions or interest thereon, payment of dividend on preference shares, payment of
statutory dues for employees, or in depositing moneys into the Investor Education and
Protection Fund. There is no reference period for such default because of which it
appears that any default, even if subsequently rectified, would prevent a company
from issuing such shares. The Committee recommended that there should be a
cooling off period of five years from the end of the financial year in which the
said default was made good for a company to be eligible to issue such shares
again. This may be provided for in the Rules.
Issue of Bonus Shares
4.2 As per Section 63(2)(a) of the Act, in order to allot bonus shares, a company should
have taken authorisation from shareholders in the general meeting which need not be
a special resolution. However, clause 5(e) of e-form PAS-3 requires the date of the
special resolution and Service Request Number (SRN) of relevant form in which the
special resolution was filed. In order to overcome this difficulty, the Committee
recommended that clause 5(e) of PAS-3 be modified to replace the words `special
resolution' with the word `resolution'.
Conversion of Loans into equity
4.3 It was observed that Form PAS-3 treats `conversion of loans into shares' as an
allotment for consideration other than cash. The Committee felt, considering
judicial precedents and earlier circulars issued under the Companies Act, 1956,
that genuine debt (including External Commercial Borrowings) converted into
shares should be treated as allotment for cash and recommended appropriate
modification of Form PAS-3.
Change in number of members of a Guarantee company
4.4 The Committee noted that there is no requirement under the Act to intimate the
Registrar of Companies of any change in the number of members of a Guarantee
Company, which was earlier required under Section 97 of the Companies Act 1956.
However, Rule 15 of the Companies (Share capital and Debentures) Rules, 2014 read
with Section 64, prescribes filing of Form SH-7 with the ROC for any alteration of
share capital and also provides a field for intimating any change in the number of
members and date of special resolution approving the same. The Committee
recommends that an appropriate modification in Rule 15 be carried out to
mandate notifying the increase in number of members of a guarantee company
as part of an increase/alteration of capital.
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Issue of Debentures for period exceeding 10 years
4.5 It was represented by the stakeholders that Infrastructure finance companies as well as
Infrastructure Debt Fund Non-Banking finance companies be allowed to issue secured
debentures for a period exceeding ten years but not exceeding thirty years. However,
Housing Finance companies regulated by National Housing Bank (NHB) have not
been allowed to issue secured debentures for a period exceeding 10 years, putting
them at the risk of asset - liability mismatch. The Committee noted that Housing
Finance Companies (HFCs) have already been allowed by way of notification
GSR 841 (E) dated 06.11.2015.
Creation of Debenture Redemption Reserve
4.6 Rule 18(7) (b) of the Companies (Share Capital and Debentures) Rules, 2014 requires
the creation of Debenture Redemption Reserve (DRR) to the extent of twenty-five
percent of the value of debentures by companies including manufacturing and
infrastructure companies. The Committee felt that in such cases the amount
available for other appropriations stand reduced and recommends that the Rule
be modified to explicitly mention that companies be allowed to set aside DRR on
a step down basis with reference to the redemption schedule for the next one
year. It also recommended that a proviso be inserted that companies be allowed
to appropriate any amount in excess of the DRR required for immediate
redemption.
Maintenance of Liquid Funds for Redemption of Debentures
4.7 Rule 18(7)(c) of the Companies (Share Capital and Debentures) Rules, 2014 states
that every company required to create DRR shall on or before the 30th day of April of
each year, invest or deposit, as the case may be, a sum which shall not be less than
fifteen percent of the amount of its debentures maturing during the year ending 31st
day of March of the next year in specified methods. Though the Committee felt that
it increases the cost of funds raised through Non-Convertible Debentures
(NCDs), keeping the investors' interest in view, no relaxation could be allowed
for maintenance of liquid funds. The Committee recommended that clarification
may also be provided in the Rules that maintenance of liquid funds and DRR
would be essential, irrespective of whether a company has sufficient profits.
Creation of Security for Debentures
4.8 The mandate to secure only company(s) assets as security for debentures is placing a
restriction on raising funds through debentures vis-à-vis bank borrowings as the banks
accept (in fact insists) that the assets of all companies which form part of company(s)
consolidated balance sheet or any other collateral security as security. The
Committee felt that Rule 18(1)(b) may be amended so as to enable issue of
debentures secured by charge on the properties or assets of the company or any
other entity or any other collateral security. Rule 18(1)(d) should also enable
creation of security for debentures in favour of the debenture trustee of movable
87
property or any other collateral security which could either be of the company or
any other entity.
Perpetual Debentures
4.9 It was represented to the Committee that the companies shall also be permitted to
issue perpetual debentures on the lines of Section 120 of the 1956 Act since RBI
allows banks and systemically important NBFCs to issue such debentures. Section
71(13) gives broad rule making powers on matters relating to debentures. The
Committee felt that enabling provision for issue of perpetual debentures may be
provided in the Rules.
Issue of sweat equity shares
4.10 Rule 8(4) of the Companies (Share Capital and Debentures) Rules, 2014 restricts the
issue of sweat equity shares to twenty-five percent of paid up equity share capital. On
suggestion by the stakeholders to relax the cap, the Committee deliberated on the
issue of sweat equity shares in excess of the said twenty-five percent ceiling and
recommended that start-ups, who may require such instruments may be
permitted to issue sweat equity shares beyond twenty-five percent and up to fifty
percent of the paid up equity share capital.
Issue of employee stock options (ESOPs)
4.11 Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014 restricts issue
of ESOPs to promoters or promoter directors even if they are employees of the
company. The Committee felt that, in order to encourage start-ups, this rule may
be relaxed to enable issuance of ESOPs to promoters who may be working as
employees or employee directors or whole time directors which would help the
promoters to gain from increase in future valuation of the company without in
any way impacting finances of the company during its initial years.
Preferential Allotments
4.12 Rule 13(2)(h) of the Companies (Share Capital and Debentures) Rules, 2014 states
that in case of a preferential issue of convertible securities, `the price of securities to
be issued on preferential basis shall be determined beforehand on the basis of a
valuation report of a registered valuer'. Rule 13(3) states that "the price of shares or
other securities to be issued on preferential basis shall not be less than the price
determined on the basis of the valuation report of a registered valuer". The Committee
felt that, in practice, upfront determination of valuation of a `convertible security' is
too restrictive. The Committee recommended that Rule 13(2)(h) may be amended,
to consider providing for convertible instruments to be valued at the time of
conversion. It was felt that the formulation used in the FDI policy may be
adopted.
4.13 Rule 13(2) (c) of the Companies (Share Capital and Debentures) Rules 2014 does
not allow preferential allotment of partly paid-up shares. Department of
88
Industrial Policy and Promotion vide its Press Note No. 9 (2015 Series) dated
15.09.2015 allows partly paid shares and warrants as eligible capital instruments
for the purposes of FDI policy. The Committee recommended amending Rule
13(2)(c) to allow preferential allotment of partly paid-up shares.
Issue and Redemption of Preference Shares
4.14 Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014
prescribes the terms and conditions for issue of securities through private placement
under Section 42. Rule 9 of the Companies (Share Capital and Debentures) Rules,
2014 also provides for the conditions to be fulfilled by a company with respect to
issue and redemption of preference shares under Section 55. Clarification had been
sought during the public consultation as to whether both Rules have to be followed for
issue of preference shares. The Committee felt that there is no ambiguity and the
issuer of preference shares (which is covered under the definition of securities)
needs to follow both the Rules.
5. COMPANIES (ACCEPTANCE OF DEPOSIT) RULES, 2014
Definition of Deposits - exclusions
5.1 Rule 2 (1)(c)(xii)(a) of the Companies (Acceptance of Deposits) Rules, 2014
(Deposits Rules) excludes advance received for supply of goods or provision of
services from the definition of `deposit' if it is appropriated within 365 days from the
date of its acceptance. The Committee noted that there are many businesses like heavy
engineering and IT Services industries where customer advance beyond 365 days is
prevalent. Large companies also give advances to SMEs for creation of infrastructure
etc., and adjust these against subsequent supply or conversion of goods by SMEs.
Similarly, in the case of seasonal or cyclical industries, advances are usually taken
much before the actual delivery of the goods, in most cases exceeding 365 days. The
Committee felts that there is a case for outstanding advances not be treated as
deposits even after 365 days, if they are received in the ordinary course of
business, as evidenced by a written contract and during normal business cycle
subject to disclosure of details of such outstanding amounts in the financial
statements. However, such relaxation should be made only after ensuring that all
regulatory concerns have been addressed.
5.2 In terms of Rule 2(1)(c) (ix) of the Deposits Rules, any amount raised by issue of
debentures compulsorily convertible into shares of the company within five years is
excluded from the definition of "deposits". The Committee recommended
excluding debentures compulsorily convertible into shares of the company within
ten years from definition of deposit under Rule 2 (1)(c)(ix).
5.3 Definition of the term `deposit' exempts amounts received from various categories of
institutions, banks and lenders, but amounts raised by the issuance of debentures/
bonds to SEBI registered entities such as Alternate Investment Funds, Domestic
89
Venture Capital Funds and Mutual Funds are not exempted. Further as these are
institutional investors and well regulated, it may not be necessary to extend the
extensive disclosure and compliance requirements intended to protect public
debenture-holders/ bond-holders under the Deposits Rules to amounts raised from
such entities. It was noted that the corresponding RBI guidelines for NBFCs expressly
exclude such amounts from the definition of the term `public deposit'. The
Committee recommended amendment of Rule 2(1)(c) of the Deposits Rules to
exclude amounts directly received by a company from Alternate Investment
Funds, Domestic Venture Capital Funds and Mutual Funds registered with
SEBI, from the definition of deposits.
5.4 In terms of Rule 2(1)(c)(ix) of the Deposits Rules, only debentures secured by an
exclusive first charge or charge ranking pari passu with the first charge on any of the
specified assets excluding intangible assets are considered not to be deposits. It was
suggested that, debentures secured by second and third charges, debentures with
intangible assets as securities may also be exempted, and unsecured debentures may
be excluded from definition of deposit. This would allow greater flexibility on issue
of debentures. Security created over intangible assets is not a certain security and
prone to high variability. Second and third charges are also not sufficient security for
investors. The Committee, therefore, did not recommend including debentures
secured by second and third charges, or consideration of security created against
intangible assets for secured debentures but it recommended that the MCA may
consider excluding unsecured debentures listed as per SEBI Regulations from
the definition of deposits.
5.5 Convertible notes are promissory notes, which are not specifically recognized in the
Companies Act, 2013 and are a mode of raising funds, especially for start-ups. It is
felt that these may be considered as `deposits' and resultantly, the compliance
requirements for raising these would apply to `start-ups' which would make it
difficult to use these instruments to raise capital. The Committee, therefore,
recommended that convertible notes, convertible into equity or repayable within
5 years from the date of issue, if issued to a person with a minimum investment
size of Rupees Twenty Five lakh brought in a single tranche, should not be
treated as deposits under the Companies Act, 2013. Further, safeguards to
prevent misuse may be finalised in consultation with RBI.
Amount brought in by promoters
5.6 As per Rule 2(1)(c)(xiii) of the Deposits Rules, the amount brought in by promoters
of a company pursuant to stipulation by a lending institution or a bank is excluded
from the definition of deposit subject to certain conditions. It was suggested that
unsecured loans brought by existing or new promoters coupled with repayment of
some existing unsecured loans to fulfil the requirement of "quasi equity" stipulated by
lending institution or bank may be treated as "exempt deposits". The Committee felt
that the present exemption is adequately worded and therefore recommended
that no further exemption or change is required.
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Issues relating to section 462 exemption vis-a-vis Deposits Rules
5.7 Private companies have been exempted from complying with the provisions of
Section 73(2)(a) to (e), while accepting deposits from its members, provided that the
deposit monies shall not exceed 100 percent of aggregate of paid up share capital and
free reserves. It has been suggested that some of the Deposits Rules are not in
harmony with such exemptions provided. The exemptions given under Section 462
of the Act would override the Deposit Rules. However, the Committee
recommended that, with a view to provide clarity, the Deposit Rules may be
amended to align with exemptions/modifications provided for private companies.
Advertisement/Circular in the form of advertisement
5.8 Rule 4(1) of the Deposits Rules requires every company intending to invite deposits
from its members to issue a circular to all members, and in addition gives flexibility to
publish the circular in a newspaper. It was suggested that it should not be
mandatory to send individual circulars to members of the company under Rule
4(1) if an advertisement has been issued by a company for acceptance of deposits
from public and also when the same is placed on the website of the company. The
Committee agreed with the suggestion and recommended that the suggested
option may be provided by amendment in the Rules.
6. COMPANIES (REGISTRATION OF CHARGES) RULES, 2014
6.1 It was pointed out that as per the existing MCA-21 system, filings in respect of
companies, which have not filed Balance Sheet or Annual Returns for three years, are
blocked. In view of this, Asset Reconstruction Companies (ARCs), which acquire
Non-Performing Assets (NPAs) of such companies, are unable to file for
creation/modification of charges in respect of such companies. For the companies
under liquidation, ARCs have an option to file an application before the Hon'ble High
Court for securing their right as secured creditor but the same remedy is not available
for companies which have a dormant status but are not in liquidation. The Committee
upon examination found that there is nothing in the Act or the Rules that does not
allow ARCs to create charges on the NPAs of dormant companies acquired by them.
The Committee recommended that, in order to protect interest of ARCs and for
capital circulation, the MCA21 system should be modified to allow for filings of
charge creation/modification by recognized ARCs on the assets of such
companies.
7. COMPANIES (MANAGEMENT AND ADMINISTRATION) RULES, 2014
Register of members, etc.
7.1 Rule 3 of the Companies (Management and Administration) Rules, 2014 provides
that every company limited by shares shall, from the date of its registration, maintain
a register of its members in Form No. MGT-1. It also provides that in the case of
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existing companies, registered under the 1956 Act, particulars shall be compiled
within six months from the date of commencement of these Rules. The Committee
noted that the companies, which have been in existence for several years, may not
have the relevant details of the shareholders, which are now required to be included in
the Register of Members and it may be impractical for such companies to procure the
required details from all its existing shareholders, given that some of them may not
even be traceable. In view of this, the Committee recommended that for the
companies incorporated prior to 1 April 2014, the members' particulars as
available under the 1956 Act should be allowed to be transferred to Register of
Members under the 2013 Act. Further, it was recommended that particulars as
are required to be captured in Form MGT-1 shall be mandatorily maintained in
respect of all persons becoming members after 1 April 2014. Finally, , the
Committee also recommended incorporation of additional fields in the transfer
form SH-4 for obtaining the requisite particulars in MGT-1 for enabling
compliance with Rule 3.
7.2 As per Rule 5(2) of the Companies (Management and Administration) Rules, 2014,
the registers shall be maintained at the registered office of the company unless a
special resolution is passed at a general meeting authorising the keeping of the
register at any other place within the city, town or village in which the registered
office is situated or any other place in India in which more than one-tenth of the total
members entered in the register of members reside. The Committee felts that as this
is a safeguard for members, which has been in place since the 1956 Act, no
amendment is required for the purpose.
7.3 As per Rule 8 of the Companies (Management and Administration) Rules, 2014,
every entry in the register maintained under Section 88 of the Act and index included
therein is required to be authenticated by the Company Secretary or by any other
person authorised by the Board along with the date of board resolution authorising the
same. It was pointed out that in respect of listed companies, there are huge
transactions almost on daily basis and that the share transfer register and
members register are maintained electronically, in most cases by Registrar and
Transfer Agent (RTA) who is an outside agency, and that the RTA may be
obligated to maintain the said registers and indexes in electronic form. The
Committee felt that the Rule 8 already gives the powers to Board, and no change
is required.
Declaration in respect of beneficial interest in any share
7.4 Section 89 read with Rule 9(1) of the Rules provides that a person whose name is
entered in the register of members of a company as the holder of shares in that
company but who does not hold the beneficial interest in such shares (hereinafter
referred to as "the registered owner"), shall file with the company, a declaration to
that effect in Form No. MGT-4 in duplicate, within a period of thirty days from the
date on which his name is entered in the register of members of such company.
Further, Form MGT-5 is prescribed for declaration to be given by beneficial owner
whose name is not entered in the Register of members in duplicate. The concerned
company, upon receipt of Forms MGT-4 and MGT-5, is required to file Form MGT-6
with the ROC electronically after attaching the scanned copies of Forms MGT-4 and
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MGT-5. The Committee recommended that the requirement of filing of Form
MGT-4 and Form MGT-5 in duplicate may be done away with as original copies
are not required to be filed with the ROC and only scanned copies of the said
forms are required to be attached to Form MGT-6. However, the suggestion to
consolidate the information in Forms MGT-4 and MGT-5 into one form was not
found to be acceptable as purposes for these two forms are different.
Annual Return
7.5 Section 92(1) read with Rule 11(1) prescribes that the annual return shall be in Form
no. MGT-7. The Committee noted that Form MGT-7 requires furnishing of specific
information which is already captured in the Board's report such as CSR spend,
remuneration of directors, details of turnover and net worth etc. The Committee
further noted that the Ministry vide its notification dated November 16, 2015 has
substituted a new Form MGT-7 through the Companies (Management and
Administration) Third Amendment Rules, 2015 removing the duplication and excess
information issues. However, the Committee recommended that the Annual
Return may be further simplified by avoiding asking for repetitive information
which may be available in other documents filed with ROC such as Financial
Statements, Board's Report etc. and making disclosures more relevant. Further
the suggestions for exempting the disclosure of certain particulars in the Annual
Return for companies with less than twenty shareholders was not accepted as it
was felt that it may lead to too many classifications of companies and
consequently lead to lack of clarity. The Committee, however, was of the opinion
that a simpler Annual Return form for OPCs and small companies could, be
prescribed.
7.6 Section 92(2) read with Rule 11(2) prescribes that an annual return, filed by a listed
company or a company having paid-up share capital of ten crore rupees or more or
turnover of fifty crore rupees or more, shall be certified by a Company Secretary in
practice in Form no. MGT-8. The Committee considered the suggestions to expand
the scope of certification of annual return and agreed that Company Secretaries
in employment should be allowed to certify annual returns.
7.7 Section 92(3) read with Rule 12 requires that an extract of annual return in form
MGT-9 be attached to the board's report. As noted elsewhere also, deletion of this
requirement without providing the information contained therein to the members may
not be appropriate. The Committee recommended that after including pertinent
information as a disclosure requirement under section 134, Form MGT-9 may be
omitted (Paragraph 9.11 of Part I of the Report).
Return to be filed with Registrar in case promoters' stake changes
7.8 Section 93 read with Rule 13 requires every listed company to file with the Registrar,
a return in Form no. MGT-10 along with fee with respect to changes relating to either
increase or decrease of two percent or more in the shareholding position of promoters
and top ten shareholders of the company on each occasion, within fifteen days of such
change. The Committee has recommended for omission of section 93 (Paragraph
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7.6 of Part I of the Report). Consequential changes in the Rules would be
required.
Calling of extraordinary general meeting
7.9 Explanation to Rule 17(2) provides that requistionists should convene the
extraordinary meeting at the registered office or in the same city or town where it is
situated and such meeting should be convened on a working day. It was suggested
that the explanation should be modified to allow holding of EGMs by requisition
on a day which is not a national holiday and the Committee agreed with the same
as the AGMs are also allowed to be convened on any day which is not a national
holiday as per Section 96(2).
Postal Ballot
7.10 Rule 22(7) provides that if a resolution is assented to by the requisite majority of the
shareholders by means of postal ballot including voting by electronic means, it shall
be deemed to have been duly passed at a general meeting convened in that behalf.
Similarly, Section 110(2) also provides that if a resolution is assented to by the
requisite majority of the shareholders by means of postal ballot, it shall be deemed to
have been duly passed at a general meeting convened in that behalf. The Committee
recommended that since these two provisions lead to repetition, the Rule 22(7)
may be deleted. Also Rule 22(14) provides that the resolution shall be deemed to
be passed on the date of a meeting convened in that behalf. This is also provided
for in Section 110(2), hence the Committee recommended that the same may be
omitted from the Rules.
7.11 The Committee noted that there is a contradiction in the provision relating to
maintenance of minutes book of general meetings, as provided in Rule 25 and section
119. While Rule 25(1)(e) permits that the minutes book of general meetings can be
kept at either the registered office or such other place as may be approved by the
Board, if the company desires not to keep the same in the registered office, Section
119 specifically provides that the general meeting minute book shall be kept only at
the `registered office' and does not allow any other option. It would be appropriate
that the minutes book for general meeting is maintained at the registered office
only. Therefore, the Committee recommended that Rule 25(1)(e) may be made
consistent with Section 119.
7.12 It was suggested, with respect to Section 120 of the Act, that a new form should
be introduced by MCA to which extracts of all statutory registers and minute
books for each financial year should be enclosed a which would be accessible
only to the MCA officials and not to the public. Further, suggestions were also
made to do away with pre-certification requirements on forms (without
specifying the forms numbers) and discontinuing STP approvals, prescribed for
certain forms. However, in the absence of any justifications behind these
suggestions, the Committee did not agree to these suggestions.
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8. COMPANIES (DECLARATION AND PAYMENT OF DIVIDEND) RULES, 2014
Declaration of Dividend
8.1 The second proviso to sub-section (1) of Section 123 of the Act provides that, where,
owing to inadequacy or absence of profits in any financial year, any company
proposes to declare dividend out of the accumulated profits earned by it in previous
years and transferred by it to the reserves, such declaration of dividend shall not be
made except in accordance with the Rules prescribed by the Central Government.
Rule 3 of Companies (Declaration and Payment of Dividend) Rules, 2014 specifies
the conditions in this regard. It was pointed that as per these provisions, compliance
with Rule 3 would be required only when dividend is declared out of `reserves'. The
said Rule 3 allows declaration of dividend out of `free reserves' only and it is not
clear whether a company would be required to comply with the said Rule even when
it proposes to declare dividend out of surplus in profit and loss account. The surplus
balance (i.e. carried forward balance of profit and loss account) is a part of "free
reserves" but it does not represent an amount 'transferred' to reserves. It has
been suggested that to avoid any legal challenges in application, the requirements
of the Rule and the section should be harmonized appropriately.
8.2 The Committee feels that Rules should use the same language as was provided in the
Act. Thus, Rule 3 should provide for conditions only in situations where, in case of
inadequacy of profits, the dividend is to be declared out of 'accumulated profits earned
by the company in the previous years and transferred by the company to the reserves
as has been referred to in the main section of the Act. The Committee discussed and
felt that companies must have the freedom of utilizing the balance standing in the
Profit and Loss account (not transferred to the reserves) for payment of dividend in
case of inadequacy of profit in a year. The Committee felt that once Rule 3 is
aligned with the provisions of the Act, it would be clear that in case a company
declares dividend out of surplus i.e. accumulated credit balance of Profit and
Loss Account which has not been transferred to reserves, the provisions of the
Act and Rule 3 would not applicable. The Committee recommended
harmonization of Rule 3 of the Companies (Declaration and Payment of
Dividend) Rules, 2014 and Section 123 of the Act to provide clarity on the issue.
Exemptions from Second proviso to section 123(1)
8.3 Item No. 6 of notification [G.S.R. 463(E)] dated 5 June 2015, provides that the
provisions of Chapter VIII and second proviso to sub-section (1) of Section 123
(provisions relating to declaration of dividend in case of inadequacy or absence of
profits), shall not apply to a Government Company in which the entire paid up share
capital is held by the Central Government, or by any State Government or
Governments or by the Central Government and one or more State Governments. It
was suggested that this exemption should be extended to non-wholly owned
Government companies as well. The Committee felt that such exemption might not
be a good practice, especially as some of the companies might be listed also. It
noted that such exemption was also not given under the 1956 Act. The
Committee, therefore, did not recommend a change.
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9. COMPANIES (ACCOUNTS) RULES, 2014
Location of servers for keeping backup of books and papers
9.1 The proviso to Rule 3 (5) of the Companies (Accounts) Rules, 2014 states that the
backup of books of account and other books and papers of company maintained in
electronic mode, including at a place outside India, if any, shall be kept in servers
physically located in India on a periodic basis. It has been argued that it may cause
difficulties in compliance with the requirements where an Indian company maintains
its books of accounts electronically outside India in a shared IT infrastructure and
may find it difficult to segregate the data for the purpose of back-up. Major ERPs like
SAP and Oracle do not allow for partial data back-up i.e. back up of data belonging to
only one company or set of books of an entity, as it would increase IT costs and thus
may negate benefits derived initially by centralizing IT processing. Further, it was felt
that this provision might conflict with territorial laws of various countries as the data
protection or privacy laws in Europe and US impose many restrictions on cross border
sharing, storing and revealing of data. On the other hand, there are several
jurisdictions across the world, for example UK, Belgium and other European
countries where accounting records are required to be maintained locally for
inspection, and therefore might lead to regulatory concerns with regard to grant of
access to data maintained outside the country. In view of the need to ensure access
for regulatory requirements, the Committee recommended that the said proviso
with regard to maintenance of local servers be retained. However, in case where
free data access to all regulatory agencies of the country are allowed under a
bilateral or multi-lateral treaty, in those cases, data servers may be allowed to be
kept in the specific countries with which such treaties have been entered into.
Accounts & manner of consolidation of Accounts
9.2 Rule 6 of the Companies (Accounts) Rules, 2014 deals with manner of consolidation
of accounts. The third proviso to Rule 6 states that this Rule shall not apply in respect
of consolidation of financial statement by a company having subsidiary or
subsidiaries incorporated outside India only for the financial year commencing on 1
April 2014 and ending 31 March 2015. The Committee deliberated on extending
this exemption perpetually, as demanded, and decided that this exemption was
only a facilitative provision for transition and it should not be extended beyond
2014-15. Further, in case the company does not have subsidiaries but only
associates and joint ventures, the Committee suggested that the exemption to
consolidate the accounts of joint ventures and associates not be extended
perpetually as AS 21 requirement are being suitably modified.
9.3 The Committee also deliberated on providing exemption from consolidation of
accounts by one person companies, small companies and private companies. The
Committee recommended that there is no justification in giving exemption,
whatever the size of a company, wherever it has one or more subsidiaries etc.
RBI suggested that the unhedged foreign exchange exposure of companies
should either be disclosed in the annual financial systems, or captured through
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AOC-4. The Committee recommended for appropriate changes to capture the
required information.
Disclosures in the Director's Report
9.4 Rule 8(1) of the Companies (Accounts) Rules, 2014 requires the Board of Directors'
Report to contain a separate section on performance and financial position of each of
the subsidiaries, associates and joint ventures. The Committee recommended that
the requirements under Rule 8(1) may be captured to the extent feasible in the
statement under Rule 5 and therefore reduce the reporting requirement under
Rule 8(1).
9.5 Rule 8(3) of the Companies (Accounts) Rules 2014 mandates disclosure of certain
information with respect to conservation of energy, technology absorption etc. The
Committee observed that as compared to the disclosure requirements of these
items under the repealed rules i.e. Companies (Disclosure of particulars in the
Reports of Board of Directors) Rules, 1988, there has been a substantial scaling
down in these disclosures and hence, decided against dispensing with the same.
Moreover, these disclosures are required for statistical purposes also. Hence, no
amendment was recommended in this regard.
Form AOC 2: Disclosure of Related Party Transactions (RPTs)
9.6 Section 134(3)(h) of the Act requires companies to disclose particulars of contracts or
arrangements with related parties referred to in Section 188(1) in the prescribed form,
AOC 2 read with Rule 8(2) of the Companies (Accounts) Rules, 2014. Section 188 of
the Act applies to RPTs, which are not entered in the ordinary course of business or
not on arm's length basis. However, Form AOC-2 (form for disclosure of related
party transactions in the Board's Report) extends the requirement of disclosure also to
material RPTs that are entered on arm's length basis, which goes beyond the
requirements of the Act. The Committee has already recommended that Form
AOC-2 may be omitted as long as the required disclosures are made in the
Financial Statements. It has also been recommended that the Board's Report
should specifically discuss and refer to these disclosures (paragraph 9.10 of Part
I of report may also be referred to). Consequential changes in the Rules may be
required.
9.7 Rule 13 of the Companies (Accounts) Rules, 2014 requires certain class of companies
to appoint an internal auditor or a firm of internal auditors. A plain reading of the
Rule gives the impression that a "company" (which in turn deploys cross section of
professionals) cannot be appointed as an internal auditor for the purposes of Section
138. This does not appear to be the intent of the legislature or the practice with regard
to appointment of internal auditors. The Committee, therefore recommended that
Rule 13 of the Companies (Accounts) Rules, 2014 be amended replacing the
word `a firm' with the term `an entity' to avoid confusion.
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Disclosure of Remuneration of Directors and KMP
9.8 Sections 134(3)(a) and 92(3) of the Act read with Rule 12 of the Companies
(Management and Administration) Rules, 2014 requires the Board's Report of a
company to include an Extract of Annual Return in Form MGT-9. The said Form,
inter alia, requires companies to disclose remuneration of Directors and key
Management Personnel (KMP) and links the said remuneration to the salary and value
of perquisites under the Income-tax Act, 1961. Further, Rule 5(2) of the Companies
(Appointment and Remuneration of Managerial Personnel) Rules, 2014 requires
disclosure of employees who are in receipt of remuneration not less than Rupees sixty
lakhs per annum or Rupees five lakh per month. Disclosure of two different figures of
remuneration in the Board's Report may create confusion. The Committee has
recommended for omission of MGT-9 requirements (paragraphs 7.5, 9.11 of Part
I of the Report) In addition, the Committee recommended that the threshold of
Rupees 60 lakh may be increased to Rupees One Hundred and Two lakh per
annum, the requirements under the different Rules be harmonized.
Compliance of all applicable laws referred to under Section 134(d)(f)
9.9 Section 134(5)(f) states that the Directors Responsibility Statement should state that
the directors had devised proper systems to ensure compliance with the provisions of
all applicable laws and that such systems were adequate and operating efficiently.
Further Form MR 3 of Companies (Appointment & Remuneration of Managerial
Personnel) Rules 2014 also requires the secretarial auditor to certify compliance on all
applicable laws. The Committee deliberated on restricting disclosure of
compliance to important laws and felt that as the company has to comply with all
applicable laws, restricting the Director's responsibility to compliance of specific
laws only would not be acceptable. Moreover, the requirement in Form MR 3
form is for the Secretarial Auditor to satisfy himself that the concerned company
has proper systems and processes at the Board level to ascertain compliance of
applicable laws and this is a reasonable requirement for the secretarial auditors
to enquire into and report.
Corporate Social Responsibility
9.10 Rule 6 of the Companies (CSR Policy) Rules, 2014 states that the CSR Policy of the
company shall deal with/disclose a list of CSR projects or programs which a company
plans to undertake (which are listed in Schedule VII of the Act) specifying modalities
of execution, implementation schedules as well as monitoring of such projects or
programs. It was suggested that at the time of formulation of the Policy, it would be
difficult for the CSR Committee to determine the exact list of projects or programs
which a company plans to undertake. However, the Committee was of the opinion
that, keeping in view the requirement of disclosures, and the fact that the
projects and programs are to be decided by the Board on the recommendations
of the CSR Committee, there should not be a difficulty in finalising the required
details and disclosing these. No change, therefore was recommended.
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9.11 Rule 3(2) of the Companies (CSR Policy) Rules, 2014 requires a company to spend
on CSR for 3 financial years even when a company ceases to be covered under sub-
Section (1) of 135. The Committee recommended that Rule 3(2) may be amended
to the effect that a company which ceases to be a company covered under sub-
section (1) for any financial year may not be required to spend on CSR for that
financial year.
9.12 The High Level CSR Committee had recommended that the administrative
overhead expenditure on CSR should not include expenditure on capacity
building of the implementing agencies, and should be increased from 5% to
10%. The Committee endorsed these recommendation and accordingly,
suggested necessary changes in the Rule.
9.13 The Committee also endorsed recommendation of the High Level CSR
Committee as contained in paragraph 9.9 of that report for providing
differentiated treatment for implementing CSR policy depending on the
available funds for CSR expenditure to a company.
10. COMPANIES (AUDIT & AUDITORS) RULES, 2014
Appointment of Auditors not ratified at the General Meeting
10.1 The Explanation to Rule 3(7) of Companies (Audit and Auditors) Rules, 2014 states
that if the appointment is not ratified by the members of the company, the Board of
Directors shall appoint another individual or firm as its auditor following the
procedure laid in the Act. The Committee has recommended for removal of the
ratification requirement. Consequential changes only would be required once the
change is carried out.
11. COMPANIES (APPOINTMENT AND QUALIFICATION OF DIRECTORS) RULES, 2014
Appointment of Independent Directors
11.1 Section 149(4) of the Act, read with Rule 4 of the Companies (Appointment and
Qualification of Directors) Rules, 2014 prescribes appointment of independent
directors in various classes of companies. The Committee noted in case of joint
venture companies, wholly-owned subsidiaries, and dormant companies that fall
within the purview of Section 455 of the Companies Act, 2013, there does not
appear to be sufficient justifiable grounds to prescribe for independent directors,
who were primarily there to protect the interests of dispersed minority
shareholders. The Committee, therefore, recommended for an amendment to be
affected in the Rules, to exclude such companies from the requirement of
appointing an independent director.
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Removal/Resignation of Independent Directors
11.2 Clause (2) of item VI of Schedule IV of the Act provides that a new independent
director shall replace an independent director who resigns, or is removed from the
Board of the company within a period of not more than one hundred and eighty days
from the date of such resignation or removal. The second proviso to Rule 4 of the
Companies (Appointment and Qualification of Directors) Rules, 2014 provides that
any intermittent vacancy of an independent director shall be filled-up by the Board at
the earliest but not later than the immediate next Board meeting or three months from
the date of such vacancy, whichever is later. The Committee noted that Regulation
25(6) of the SEBI (LODR) Regulations provides that an independent director who
resigns or is removed from the Board shall be replaced by a new independent director
at the earliest but not later than the immediate next Board meeting or three months
from the date of such vacancy, whichever is later. The Committee recommended,
with a view to harmonise the provisions, that Schedule IV of the Act may be
amended to provide for filling up of the vacancy within three months in line with
Rule 4 and SEBI Listing regulation.
ESOPs issued to IDs Prior to Commencement of the Act
11.3 Clarity was sought as to whether an independent director vested with ESOPs prior to
commencement of the Act i.e. 1 April 2014 can continue to hold such ESOPs and
exercise these in the subsequent years. The Committee felt that prohibition under
the Act cannot apply retrospectively and it is implied that any ESOPs issued or
held prior to commencement of the Act would be valid and would be regulated as
per the earlier regulations. The Committee felt that there was no need to issue
any clarification on this matter.
Separate Meeting of independent directors
11.4 Clause (1) of item VII of Schedule IV provides that the independent directors of the
company shall hold at least one meeting in a year, without the attendance of non-
independent directors and members of management. Stakeholders requested that the
term `year' may be clarified as to whether it is a calendar year or financial year. The
Committee felt that since the compliances under the Act are mostly aligned to a
financial year, the requirement should be linked to the financial year. The
Schedule may be amended accordingly.
11.5 The Committee also deliberated as to whether guidelines, for the separate meetings
required to be held by Directors, need to be issued in light of demand from certain
quarters in this regard. It, however, felt that these new concepts would evolve during
the course of time and the Industry Chambers may guide their corporate members
suitably through dissemination of best practices. There may not be any need for
guidelines to be issued by Government at this moment.
11.6 In the context of the above two paragraphs, the changes recommended in
paragraph 12.7 of Part I of the Report may also be referred to.
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Woman Directors
11.7 The second proviso to Section 149 read with Rule 3 the Companies (Appointment and
Qualification of Directors) Rules, 2014 lays the requirement for every listed company
and every other public company having paid up share capital of Rupees one hundred
crore or more; or turnover of three hundred crore rupees or more to appoint at least
one woman director. The Committee deliberated on the suggestions to increase the
prescribed thresholds, making the requirement optional and penal provisions for
non-compliance. The Committee felt that no change in the rule position is
necessary.
Resignation of a director
11.8 The proviso to Section 168 read with Rule 16 lays down requirement for a director to
forward a copy of his resignation along with detailed reasons for the resignation to the
Registrar within thirty days of resignation in form DIR-11. It was pointed out that
many of the directors do not have digital signature and the directors who are willing
to resign from the board but do not have a DSC are forced to take a DSC for the
limited purpose of filing form DIR-11, which may not be useful for them thereafter, if
they are not on the Board of any other company(ies). The Committee noted that in
the light of its recommendation to make intimation of resignation by the
directors optional, the issue would be addressed. However, it was also noted that
the proviso to Rule 16 already provides that a professional can file the relevant
Form on behalf of a foreign director.
11.9 It has also been suggested that the resigning director should be allowed to file Form
DIR-11 which should record his resignation in register of directors, if the company
does not notify the resignation of director in Form DIR-12 within the prescribed
period. The Committee understands that the Form DIR-11 is only a facility to the
resigning director to intimate RoC of his resignation and filing of the said Form
should not result in recording change of his status in the register of directors.
The change should get recorded only after DIR-12 is filed by the company. This
safeguard is needed to prevent unilateral departures from the Board by the
directors. The Committee's recommendation in paragraph 11.17 of Part I of the
report removing the mandatory requirement may also be noted.
12. COMPANIES (MEETINGS OF BOARD AND ITS POWERS) RULES, 2014
Meetings of board held through Video-conferencing
12.1 Rule 3 of the Companies (Meetings of Board and its Powers) Rules, 2014 lays down
the manner of conducting meeting of the Board through video conferencing. It was
suggested that the procedure in this regard needed to be simplified and the
requirement of recording entire proceedings of the meetings held through video
conferencing should be done away with. With a view to reduce the requirements,
the Committee recommended that video recording may be preserved only until
the minutes of the meeting are irrefutably confirmed by each of the Directors, as
required under Rule 3(12)(b), and signed by the Chairman, as such minutes
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would be admissible evidence in the court of law. Further, the recording
requirement of the meetings should be limited only to the summary of decisions
taken at the meeting, as against the entire proceedings in line with the May 20,
2011 Circular of MCA. The Committee, however, feels that the provisions with
regard to ensuring integrity, reliability, maintaining confidentiality, etc. are
broad principles, and specific video conferencing services like Skype need not be
mentioned in the Rules.
Audit Committee omnibus approval
12.2 Attention was drawn to Regulation 23(3) of the SEBI (LODR) Regulations and
proviso to Section 177(4)(iv) which empower the Audit Committee to give omnibus
approval for related party transactions subject to prescribed conditions. It was
indicated that the Act does not contain an explicit provision for granting omnibus
approval for unforeseen transactions. The Committee noted that relevant
provisions of the Act were notified on 14 December, 2015 and the relevant Rules
also provide, inter alia, that where the need for related party transaction cannot
be foreseen and aforesaid details are not available, the audit committee may
grant omnibus approval for such transactions subject to their value not
exceeding rupees one crore per transaction. The suggestion made, therefore, is
already addressed.
Rule 6: Thresholds specified under section 177
12.3 Rule 6 prescribes class of companies, in addition to listed companies, as required
under Section 177 where the Board of Directors should constitute an Audit
Committee. Suggestions were received to revise the thresholds so that these
requirements do not apply to smaller unlisted companies. The Committee
recommended for reviewing the thresholds prescribed for independent directors,
audit committees and nomination and remuneration committees keeping in view
the suggestions already made by SEBI.
Related Party Transactions
12.4 The third proviso to Section 188(1) has reference to the terms, `ordinary course of
business' and `arm's length basis'. It has been suggested that these terms may be
clarified/defined since these terms would differ on case-to-case basis. The Committee
felt that these terms are known in general commercial parlance and enough
accounting guidance is also available. The Committee, therefore, did not
recommend any change in the Act/Rules. It was noted that ICAI should also
come up with suitable guidance note on these matters to guide its members on
compliance with respect to Section 188 requirements.
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13. COMPANIES (APPOINTMENT AND REMUNERATION OF MANAGERIAL PERSONNEL)
RULES, 2014
13.1 Form MR-1 has been prescribed under Section 196(4) for filing a return of
appointment of managerial personnel but has also been extended for use of filing
returns for CS, CFO and CEO who are KMPs. The details of KMPs are
captured through Form DIR-12. The Committee, therefore, recommended for
appropriate changes in the Form to restrict it to managerial personnel only.
13.2 The Committee also recommends that the disclosures under Rule 5 may be
pruned to exclude information prescribed under Rule 5(1) except 5(1)(i) and
5(1)(iv). Further, the reporting requirement threshold of Rupees 60 lakh per
annum for reporting of details of employees under Rule 5(2) may be changed to
the top ten employees in terms of remuneration and employees receiving beyond
the threshold of Rupees 102 lakh per annum (Rupees 8.5 lakh per month).
13.3 The Committee also deliberated on the requirements for reporting on
compliance with company and other laws as part of Secretarial Audit. It felt that
the Secretarial Auditor being an expert in corporate laws couldn't be expected to
report compliance on other laws applicable to a company. Keeping this in view,
it is expected that the Secretarial Auditor has to, therefore, satisfy himself that
there are appropriate board processes as well as systems in the company to
monitor and ensure the compliance with applicable laws. The reporting is
accordingly prescribed in the Form MR-3. The Committee took the view that no
change in these prescriptions is required.
14. COMPANIES (AUTHORISED TO REGISTER) RULES, 2014
Conversion into companies
14.1 Section 366 of the Act enables conversion of a partnership firm, LLP, co-operative
society, society or any other business entity formed under any other law for the time
being in force into companies under the Act. The Rules, however, provide for
registration/conversion of only LLPs into companies though references to other
entities are there in Forms URC-1 and URC-2. Hence, the Committee
recommended to prescribe necessary Rules to enable other forms of business
organizations also to convert into companies.
14.2 At present, an LLP is required to first obtain availability of name from the Registrar
before filing Form URC-1 which requires avoidable information to be furnished. The
present procedure is as elaborate as for an entity being registered for the first time
under the Companies Act, 2013. The Committee recommended that the process
for conversion of an LLP into a company may be made simpler by doing away
with requirement for filing some documents, etc.
103
Relaxations on requirements to provide NOCs from other regulators.
14.3 Form URC-1 requires attachment of NOC from the Registrar of Firms. It was
suggested that the same may be dispensed with. The Committee noted that
registered as well as unregistered firms are enabled to be converted under
Section 366. The requirement of NOC from existing regulators should be
obtained by registered firms before effective conversion with a view to ensure
that the applicant is reasonably compliant of the law by which it was hitherto
governed.
15. COMPANIES (REGISTRATION OF FOREIGN COMPANIES) RULES, 2014
Companies incorporated outside India without a physical place of business in India
15.1 Companies, which are incorporated outside India and are conducting business in
electronic mode only without establishing any physical presence in India would
not be able to mention place of business in India. The Committee felts that in
such cases, the Rules may prescribe reporting of their principal place of business
from where they are managing/administering their business in India.
Closure of Liaison office/Branch Office/Project Office
15.2 The 1956 Act provided a Form- 52 for the purpose of filing application for
closure of Liaison office/Branch Office/Project Office. However, no
corresponding form under Chapter XXII of the Companies Act, 2013 has been
prescribed. The Committee recommended that necessary rule along with the
Form may be prescribed for the purpose.
Debentures, annual return, etc. and their inspection.
15.3 Section 384 provides that the provisions of Chapter VI shall apply mutatis
mutandis to charges on properties, which are created or acquired by any foreign
company. Form FC-4 for filing of Annual Return of foreign companies provides
only about the properties in India. The Committee recommends that clarity
needs to be provided that these provisions will apply only to charges on funds
raised in India.
Annual Return
15.4 Section 384 (2) provides that the provisions of Section 92 shall, subject to such
exceptions, modifications and adaptations as may be made therein by rules made
under this Act, apply to a foreign company as they apply to a company incorporated
in India. As in the case of a foreign company operating as a branch of foreign
company e.g. a foreign bank, all the above details may not be available with it.
Therefore, the Committee felt that disclosures required under Form FC-4 may
be reviewed.
104
Accounts of foreign company
15.5 Section 381 read with Rule 5(2) of the Companies (Registration Of Foreign
Companies) Rules, 2014 provides that the provisions of Chapter X and Rules made
thereunder, as far as applicable, shall apply mutatis mutandis, to foreign companies.
Chapter X contains many provisions, which may not be relevant to foreign
companies. The Committee noted that the intention of section 381 and Rule 5(2) is to
apply only to those provisions, which relate to the manner of conduct of audit of
Indian accounts of a foreign company. Since the board and shareholders of such a
company are located outside India, the applicability of the provisions of Chapter X
requiring approval of such authorities would not apply. The Committee felt that the
Ministry may clarify specifically the provisions of Chapter X that would be
applicable in case of audit of Indian accounts of a foreign company (refer
paragraphs 20.1 and 20.2 of Part I of the report).
16. COMPANIES (REGISTRATION OFFICES AND FEES) RULES, 2014
Rule 10: Limits on resubmission
16.1 As per Rule 10 (3) and Rule 10(4) of the Companies (Registration Offices and Fees)
Rules, 2014, the Registrar of Companies allows fifteen days' time to the person or
company which has filed the application or e-Form or document for furnishing further
information or for rectification of defects etc. and if such information is not provided
or is furnished partially within the time allowed, the Registrar is to either reject or
treat the application or e-Form or document as invalid. Further, only one chance of
resubmission is provided. Where the Registrar has recorded any document as invalid,
the applicant/company can only re-file the document by fresh filing along with
payment of fee and additional fee as applicable at the time of fresh filing. The
Committee felt that this is a reasonable requirement aimed to reduce slackness in
the system, both on the part of the Government and professionals, and any
grievances, due to mistakes or misuse of the system, should be addressed through
the redress mechanism and no relaxation in the prescribed procedure is
recommended. The Committee also noted that qualified professionals, who should be
fully equipped to submit complete and compliant applications, are preparing the
forms.
17. NIDHI RULES, 2014
Loans
17.1 Rule 15(4) of the Nidhi Rules, 2014 permits only three kinds of securities against
which a Nidhi can give loan to its members, namely:- (a) gold, silver, and jewellery;
(b) immovable property and (c) fixed deposits receipts, National Savings Certificates,
other Government Securities and insurance policies. A suggestion was received from
stakeholders that in case of urban marginal or lower class, vehicles like auto-
rickshaw, etc. are sources of income and are available on hypothecation of vehicle
105
itself and no other security is required. Further urban lower class has no immovable
property or gold etc. Therefore, it was suggested that vehicles should be allowed as
security for hypothecation. The Committee deliberated and did not agree with
the suggestion since vehicles are not ejusdem generis i.e. of the same kind as the
other assets permitted.
18. COMPANIES (MISCELLANEOUS) RULES, 2014
Dormant Company
18.1 Section 455 deals with dormant company. Rule 7 of the Companies (Miscellaneous)
Rules, 2014, requires a dormant company to file a `Return of Dormant Company'
annually in Form MSC-3, inter alia, indicating the financial position duly audited by
a Chartered Accountant in practice along with the annual fee as provided in the
Companies (Registration Offices and Fees) Rules, 2014 within thirty days from the
end of each financial year. The Committee discussed the suggestion that once a
Company becomes dormant, whether it is prudent to have a requirement for
such company to file any forms and returns. Since the Return of Dormant
Company is a minimal form and only seeks to update its status in the Registry,
the Committee did not recommend dispensing with it.
Condonation of delay in certain cases
18.2 Section 460 provides that where any application required to be made to the Central
Government under any provision of this Act in respect of any matter is not made
within the time specified therein, that Government may, for reasons to be recorded in
writing, condone the delay. The Committee discussed that for condonation of
delay under Section 460, no e-Forms have been prescribed. The Committee felt
that this is required in view of the ease of doing business. Therefore, the
Committee recommended that, for this purpose a single pro-forma application
form can be designed and necessary amendment may be made in the Rules.
Power to exempt class or classes of companies from provisions of this Act
18.3 The Companies Act, 2013 provides the power to issue notifications under various
sections of the Act. The Committee deliberated on the suggestion whether language to
the effect that the notification shall come into force on the date it is published in the
Official Gazette should be provided in all the notifications under the Act. The
Committee discussed the need to provide clarity in each notification about the
effective date on which the notification shall come into force. The notifications
issued by the Ministry of Corporate Affairs, unless a date is specifically
provided, are effective from the date on which they are issued/published. The
Committee however noted that care can be taken to provide such a date of
enforcement, wherever feasible.
106
ANNEXURE I: COPY OF ORDER CONSTITUTING THE COMPANIES LAW COMMITTEE
107
108
ANNEXURE II: CHAPTER WISE BREAK UP OF SUGGESTIONS RECEIVED
Suggest-ions Suggestions Total
Chapter Name received received on Suggestions
through portal paper
Chapter I -Preliminary. 155 4 159
(1 - 2)
Chapter II -Incorporation of Company and 97 2 99
Matters Incidental Thereto. (3 - 22)
Chapter III -Prospectus and Allotment of 91 9 100
Securities. (23 - 42)
Chapter IV -Share Capital and Debentures. (43 - 140 7 147
72)
Chapter V -Acceptance of Deposits by 85 1 86
Companies. (73 - 76)
Chapter VI -Registration of Charges. 25 4 29
(77 - 87)
Chapter VII -Management and Administration. 176 2 178
(88 - 122)
Chapter VIII -Declaration and Payment of 12 0 12
Dividend. (123 - 127)
Chapter IX -Accounts of Companies. (128 - 138) 254 5 259
Chapter X -Audit and Auditors. 159 1 160
(139 - 148)
Chapter XI -Appointment and Qualifications of 158 3 161
Directors. (149 - 172)
Chapter XII -Meetings of Board and its Powers. 340 10 350
(173 - 195)
Chapter XIII -Appointment and Remuneration of 143 0 143
Managerial Personnel. (196 - 205)
Chapter XIV - Inspection, Inquiry and 3 0 3
Investigation.(206 - 229)
Chapter XV -Compromises, Arrangements and 18 0 18
Amalgamations.
(230 - 240)
Chapter XVI-Prevention of Oppression and 8 1 9
Mismanagement.
(241 - 246)
Chapter XVII-Registered Valuers. 4 0 4
(247)
Chapter XVIII-Removal of Name of companies 0 0 0
from the Register of Companies. (248 - 252)
Chapter XIX-Revival and Rehabilitation of Sick 8 0 8
Companies.
(253 - 269)
109
Suggest-ions Suggestions Total
Chapter Name received received on Suggestions
through portal paper
Chapter XX-Winding Up. (270 - 365) 5 0 5
Chapter XXI Companies Authorised to Register 14 0 14
Under This Act & Winding Up of Unregistered
Companies. (366 - 378)
Chapter XXII-Companies Incorporated Outside 19 1 20
India.
(379- 393)
Chapter XXIII-Government Companies. (394 - 0 0 0
395)
Chapter XXIV-Registration offices and fees. (396 22 0 22
- 404)
Chapter XXV-Companies to Furnish Information 3 0 3
or Statistics. (405)
Chapter XXVI-Nidhis. (406) 2 0 2
Chapter XXVII-National Company Law Tribunal 2 0 2
and Appellate Tribunal.
(407 - 434)
Chapter XXVIII- Special Courts. 6 0 6
(435 - 446)
Chapter XXIX Miscellaneous. 31 1 32
(447 - 470)
Total No of suggestions received 1980 51 2031
110
ANNEXURE III: SUMMARY OF PROPOSED CHANGES
PART I: RECOMMENDATIONS PROPOSING AMENDMENTS TO THE ACT
PROVISION NATURE OF AMENDMENT
CHAPTER 1: DEFINITIONS
Section 2(6) a. Explanation to Section 2(6) to read as "For the purposes of this clause,
`significant influence' means control of at least twenty per cent of the total
Associate voting power, or control of or participation in taking business decisions
Company under an agreement."
b. `Joint venture' to be assigned the same meaning as under Indian
Accounting Standard (Ind AS) 28, as part of the Explanation to Section
2(6) itself. (Para 1.3, 1.4)
Section 2(28) Provision to be amended to define cost accountant in practice. (Para 10.19)
Cost Accountant
Section 2(30) a. Exception to be made for instruments covered under Chapter III D of the
RBI Act.
Debenture b. Exception to also be made for deposits accepted by banking companies,
and flexibility to be given to the Central Government, in consultation with
RBI and SEBI, as applicable, to carve out other instruments from the
definition, as may be required. (Para 1.7)
Section 2(41) To expand the first proviso to Section 2(41), to allow a company having
associates and joint ventures incorporated outside India to apply for a different
Financial Year financial year to the Tribunal. (Para 1.9)
Section 2(46) To add an explanation in Section 2(46) in line with explanation (c) to Section
2(87). (Para 1.11)
Holding
Company
Section 2(49) To omit Section 2(49). (Para 1.12)
Interested
director
Section 2(51) To allow the Boards of relevant companies to appoint any other person as
KMP/whole-time KMP (Para 13.10)
Key managerial
personnel
Section 2(57) To include `debit or credit balance of profit and loss account' in the definition
of net worth. (Para 1.15)
Net worth
Section 2 (57A) New definition to be inserted. (Para 11.6)
Nominee director
Section 2(76) a. To amend Section 2(76) (viii) to substitute the word `company' with the
word `body corporate' and to also include investing company or the
Related Party venturer of a company.
b. To bring the Companies (Removal of Difficulties) Fifth and Sixth Order,
2014 into the Act. (Para 1.20)
Section 2(85) a. To replace the words `last profit and loss account' with the words `last
111
PROVISION NATURE OF AMENDMENT
audited profit and loss account'.
Small Company b. To incorporate the Companies (Removal of Difficulties) Order, 2015 into
the Act.
c. Review of the thresholds to be done by the MCA, at an appropriate time.
(Para 1.21)
Section 2(87) a. To replace the words `total share capital' with the words `total voting
power in Section 2(87) (ii), with consequential changes in the Rules to be
Subsidiary also carried out.
Company b. To omit the proviso in Section 2(87) dealing with restrictions on layers of
subsidiaries. (Para 1.23, 1.24)
Section 2(91) To revise the definition of `turnover' as "the gross amount of revenue
recognised in the profit and loss account from the sale, supply, or distribution
Turnover of goods or on account of services rendered, or both, by the company during a
financial year." (Para 1.25)
CHAPTER 2: INCORPORATION OF COMPANIES
Section 4(1) (c) a. To amend Section 4(1)(c) to allow companies to have an option to have a
more generic object clause, i.e., `to engage in any lawful act or activity or
Memorandum business as per the law for the time being in force' in the MOA.
b. To amend Section 4(5)(i), to reduce the period of name reservation from
sixty to twenty days from the date of approval, and simultaneously, the fees
for such reservation to be reduced to Rupees Five Hundred. (Para 2.1, 2.2)
Section 7(1) (c) The requirements with respect to affidavits under Section 7(1) (c) to be
replaced with self-declarations. (Para 2.3)
Incorporation of
companies
Section 12(1) and a. Section 12(1) to be amended to provide for a company to have its
12(4) registered office within thirty days of its incorporation.
b. Section 12(4) to be amended so as to increase the time limit for registering
Registered office change in registered office to thirty days. (Para 2.4, 2.5)
of company
Section 21 Section 21 to be amended to allow `any employee of the company duly
authorised by the Board' to authenticate company's documents. (Para 2.6)
Authentication of
documents,
proceedings and
contracts
New section a. To provide for consequences of number of members falling below the
prescribed minimum i.e. fastening the continuing members with the
Effect of number liability for all the debts incurred by the company till the prescribed
of members minimum is restored.
falling below b. Provision to be made for the maximum period of 6 months within which
minimum the default shall be made good, failing which the violation triggers. (Para
required 2.7)
CHAPTER 3: PROSPECTUS AND ALLOTMENT OF SECURITIES
Section 26 Section 26(1) to be modified to empower SEBI to prescribe the contents of a
prospectus, in consultation with the MCA. MCA and SEBI to devise the
Matters to be minimum disclosures to be included in the prospectus to reduce the size of the
stated in prospectus. (Para 3.1)
prospectus
Section 35 Provision to be amended to hold experts identified in the prospectus, liable for
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PROVISION NATURE OF AMENDMENT
statements prepared by them, and on which the directors relied upon. (Para
Civil liability for 3.2)
misstatement in
prospectus
Section 42 a. Requirement under Section 42 and Rule made thereunder with regard to
preparation and filing of the private placement offer letter and form PAS 4
Private placement to be discontinued.
b. Disclosures mandated under Rule 13(2) (d) of the Companies (Share
Capital and Debenture) Rules, 2014 to be embodied in the Private
Placement Application Form.
c. Important information presently provided in Form PAS-4 to be shifted as
disclosure requirement under Rule 13(2) (d). In case of private placement
of non-convertible debentures within the ceiling specified under Section
180(1) (c), the Board resolution under Section 179(3) (c) to provide for
reasonable details about the proposed offer.
d. Subject to the limit on the number of persons who could be made the offer
of securities as prescribed under Section 42(2), a company to be allowed to
open more than one issue of securities, at the same time, in a year, to such
classes of investors as may be prescribed by Rules.
e. Section 42(3) to be made explicit about the simultaneous offering of
securities of different kinds, as currently prescribed in the Rules.
f. To modify Section 42(7) to offer securities only to persons whose details as
may be prescribed, are recorded by the company, prior to the invitation to
subscribe, with no requirement to file it with the Registry.
g. New Rule to be inserted to the effect that companies would initiate
circulation of application form and collect monies only after the resolution
(i.e. Special resolution or the Board resolution) is filed with the Registry.
h. Consequential change to be made to Rule 14(3) and form PAS-5 to be
omitted.
i. In case of non-convertible debentures, the proviso to Rule 14(2)(a) to be
amended to prescribe that the relevant board resolution under Section
179(3)(c) would be adequate in case the offer under Section 42 is for
debentures up to the amount permissible for Board under Section 180(1)(c)
of the Act.
j. Board resolution to clearly mention (in the body of the resolution) that the
offer of debentures being approved by the Board is through private
placement under Section 42 and certain other minimum details to be
provided in the Board resolution, as may be prescribed in the Rules.
k. Private companies (who have been given exemption from Section 117(3)
(g) through Section 462 notification) to be required to file board resolutions
under Section 179(3) (c) or pass a special resolution.
l. Section 42(1) to clearly provide that provisions of Section 42 and rules
made thereunder shall also apply to offer of convertible securities referred
to in Section 62(1) (c) read with Rule 13 of the Companies (Share Capital
and Debentures) Rules, 2014.
m. Companies to be required to file return of allotment (PAS-3) within the
prescribed timeline, and to be made liable for penalties under Section 42 in
case of non-compliance.
n. Act/Rules to provide that companies would not be allowed to utilise the
monies raised through private placement unless such return of allotment is
filed.
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PROVISION NATURE OF AMENDMENT
o. Company to be mandated to get valuation done (in respect of equity and
convertible securities), but the report of the valuer not to be required to be
filed/ circulated.
p. Section 62(1)(c) and Rule 13(3) requiring price of securities to be decided
in advance to be modified and provisions allowing pricing as per a formula
(on the lines of RBI regulation/FDI Policy) to be considered.
q. For equity or mandatorily convertible securities, the minimum investment
size to be Rupees Twenty Thousand with no linkage to face value. For non-
convertible preference shares or non-convertible debentures, the minimum
investment size to be Rupees One Lakh with no linkage to face value.
r. An accountable way of use of renunciation rights by shareholders to be
prescribed. (Para 3.4-3.13)
CHAPTER 4: SHARE CAPITAL AND DEBENTURES
Section 53 a. The words `discounted price' to be replaced with the word `discount'.
b. Companies to be allowed to issue shares at a discount pursuant to RBI's
Prohibition of Strategic Debt Restructuring Scheme. (Para 4.1)
shares at discount
Section 62 a. To allow any mode of delivery that would provide irrefutable/certain proof
of delivery.
Further issue of b. Section 62(1)(c) and Rule 13(3) to be amended to allow pricing of
share capital convertible securities at the time of conversion as per a formula (on the
lines of RBI regulation/FDI Policy). (Para 4.3, 3.11)
CHAPTER 5: ACCEPTANCE OF DEPOSITS BY COMPANIES
Section 73 a. In Section 73(2) (c), the requirement for the amount to be deposited and
kept in a scheduled bank in a financial year to be not less than 20% of
Prohibition of amount of deposits maturing during that financial year.
acceptance of b. Provisions of Section 73(2) (d) along with the relevant rules providing for
deposits from deposit insurance to be omitted.
public c. Section 73(2) (e) to be amended to enable companies which have made
good the default to accept deposits after five years from the date the default
was made good, with full disclosures.
d. Exemptions to be provided to private companies engaged in the
infrastructure sector from the upper limit.
e. Limits with regard to raising of deposits from members for `Start-ups'
which are private companies to be removed for the first five years from
their incorporation by using Section 462 of the Act. (Para 5.1-5.5)
Section 74 To bring Rule 19 of Companies (Acceptance of Deposits) Rules, 2014 into the
Act. (Para 5.6)
Repayment of
deposits accepted
before the
commencement
of this Act
Section 76A Minimum fine to be modified to Rupees One Crore, or twice the amount of
deposit accepted, whichever is lower, and the maximum amount to be as
Punishment for already provided. (Para 5.7)
contravention of
Section 73 or
Section 76
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PROVISION NATURE OF AMENDMENT
CHAPTER 6: REGISTRATION OF CHARGES
Section 77 Section 77(3) to provide for prescriptive powers, to allow certain liens or
securities or pledges to be exempted from filing. (Para 6.2)
Duty to register
charges, etc.
Section 82 Time limits, as provided for under Section 77 for registration of charge to be
allowed for reporting satisfaction of charges under Section 82. (Para 6.3)
Company to
report satisfaction
of charge
CHAPTER 7: MANAGEMENT AND ADMINISTRATION
Section 89 Definition of beneficial interest in a share, to be provided as an Explanation.
(Para 7.1, 7.2)
Declaration of
beneficial interest
New section a. Definition to be provided for the beneficial ownership in a company.
b. Companies and individuals to be obligated to obtain information on
Declaration of beneficial ownership and companies to be empowered to seek information
beneficial from members and in case of failure to supply the required information,
ownership etc. apply sanctions in the form of suspension of rights against the beneficial
interests, subject to adequate safeguards.
c. Companies to be mandated to maintain register of beneficial owners and
provide the information to the registry (MCA21). Periodic updating to also
be mandated. Data privacy concerns to be addressed by making only part
of the filed information available to the public.
d. Companies not complying with the requirements to be liable to fine and
criminal prosecution. (Para 7.2)
Section 92 a. The Companies (Second) (Removal of Difficulties) Order, 2014, replacing
the words "paid up capital and turnover" with the words "paid up capital
Annual Return or turnover" to be included in the Act by way of an amendment.
b. Prescriptive powers for separate Annual Return format for small companies
and OPCs, with lesser detail to be included in the Section.
c. The requirement of attaching extract of the annual return to the Board's
Report under Section 92(3) to be omitted. The web address/link of the
Annual Return filed by the company and hosted on its website, if any, to be
provided in the Board's Report. Information with regard to shareholding
pattern to be provided as part of Section 134 requirements. (Para 7.4, 7.5)
Section 93 Requirement to be omitted. (Para 7.6)
Return to be filed
with Registrar in
case promoters'
stake changes
Section 94 Personal information in the register of members, as may be prescribed in the
Rules, not to be made available publicly. (Para 7.7)
Place of keeping
and inspection of
registers, returns
etc.
Proviso to The requirement of providing the Registrar with an advance copy of a
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PROVISION NATURE OF AMENDMENT
Section 94 (1) proposed special resolution as required under Section 94(1) to be done away
with. (Para 7.8)
Place of keeping
and inspection of
registers, returns,
etc.
Section 96 a. Private limited companies and wholly owned subsidiaries of unlisted
companies to be allowed to convene AGMs at any place in India, provided
Annual General approval of 100% shareholders is obtained in advance.
meeting b. Section 96(2) to be amended to provide for exemption to a class of
companies. (Para 7.9)
Proviso to a. Requirement of consent of ninety-five percent of the votes exercisable at a
Section 101 (1) general meeting at a short notice, to be applicable in the case of
extraordinary general meetings only. (Para 7.10)
Requirement of
consent
Section 100 and a. Explanation to Rule 18(3) Companies (Management and Administration)
applicable rule Rules, 2014 to be deleted and an explanation to be incorporated at the end
of Section 100 mandating that EGMs shall be held only in India.
Calling of b. Exemptions to be provided to wholly owned subsidiaries of companies
extraordinary incorporated outside India. (Para 7.11)
general meeting
Section 110 Section 110 to be amended, such that Rule 22(16) of the Companies
(Management and Administration) Rules, 2014 would provide that if a
Postal Ballot company is required to provide for electronic voting, then the mandatory items
to be transacted through postal ballot could be transacted through e-voting in
the general meetings. (Para 7.12)
117 a. Clause (e) of Section 117(3) to be deleted.
b. Exemption for banks from compliance of Section 117(3) (g) w.r.t.
Resolutions and resolutions passed under section 179(3)(f). (Para 7.14, 7.16)
agreements to be
filed
CHAPTER 8: DECLARATION AND PAYMENT OF DIVIDEND
Section 123 Section 123(3) be amended in such a way as to allow declaration of interim
dividend from out of the profits of the current financial year, generated till the
Declaration of date of declaration, including brought forward surplus in the Profit & Loss
dividend Account, and the same could be declared anytime up to convening of AGM for
the said financial year. (Para 8.3)
CHAPTER 9: ACCOUNTS OF COMPANIES
Section 129(3) a. To provide that where a CFS was statutorily required to be prepared as per
read with Section the law of the jurisdiction in which the overseas subsidiary is established
136 and is placed on the website in the statutory format, there would be no
requirement for standalone financial statements of the step down
Consolidated subsidiaries to be attached to the financial statement of the company. No
Financial exemption to be provided in other cases.
statement b. The reference to `associates' and `joint ventures' under Section 129 to be
amplified/clarified to be in accordance with the applicable Accounting
Standards. (Para 9.3, 9.5)
Section 130 a. A provision to be included to enable the Court/Tribunal to give notice to
any other party/person concerned in the matter, who has not been
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PROVISION NATURE OF AMENDMENT
Re-opening of specifically referred to in the provisions.
accounts b. Applicability of provisions of Section 130 for the re-opening of accounts to
be restricted to eight years, unless a longer period is required through a
specific direction issued by the Central Government, under Section 128(5).
(Para 9.7, 9.8)
Section 134 a. In case of a company not having a managing director, the Chief Executive
Officer to be mandated to sign the financial statements. The words "if
Financial any", to be inserted after the words "managing director" in Section
Statement, 134(1).
Board's Report, b. Form MGT-9 to be omitted with details regarding shareholding, etc. to be
etc. specifically prescribed under Section 134(3).
c. Salient points of the CSR Policy, Remuneration Policy to be included in
the Board's Report and the detailed documents/policies to be placed on the
website of the company, if any, and web address or link of these
documents/policies to be provided in the Board's report. Changes in the
policies to be specifically highlighted in the salient points.
d. Disclosures/ attachments with regard to loans or investments under Section
186 and particulars of contracts with related parties under Section 188 to be
omitted if provided in the financial statements. Such matters to be
discussed only in the main Report. Disclosure requirements under
Companies (Appointment and Remuneration of Managerial Personnel)
Rules, 2014 to be pruned.
e. For small companies, separate format for the Board's Report to be
prescribed.
f. Disclosures in the Director's Report, Financial Statements and the
Corporate Governance reporting requirements of SEBI to be harmonized to
avoid repetition and make the Annual Report more structured.
g. Board's Report to disclose compliance with regard to maintenance of cost
records, where mandated.
h. Disclosures of compliance under CARO 2015 to be provided in Section
134(3). (Para 9.10, 9.11, 9.12, 9.14, 10.20)
Section 135 a. Companies not required to appoint Independent Directors to have CSR
Committee with two or more directors.
Corporate Social b. The words "any financial year" to be replaced by the words `preceding
Responsibility financial year'.
c. The inconsistency between Rule 2(1) (f) of CSRP Rules, 2014 and
provisions of the Act to be removed by `providing prescriptive powers to
exclude certain income from net profit' in Section 135(1) itself.
d. Section 135 (3) (a) to be modified to refer to subjects in Schedule VII
within which CSR activities could be taken up by an eligible company.
e. The term "average net profit" in Section 135(5) to be replaced with the
words "net profit", to remove any ambiguity, and prescriptive powers to be
introduced for specifying the manner of calculation of `net profits' of a
foreign company, through Rules, while referring to Section 381. (Para
9.16, 9.17, 9.18, 9.20, 9.21)
Section 136 a. Financial statements to be allowed to be circulated at a shorter period as
per requisite approval of shareholders.
Right of member b. Requirements in item (a) of the 4th proviso to Section 136 (1) to be limited
to copies of to listed companies. (Para 9.26, 9.27)
audited financial
statement
117
PROVISION NATURE OF AMENDMENT
CHAPTER 10: AUDIT AND AUDITORS
Section 139 (1) a. Provisions relating to ratification to be omitted.
b. Provision to make it explicit that if the auditor was unwilling to continue at
Appointment of any stage before completion of his five-year term, it would be treated as a
Auditors case of resignation, and provisions of Section 139(8) for the filling up such
casual vacancy arising due to resignation would apply. (Para 10.2, 10.3)
Third proviso to Rule 6 to provide clarity over the fact that the three years' transition period
Section 139 (2)- would be counted from AGM to AGM, and not from the commencement of the
Act. (Para 10.5)
Transitional
period for
rotation of
auditors
Section 141 a. For the purposes of Section 141(3)(d), the term "relative" to be suitably
modified.
Disqualifications b. Section 141(3)(i) to be amended to provide clarity on the restriction
of auditors provided therein linked to the services prohibited under Section 144. (Para
10.8, 10.9)
Section 143 First proviso to Section 143(1) to be amended to provide the auditor of a
Powers and holding company a right of access to accounts and records of an associate
duties of auditors company and joint venture. (Para 10.10)
and auditing
standards
Section 143 (3) a. To provide for reporting obligations for auditors on internal financial
(i) controls to be with reference to the financial statement.
b. Auditor to express true and fair opinion on the consolidated financial
Reporting on statements and report on the relevant and significant matters concerning
Internal Financial subsidiaries/associates requiring attention of shareholders, rather than the
Control entire reporting requirements of section 143(3) of the Act. (Para 10.11,
10.12)
Section 143(12) Form ADT-4, which specified the manner of reporting fraud, to be modified to
allow an auditor to explain his comments. (Para 10.14)
Reporting of
fraud by auditor
Section 147 a. Provisions of Rule 9 to be brought in the Act.
b. Punishment under Section 147(2) and 147(3) to be aligned. (Para 10.17,
Punishment for 28.17 and 28.18)
contravention
Section 148 The name of Institute of Cost and Works Accountants of India (ICWAI) to be
corrected as Institute of Cost Accountants of India (ICAI). (Para 10.21)
Central
Government to
specify audit of
items of cost
CHAPTER 11: APPOINTMENT AND QUALIFICATIONS OF DIRECTORS
Section 149 (3) Provision to provide for the residence requirements to be for the current
financial year, with the requirement affected after a period of six months from
Residence incorporation. (Para 11.1)
requirement for
118
PROVISION NATURE OF AMENDMENT
Directors
Section 149 (6) a. To introduce the test of materiality, for the purpose of determining whether
pecuniary relationships could impact the independence of an individual for
Independent becoming an independent director.
Directors b. In Section 149(6)(d), the scope of the restriction on "pecuniary
relationship or transaction" entered into by a relative to be made more
specific by clearly categorizing the types of transactions as provided under
Section 141(3)(d).
c. In Section 149(6)(e)(i), the scope of the restriction to be modified. For the
preceding years, the restriction is to be for relatives holding Board or
KMP/one level below Board position similar to that contained in Section
141(3)(f). This scope of restriction after appointment is to be retained as
provided. (Para 11.2-11.5)
Definition Clause Definition of `nominee director' to be specifically included in the definition
clause. (Para 11.6)
Nominee
Director
Section 160 In case of appointment of Independent Directors and Directors recommended
by the Nomination and Remuneration Committee, requirements of Section 160
Rights of persons to be dispensed with. (Para 11.7, 11.8)
other than retiring
directors to stand
for directorships
Section 161 (2) Section to prohibit appointment of a director of a company as an alternate
director in the same company. (Para 11.9)
Appointment of
additional,
alternate and
nominee directors
Section 161 (4) Right to fill a casual vacancy to be made available to the Boards of private
companies as well. (Para 11.10)
Casual vacancy
Section 165 Directorship in a dormant company to be excluded for reckoning the limit of
directorships specified. (Para 11.12)
Number of
directorships
Section 167 (1) Scope of Section 167(1) (a) to be limited to only disqualifications under
(a) Section 164(1). (Para 11.13)
Disqualifications
from appointment
as, and vacation
of office of
director
Section 164 a. Inconsistency between proviso to sub-section (3) of Section 164 and
Section 167(1)(f) to be corrected and in case of requirement for vacation of
Disqualifications office of a Director, it would not take effect until the appeals are disposed
for appointment off, while in case of disqualification, provisions for pendency of appeal not
of director to be provided.
b. Disqualification under Section 164(2) to be only applicable to a person
119
PROVISION NATURE OF AMENDMENT
who was a director at the time of the non-compliance, and in case of a
continuing non-compliance, a period of six months is to be allowed for a
new Director to make the company compliant. (Para 11.14, 11.15)
Section 168 a. In the proviso to Section 168(1), director to be given an option for filing his
resignation, instead of making it mandatory.
Resignation of b. Necessary flexibility to be provided in the Act to do away with the
director requirement of DIN or provide an option to shift to AADHAAR or any
other universally accepted identification number at a future date. (Para
11.17, 11.18)
CHAPTER 12: MEETINGS OF BOARD AND ITS POWERS
Section 173 (2) Flexibility to be provided to allow participation of Directors through video
conferencing, subject to such participation not being counted for the purpose of
Participation quorum, but considered for the purpose of sitting fees. (Para 12.1)
through video-
conferencing
Section 174 (3) Exemption to be provided under Section 174(3) to enable participating
interested Directors for the purposes of quorum, using Section 462 of the Act.
Interested (Para 12.2)
directors:
exemptions from
Section 174(3) to
private
companies
Section 177 (4) a. For transactions not covered under Section 188, the Audit Committee to
give its recommendation to the Board in case it is not approving a
Audit Committee particular transaction.
b. Subject to safeguards, Audit Committee to allow ratification subject to an
upper threshold of Rupees One Crore on such transactions.
c. Section 177 to be amended to provide that related party transactions
between a holding company and its wholly owned subsidiaries not
requiring Board approval under Section 188 need not require the approval
of the Audit Committee.
d. A clarification to be issued, stating that dormant companies are exempt
from the requirement to constitute Audit Committee. (Para 12.3, 12.4,
12.5, 12.6)
Section 178 (4) a. Amendment of Schedule IV, to enable the NRC to prescribe `a
methodology for the evaluation of performance of individual Directors,
Nomination and Committee(s) of the Board and the Board as a whole', and the Board to
Remuneration carry out the performance evaluation as per the methodology approved by
Committee the Board.
b. Companies to be allowed place the remuneration policy on its website, if
any, and to disclose only the salient features of the policy, along with the
web-link in the Board's report. (Para 12.7, 12.8)
Section 177 and With respect to private companies which have debt securities listed in a stock
178 exchange, review to be done of existing thresholds, or exemptions under
Section 462 to be given, if required. (Para 12.9)
Audit Committee
Section 180 (1) To include securities premium for calculation of aggregate of paid up capital
(c) and free reserves. (Para 12.11)
120
PROVISION NATURE OF AMENDMENT
Restriction on
Board Power
Section 184 (5) To include body corporate (foreign company) in this provision, to align it to
Section 184(2), where the words `body corporate' have been used to evaluate
Disclosure of the interest of a director. (Para 12.13)
interest by
directors
Section 185 a. Companies to be allowed to advance loans to any other person in whom the
director is interested, subject to the prior approval of the company by a
Loans to special resolution.
Directors, etc. b. Loans extended to persons, including subsidiaries, falling within the
restrictive purview of Section 185 to be used by the subsidiary for its
principal business activity only, and not for further investment or grant of
loan.
c. Interest rate prescribed in the proviso to be aligned with the rate provided
under Section 186(7). (Para 12.14, 12.15)
Section 186 (1) a. To remove restrictions on layering.
b. `Principal business' of an investment company to be clarified in the
Loan and explanation below sub-section (13) of Section 186 on the lines of RBI's
Investment by stipulations. (Para 12.16)
company
Section 186 (2) a. Provisions of Rule 13(1) of the Companies (Meetings of Board and its
Powers) Rules, 2013 relating to aggregation of loans and investments for
Loan and the purpose of calculating the limits under Section 186(2) to be provided in
Investment by the Act.
company b. An `explanation' to be inserted to clarify the exclusion of employees from
the requirement of the sub-section/clause. (Para 12.17, 12.18)
Section 186 (7) The loan given to foreign entity should be at the effective yield which should
not be less than the rate provided under Section 186 (7). (Para 12.20)
Loan and
Investment by
company
Section 186 (11) a. The Removal of Difficulty Order for Section 186(11) with regard to
Insurance and Housing Finance Companies, etc. issued in January 2015,
Loan and subject to legal clarification, to be included in the sub-section itself through
Investment by an amendment. (Para 12.21)
company
Second proviso a. MCA circular no. 30/2014 in relation to Section 188 (1) to be withdrawn.
to Section 188 (1) b. Related parties in case of joint ventures and closely held public companies
where they are not allowed to vote, to be specifically excluded from the
Related Party requirements of the second proviso. (Para 12.22)
Transactions
121
PROVISION NATURE OF AMENDMENT
Section 194 and To be deleted. (Para 12.23)
195
Prohibition on
forward trading
and insider
trading of
securities
CHAPTER 13: APPOINTMENT AND REMUNERATION OF MANAGERIAL PERSONNEL
Section 197 The requirement for government approval to be omitted altogether, and
necessary safeguards in the form of additional disclosures, audit, higher
Managerial penalties, etc. may be prescribed instead. (Para 13.5)
remuneration
Section 198 (4) a. Amendment of Section 198(4)(l), to include brought forward losses of the
years subsequent to the Companies (Amendment) Act, 1960.
Calculation of b. Specific provisions for investment companies, whose principal business is
profits sale and purchase of investments, to be incorporated in the Act. (Para 13.8,
13.9)
Section 203 read a. Board to be empowered to designate other whole time officers of the
with Schedule V company as key managerial personnel and the definition of key managerial
personnel in Section 2(51) to be accordingly modified.
Appointment of b. A whole time key managerial personnel, holding necessary qualifications,
key managerial to be allowed to hold more than one position in the same company at the
personnel same time.
c. Companies to file information (similar to that for auditors) on the
resignation of any of the KMPs in the Registry.
d. The requirement under Schedule V for a foreign national to have stayed in
India for a year in order to be a Managing Director/ Whole time director to
be done away with. (Para 13.10,13.11, 13.12, 13.14)
CHAPTER 14: INSPECTION, ENQUIRY AND INVESTIGATION
Section 223 Reports to be made available to the members of the company and other body
corporate, and also to any other person, whose interests as a creditor of the
Inspection, company and other body corporate appear to the Central Government to be
Inquiry and affected. (Para 14.1)
Investigation
CHAPTER 15: COMPROMISES, ARRANGEMENTS AND AMALGAMATIONS
Section 236 References to the phrase `transferor company' in Section 236, to be modified
to a `company whose shares are being transferred' or alternatively, an
Purchase of explanation to be provided in the provision clarifying that Section 236 only
Minority applies to the acquisition of shares. (Para 15.1)
Shareholders
CHAPTER 16: PREVENTION OF OPPRESSION AND MISMANAGEMENT
No amendments recommended.
CHAPTER 17: REGISTERED VALUERS
Section 247 (2) a. Government to decide on framework after taking into account views of
(d) all stakeholders.
b. Valuer to be disqualified for valuing any asset, if he had any interest in
Registered such an asset, at any time during three years prior to his appointment,
Valuers and three years after his cessation as a valuer. (Para 17.1, 17.2)
122
PROVISION NATURE OF AMENDMENT
CHAPTER 18: REMOVAL OF NAMES OF COMPANIES FROM THE REGISTER OF COMPANIES
No amendments recommended.
CHAPTER 19: COMPANIES AUTHORISED TO REGISTER UNDER THIS ACT
Section 366 (2) a. Provision to be amended to allow for conversions to companies from
partnership firms, etc. with `two or more members', provided that in case
Companies of less than seven members, the conversion would be to a private company.
authorized to b. Changes in the Rules to be made to allow registration of partnership firms
register under this as companies. (Para 19.1, 19.2)
Act.
CHAPTER 20: COMPANIES INCORPORATED OUTSIDE INDIA
Section 379 Clarity to be provided in respect of applicability of relevant provisions of
Chapter XXII to foreign companies in which the Indian citizens/bodies
Application of corporate do not hold 51% or more shareholding, on the lines of Section 591(1)
Act to Foreign of the Companies Act, 1956. Amendment in Section 379 with respect to the
Companies threshold of transactions etc. conducted by such companies, to be prescribed in
the relevant Rules. (Para 20.2)
Section 384 Provision to be amended to incorporate the provisions of Rule 3 of the CSR
Policy Rules, 2014. (Para 9.19)
Debentures,
annual return,
registration of
charges, books of
account and their
inspection
CHAPTER 21: GOVERNMENT COMPANIES
No amendments recommended.
CHAPTER 22: REGISTRATION OFFICES AND FEES
Section 403 (1) a. Necessary changes to be made in the Act to bring clarity that the
requirement of filing with additional fee for 270 days under first proviso to
Fee for filing etc. Section 403 is applicable only to the six sections.
b. Additional fees to be enhanced substantially (by up to ten times of the
current prescribed amount) to deter non-compliance, and if a company files
a document within the original period, not including the period allowed
with additional fees. A separate requirement for additional fees for other
than six sections to also be prescribed.
c. Rules to clarify that, irrespective of the delay, obtaining condonation of
delay is not a pre-requisite to filing a document. (Para 22.2, 22.3)
CHAPTER 23: COMPANIES TO FURNISH INFORMATION OR STATISTICS
No amendments recommended.
CHAPTER 24: NIDHIS
Section 406 Nidhis to be regulated at a central level in the Ministry, or through one or more
Regional Directors. (Para 24.1)
Nidhi
CHAPTER 25: NATIONAL COMPANY LAW TRIBUNAL AND NATIONAL COMPANY LAW APPELLATE
TRIBUNAL
Section 409, 411, Sections 409(3)(a) & (e), 411(3) and 412(2), as directed by the Honourable
412 Supreme Court, to be included in the Act. (Para 25.1)
NCLT and
123
PROVISION NATURE OF AMENDMENT
NCLAT
CHAPTER 26: SPECIAL COURTS
Section 435 Early establishment/designation of the Special Courts to be done. Special
Courts at the subordinate level to also be established, in addition to the
Establishment of Sessions Judge or Additional Sessions Judge. (Para 26.1)
Special Courts
Section 439 (2) The word `shareholder' to be replaced by the words `shareholder or member'.
(Para 26.2)
Establishment of
Special Court
Section 441 a. Under sub-section (1), the Tribunal to have the power to compound
offences punishable with fine as well as offences punishable with
Compounding of imprisonment or fine or both.
Offences b. Consequential change in Section 441(6) to be made to refer to Special
Courts, as well as other courts with whose permission the compounding
may be allowed. (Para 26.3)
CHAPTER 27: MISCELLANEOUS
No amendments recommended.
CHAPTER 28: PENALTIES
Section 92 and Fines under sections 92(5) and 137(3) to be reduced to half for a prescribed
137 class of companies. (Para 28.6)
Annual Returns
and Financial
Statements
Section 403 a. Clarification to be issued under Note 3 of Table B, that on a combined
reading of the second proviso of sub-section (1) of Section 403 along with
Fee for filing Table B, documents are permitted to be submitted, filed, registered or
recorded under the provisions of the Act even after a delay of two hundred
and seventy days from the date on which it should have been filed, on a
payment of additional fee as prescribed.
b. The fees prescribed in Table A pursuant to Rule 12 of the Companies
(Registration of Offices and Fees) Rules, 2014 to be halved for small
companies and OPCs.
c. Fees for timely filing may be reduced to zero and additional fees may be
increased to up to 10 times of the current additional fees with steep slabs
after the first slab. Non-compliance should result in deprival of moratorium
from prosecution as specified and levy of higher level of additional fees..
(Para 28.8, 28.9, 28.10)
Section 177, 178 Punishment provided for officer in default under Section 178(8) to be aligned
with the punishment provided under Section 292A (11) of the Companies Act,
Audit Committee 1956. (Para 28.11)
and Nomination
& Remuneration
Committee and
Stakeholders
Relationship
Committee
Section 184 Deletion of the minimum fine of Rupees Fifty Thousand. (Para 28.12)
124
PROVISION NATURE OF AMENDMENT
Disclosure of
interest by
director
Schedule V Revision of the disqualifying fine in Part I of Schedule V to Rupees Fifty
Thousand in respect of conviction of offences under the Act to be done. (Para
Conditions to be 28.13)
fulfilled for the
appointment of
certain directors
Section 447 Provision to be amended to provide that frauds, which involve at least an
amount of Rupees Ten Lakh or one percent of the turnover of the company,
Punishment for whichever is lower, (and non-compoundable). Frauds involving amounts below
fraud such limits which do not involve public interest to be given a differential
treatment and to be made compoundable. (Para 28.15)
Section 441 Under sub-section (1), the Tribunal to have the power to compound offences
punishable with fine as well as offences punishable with imprisonment or fine
Compounding of or both. (Para 28.16)
offences
Section 147 a. The term `any other persons' in sub-section (3) to be replaced with the
phrase `shareholder or creditor'.
Punishment for b. Under sub-section (2), minimum fine as specified to be retained and
contravention by maximum fine to extend to Rupees Five Lakh or four times the audit fees,
auditors whichever is less, and under the proviso to sub-section (2), the minimum
fine to be Rupees Fifty Thousand, and which may extend to Rupees
Twenty-Five Lakh or eight times the audit fees, whichever is less. (Para
28.18)
Section 132 The minimum fine on the firm to be rationalised to Rupees Five Lakh. (Para
28.19)
National
Financial
Reporting
Authority
Section 140 In Section 140(3), the minimum fine is to be reduced to Rupees Fifty Thousand
or the audit fees, whichever is lesser. (Para 28.20)
Removal,
resignation of
auditor and
giving of special
notice
Section 42 a. Contravention of sub-section (7) and (9) of Section 42 to be subject to a
penalty (adjudicated under Section 454) of Rupees One Thousand per day
Offer or of default, not exceeding Rupees Twenty Lakh, commencing from the
invitation for expiry of the time period within which the filings have to be made under
subscription of the said sub-sections. Section 403 not to be applicable to such
securities on contraventions.
private placement b. Other contraventions under Section 42 to result in the company, its
promoters and directors being punishable with penalty which is to extend
to the amount involved in the offer or invitation, or Rupees Two Crore,
whichever is lower. Refund of all monies, as prescribed, to continue in both
125
PROVISION NATURE OF AMENDMENT
the sub-sections. (Para 28.22)
Section 117 The minimum fine for both company and officer in default to be reduced to
Resolutions and Rupees One Lakh and Rupees Fifty Thousand respectively, and a proviso to be
agreements to be inserted in sub-section (2) of Section 117, wherein the punishment prescribed
filed for OPCs and small companies is to be halved to that under sub-section (2).
(Para 28.23)
Section 185 and Punishments under Section 185 and 186 to be reduced. (Para 28.25, 28.26)
186
Inter-corporate
loans and
investments
CHAPTER 29: REVIVAL AND REHABILITATION AND WINDING UP
Chapter XIX and Appropriate amendments to the Act to be carried out at the time of enactment
XX of the Bankruptcy Code or soon thereafter. (Para 29.2)
Revival and
Rehabilitation
and Winding Up
126
PART II: RECOMMENDATIONS PROPOSING AMENDMENTS TO THE RULES
PROVISION NATURE OF AMENDMENT
CHAPTER 1: COMPANIES (SPECIFICATIONS OF DEFINITIONS DETAILS) RULES, 2014
Rule 2(1)(r) To be omitted. (Para 1.1)
Total share capital
CHAPTER 2: COMPANIES (INCORPORATION) RULES, 2014
Form INC-29 a. Option to use the integrated incorporation E-Form INC-29 in case name approval
is separately obtained using INC-1 to be allowed.
b. Option of giving more than one name as alternatives to be permitted.
c. The number of allowed re-submissions to be increased from two to three times.
d. In point no. 6(e) of INC-29, wherein registration number of a company
incorporated outside India is required to be specified, alpha-numeric registration
numbers to be accepted.
e. In point no. 6(e) of INC-29, wherein the particulars of the authorized person of the
company incorporated outside India are required to be specified, PAN or Passport
number of the authorized person to be accepted. Also, the form to be enabled to
accept the foreign address of the said authorized person in the field `present
address of the authorized person'.
f. The facility for PAN, TAN and ESIC is to be enabled as part of the integrated
application form, and incorporation form INC-7, available on the MCA21 portal.
(Para 2.1, 2.2)
Rule 16 References to the word `partnership firm' in Rule no.16(2)(g) to be removed. (Para
2.4)
Removal of
references to the
word `partnership
firm'.
Removal of a. Changes in the MCA21 system/E-Forms to be made to ensure that in case of a
duplication of person holding DIN, the form requiring such information has to be prefilled and
information in additional documentation would not be required.
forms b. Rule 16(1)(q) to be omitted along with Form INC-10. (Para 2.6, 2.7)
Rule 3(2) To be suitably rephrased, to bring clarity. (Para 2.8)
Formation of one
person company
Rule 25 To be amended to make companies that have a website, for conducting online
business or otherwise, to require to provide the registered office and other details as
Registered office required in Section 12(3) on the landing/home page of the website(s). Similar changes
of company to also be carried out for foreign companies in Rule 6 of Companies (Registration of
Foreign Companies) Rules, 2014. (Para 2.9)
Rule 29 Change in memorandum to be allowed after defaults are made good. (Para 2.10)
Alteration of
memorandum
Rule 28 and 30 a. Explanatory note to be provided in both rules to the effect that `on completion of
such inquiry, inspection or investigation as a consequence of which no
Shifting of prosecution is envisaged or no prosecution is pending, shifting of registered office
registered office shall be allowed'. In case of a pending prosecution, on submission of an
undertaking that the company would not seek any change in jurisdiction on
account of shift in office, such shifting is to be allowed.
127
PROVISION NATURE OF AMENDMENT
b. Requirement of serving a copy of the notice to SEBI in Rule 30(6)(c) to be
dispensed with. (Para 2.11, 2.12)
Rule 8 Requirement in Rule 8(2) (a) (ii) to be changed and rule to be modified to read as `it
includes the name of a `trade mark registered or a trade mark which is subject of an
Undesirable names application for registration under the Trade Marks Act, 1999 and the rules framed
thereunder', unless the consent of the owner or applicant for registration, of the trade
mark, as the case may be, has been obtained and produced by the promoters. (Para
2.13)
Rule 13 a. Rule to be suitably modified to allow typewritten subscriber sheets. Similar
modifications to be carried out in Rule 13(2) with respect to entering of particulars
Signing of of an illiterate subscriber electronically.
Memorandum and b. Rule 13(4) to be redrafted keeping in view that an LLP can also be a subscriber to
Articles the MOA. (Para 2.16, 2.17)
CHAPTER 3: COMPANIES (PROSPECTUS AND ALLOTMENT OF SECURITIES) RULES, 2014
Rule 3(6) Section 26 to be modified to allow prescription powers to SEBI, consequential
changes resulting from the same to result in omission/modification of the Rules and
Disclosures of these requirements. (Para 3.1)
Sources of
Promoters'
Contribution
Rule 14 a. The private placement requirements to be changed in the Act. Consequential
changes to Rules to be addressed in these Rules.
Private placement b. Exemption, as in the case of NBFCs, from the Rule 14 to be extended to PFIs.
of securities (Para 3.3, Para 3.4)
CHAPTER 4: COMPANIES (SHARE CAPITAL AND DEBENTURE) RULES, 2014
Rule 4(1)(g) A cooling off period of five years to be prescribed from the end of the financial year
in which the default was made good for a company to be eligible to issue such shares
Shares with again. (Para 4.1)
Differential voting
Rights
Form PAS-3 Clause 5(e) of Form PAS-3 to be modified to replace the words `special resolution'
with the word `resolution'. (Para 4.2)
Issue of bonus
shares
Form PAS-3 Form PAS-3 to be appropriately modified so that genuine debt (including External
Commercial Borrowings) converted into shares can be treated as allotment for cash.
Conversion of (Para 4.3)
Loans into equity
Rule 15 Appropriate modification in Rule 15 to be carried out to mandate notifying the
increase in number of members of a guarantee company as part of an
Change in number increase/alteration of capital. (Para 4.4)
of members of a
Guarantee
company
Rule 18(7) (b) a. Rule to be modified to explicitly mention that companies be allowed to set aside
DRR on a step down basis with reference to the redemption schedule for the next
Creation of one year.
Debenture b. Proviso to be inserted that companies be allowed to appropriate any amount in
Redemption excess of the DRR required for immediate redemption. (Para 4.6)
Reserve
Rule 18(1) a. Rule 18(1)(b) to be amended so as to enable issue of debentures secured by charge
on the properties or assets of the company or entities that form part of
128
PROVISION NATURE OF AMENDMENT
Creation of consolidated balance sheet of the company or any other collateral security.
Security for b. Rule 18(1)(d) to also enable creation of security for debentures in favour of the
Debentures debenture trustee of movable property which could either be of the company or
entities that form part of the consolidated balance sheet or any other collateral
security. (Para 4.8)
New Rule Enabling provision for the issue of perpetual debentures to be provided. (Para 4.9)
Perpetual
Debentures
Rule 8(4) Start-ups to be permitted to issue sweat equity shares beyond twenty-five percent and
up to fifty percent of the paid up equity share capital. (Para 4.10)
Issue of sweat
equity shares
Rule 12 Rule to be relaxed to enable issuance of ESOPs to promoters who may be working as
employees or employee directors or whole time directors. (Para 4.11)
Issue of employee
stock options
(ESOPs)
Rule 13 a. Rule 13(2)(h) to be amended, to consider providing for convertible instruments to
be valued at the time of conversion. Formulation used in the FDI policy to be
Preferential adopted.
Allotments b. Rule 13(2)(c) to be amended to allow preferential allotment of partly paid-up
shares. (Para 4.12)
CHAPTER 5: COMPANIES (ACCEPTANCE OF DEPOSIT) RULES, 2014
Rule 2(1)(c) a. In Rule 2(1)(c)(xii) a), relaxation to be given for outstanding advances, such that
they are not treated as deposits even after 365 days, if they are received in the
Definition of ordinary course of business, as evidenced by a written contract and during normal
Deposits - business cycle, subject to disclosure of details of such outstanding amounts in the
exclusions financial statements, and regulatory concerns.
b. Debentures compulsorily convertible into shares of the company within ten years
to be excluded from the definition of deposit under Rule 2(1)(c)(ix).
c. Amounts directly received by a company from Alternate Investment Funds,
Domestic Venture Capital Funds and Mutual Funds registered with SEBI, to be
excluded from the definition of deposits.
d. To consider excluding unsecured debentures listed as per SEBI Regulations from
the definition of deposits.
e. Convertible Notes, convertible into equity or repayable within 5 years from the
date of issue, if issued to a person with a minimum investment size of Rs.25 lakh
brought in a single tranche, not to be treated as deposits. Safeguards to prevent
misuse to be finalised in consultation with RBI. (Para 5.1-5.5)
Issues relating to Exemptions given under Section 462 of the Act to override the Deposit Rules. Deposit
Section 462 Rules to be amended to align with exemptions/modifications for private companies.
exemption vis-à- (Para 5.7)
vis Deposits Rules
Rule 4(1) Rule to be amended to provide that individual circulars to members of the company
under Rule 4(1) not to be sent if an advertisement has been issued by a company for
Advertisement/ acceptance of deposits from public and also when the same is placed on the website of
Circular in the the company. (Para 5.8)
form of
advertisement
CHAPTER 6: COMPANIES (REGISTRATION OF CHARGES) RULES, 2014
Filings of charge MCA21 system to be modified to allow filings of charge creation/modification by
creation/modificati recognized ARCs on the assets of dormant companies. (Para 6.1)
on by recognized
129
PROVISION NATURE OF AMENDMENT
ARCs
CHAPTER 7: COMPANIES (MANAGEMENT AND ADMINISTRATION) RULES, 2014
Rule 3 a. For the companies incorporated prior to 1 April 2014, the members' particulars as
available under the Companies Act, 1956 to be transferred to the Register of
Register of Members, and particulars as are required to be captured in Form MGT-1 in
members, etc. respect of all persons becoming members after 1 April 2014.
b. Incorporation of additional fields in the transfer form SH-4. (Para 7.1)
Rule 9(1) Requirement of filing of Form MGT-4 and Form MGT-5 in duplicate to be done away
and only scanned copies to be attached to Form MGT-6. (Para 7.4)
Declaration in
respect of
beneficial interest
in any share
Rule 11(1) a. Annual Return to be further simplified by avoiding asking for repetitive
information which may be available in other documents filed with ROC
Annual Return b. A simpler Annual Return form for OPCs and small companies to be prescribed.
(Para 7.5)
Rule 11(2) Company Secretaries in employment to be allowed to certify annual returns. (Para
7.6)
Annual Return
Rule 12 Form MGT-9 to be omitted after including pertinent information as a disclosure
requirement under Section 134. (Para 7.7)
Rule 13 Section 93 to be omitted and consequential changes in the Rules to be affected. (Para
7.8)
Return to be filed
with Registrar in
case promoters'
stake changes
Rule 17(2) Explanation to Rule 17(2) to be modified to allow holding of EGMs by requisition on
a day which is not a national holiday. (Para 7.9)
Calling of
extraordinary
general meeting
Rule 22 a. Repeated provision from Rule 22(7) to be deleted.
b. Rule 22(14), which provides that the resolution shall be deemed to be passed on
Postal Ballot the date of a meeting, convened in that behalf, to be omitted from the rules. (Para
7.10)
Rule 25 Rule 25(1) (e) to be made consistent with Section 119, to enable the minutes book for
general meetings to be maintained only at the registered office. (Para 7.11)
CHAPTER 8: THE COMPANIES (DECLARATION AND PAYMENT OF DIVIDEND) RULES, 2014
Section 123(1) and a. The requirements of the Rule and the Section to be harmonized appropriately.
Rule 3 b. Rules to be amended to align Rule 3 with the provisions of the Act, to make it
clear that in case a company declares dividend out of surplus i.e. accumulated
Declaration of credit balance of Profit and Loss account which has not been transferred to
reserves, the provisions of the Act and Rule 3 would not be applicable. (Para 8.1,
dividend
8.2)
CHAPTER 9: THE COMPANIES (ACCOUNTS) RULES, 2014 AND COMPANIES (CORPORATE SOCIAL
RESPONSIBILITY POLICY) RULES, 2014
Rule 3(5) While the proviso with regard to maintenance of local servers to be retained, in case
where free data access to all regulatory agencies of the country are allowed under a
Location of servers bilateral or multi-lateral treaty, data servers may be allowed to be kept in the specific
countries with which such treaties have been entered into. (Para 9.1)
130
PROVISION NATURE OF AMENDMENT
for keeping backup
of books and
papers
Rule 8(1) Reporting requirements under Rule 8(1) to be reduced and to be captured to the extent
feasible in the statement under Rule 5. (Para 9.4)
Disclosures in the
Director's Report
Rule 8(2) To omit Form AOC-2 and instead the Board's Report to specifically discuss and refer
to relevant disclosures. Consequential changes in the Rules to be made in order to give
Disclosure of effect to these recommendations. (Para 9.6)
Related Party
Transactions
(RPTs)
Rule 13 The words "a firm" to be replaced by "an entity". (Para 9.7)
Companies
required to appoint
internal auditor
Form MGT-9 and MGT-9 requirements to be omitted and the threshold of Rupees Sixty Lakhs to be
Rule 12 increased to Rupees 102 Lakhs per annum. Requirements under different Rules to be
harmonized. (Para 9.8)
Disclosure of
remuneration of
directors and KMP
Rule 3(2) A company which ceases to be covered under Section 135 (1) of the Act for a
financial year not be required to spend on CSR for that particular year. (Para 9.11)
Corporate Social
Responsibility
Rule 4(6) Expenditure on building CSR capacities in one financial year to be increased from 5%
to 10%. (Para 9.12)
CSR Activities
Differentiated Differentiated treatment for implementing CSR policy to be allowed depending on the
treatment for available funds for CSR expenditure to a company. (Para 9.13)
implementing CSR
policy
CHAPTER 10: THE COMPANIES (AUDIT AND AUDITORS) RULES, 2014
Rule 3(7) Removal of the requirement to ratify the appointment of an auditor. (Para 10.1)
Manner and
procedure of
selection and
appointment of
auditors
CHAPTER 11: THE COMPANIES (APPOINTMENT AND QUALIFICATION OF DIRECTORS) RULES, 2014
Rule 4 and a. Joint venture companies, wholly-owned subsidiaries, and dormant companies that
Schedule IV fall within the purview of Section 455 of the Companies Act, 2013 to be excluded
from the requirement of appointing an independent director.
b. Schedule IV of the Act to be amended to provide for filling up an intermittent
Number of
vacancy of an Independent Director within three months in line with Rule 4 and
Independent SEBI Listing regulation. (Para 11.1, 11.2)
Directors
Schedule IV Requirement for Independent Director to hold at least one meeting in a year without
131
PROVISION NATURE OF AMENDMENT
the presence of non-independent directors to be linked to the financial year. (Para
Code for 11.4)
Independent
Directors
Form DIR-11 and a. Professional can file DIR-11 on behalf of a foreign director.
DIR-12 b. Form DIR-11 is only an information by resigning director. The change in
status in Register of directors to get triggered only on filing DIR-12. (Para
Resignation of 11.9)
directors
CHAPTER 12: THE COMPANIES (MEETINGS OF BOARD AND ITS POWERS) RULES, 2014
Rule 3(12)(b) a. Video recording to be preserved only until the minutes of the meeting are
irrefutably confirmed by each of the directors as required under Rule 3(12)(b) and
Meetings of Board signed by the chairman.
b. Recording requirement of the meetings to be limited only to the summary of
held through video
decisions taken at the meeting in line with the MCA circular dated 20 May 2011.
conferencing (Para 12.1)
Rule 6 Prescribed thresholds for the setting up Audit Committee and Nomination and
Committees of the Remuneration Committee to be reviewed keeping in view the suggestions already
Board made by SEBI. (Para 12.3)
CHAPTER 13: THE COMPANIES (APPOINTMENT AND REMUNERATION OF DIRECTORS) RULES, 2014
Form DIR-12 Form to be amended to restrict filing requirement pertaining to the return of
appointment for managerial personnel. (Para 13.1)
Particulars of
appointment of
directors and the
key managerial
personnel and the
changes among
them
Rule 5 a. The specific part of Rule 5(1)(vii) related to unlisted companies to be deleted.
b. Ruled 5 to be pruned to exclude information prescribed under Rule 5(1) except
Disclosure in Rule 5(1(i) and Rule 5(1)(iv).
c. The reporting requirement threshold of Rupees 60 Lakhs per annum for reporting
Board's Report
of details of employees to be changed to the top ten employees in terms of
remuneration and employees receiving remuneration beyond the threshold of
Rupees 102 Lakhs per annum. (Para 13.2, 13.3)
CHAPTER 14: THE COMPANIES (AUTHORIZED TO REGISTERED) RULES, 2014
New Rules a. Necessary rules to be prescribed to facilitate easy conversion of forms of
businesses other than LLPs into companies.
Conversion into b. The process for conversion of an LLP into a company to be made simpler by
companies doing away with requirement for filing some documents, etc. (Para 14.1, 14.2)
CHAPTER 15: THE COMPANIES (REGISTRATION OF FOREIGN COMPANIES) RULES, 2014
Companies a. Rules to prescribe reporting of principal place of business from where the
incorporated management/administration of business in India is being carried out. (Para
outside India 15.1)
without a physical
place of business in b. Clarity to be provided that provisions with respect to charges will apply only on
India funds raised in India (Para 15.3)
New Rule and New Rule and Form along the lines of Form-52 of the Companies Act 1956 for the
Form purpose of filing application for closure of liaison office/branch office/project office
to be prescribed. (Para 15.2)
132
PROVISION NATURE OF AMENDMENT
Form FC-4 Disclosures needed to be made under Form FC-4 to be reviewed. (Para 15.4)
Annual Return of a
Foreign Company
CHAPTER 16: THE COMPANIES (REGISTRATION OFFICES AND FEES) RULES, 2014
No amendments recommended.
CHAPTER 17: NIDHI RULES, 2014
No amendments recommended.
CHAPTER 18: THE COMPANIES (MISCELLANEOUS) RULES, 2014
E-form for A pro-forma application form to be designed for condonation of delay under Section
condonation of 460. Consequent changes in Rules to be affected. (Para 18.2)
delay under
Section 460 of the
Act
133
LIST OF ABBREVIATIONS
AGM Annual General Meeting
AOA Articles of Association
AS Accounting Standards
BLRC Bankruptcy Laws Reforms Committee
CARO Companies (Auditor's Report) Order
CFS Consolidated Financial Statement
CLC Companies Law Committee
CSR Corporate Social Responsibility
C&AG Comptroller and Auditor General of India
DPE Department of Public Enterprises
DRR Debenture Redemption Reserve
EGM Extra Ordinary General Meeting
ESOP Employees Stock Option Plan
FICCI Federation of Indian Chambers of Commerce and Industry
FDI Foreign Direct Investments
GAAP Generally Accepted Accounting Principles
ICAI Institute of Chartered Accountants of India
ICoAI Institute of Cost Accountants of India
ICSI Institute of Company Secretaries of India
IEPF Investors Education and Protection Fund
IndAS Indian Accounting Standard
IDFC Industrial Development Finance Corporation
JV Joint Venture
KMP Key Managerial Personnel
LLP Limited Liability Partnership
LIC Life Insurance Corporation
MCA Ministry of Corporate Affairs
MOA Memorandum of Association
MoU Memorandum of Understanding
NBFC Non-Banking Financial Company
NCD Non-convertible Debentures
NCLT National Company Law Tribunal
NCLAT National Company Law Appellate Tribunal
NFRA National Financial Reporting Authority
NRC Nomination and Remuneration Committee
NVGs National Voluntary Guidelines
NOC No Objection Certificate
OPC One Person Company
PAN Permanent Account Number
134
PPOL Private Placement Offer Letter
QIB Qualified Institutional Buyer
RBI Reserve Bank of India
RD Regional Director
ROC Registrar of Companies
SEBI Securities and Exchange Board of India
SMEs Small and Medium Enterprises
STP Straight Through Process
SUUTI Specified Undertaking Unit Trust of India
135
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