Companies Act: 98 Sections Notified; Lawyers Worried!
Published on Sat, Sep 14,2013 | 18:39, Updated at Sat, Sep 14 at 19:13Source : Moneycontrol.com
The Ministry of Corporate Affairs notified 98 Sections of the Companies Act, 2013 on 12th September. These provisions of the Act do not require notification of Rules.
Payaswini Upadhyay got leading General Counsels and Corporate Lawyers to give their first reactions.
Bharat Vasani, Group General Counsel, Tata Group
“I must confess that I was surprised to see this notification. It is not very clear to me as to why MCA was in such a tearing hurry to notify those 98 sections when only a part of the draft rules were released for public comments just a few days ago. In my view, it would have been advisable to notify those sections once the Rules were finalised and the Corporate Sector had digested the new law.
Section 465 of the Act which deals with repeal and saving has not been notified. As a result, the entire 1956 Act will continue to remain in full force and effect. Hence the notification of a few sections has created confusion which could have been avoided. Given that the Companies Act is a basic charter for the corporate sector like the Constitution of India, it is always advisable to give adequate time to create a proper infrastructure for implementation before the new law is notified.”
Shardul Shroff, Managing Partner, Amarchand Mangaldas
“Although notification of 98 sections of the Companies Act, 2013 (“New Act”) is welcome and this means that the MCA is serious about implementing this new law as soon as possible, until the remaining sections are notified, one will need to read two sets of companies acts for structuring of transactions and day to day compliance purposes. In some cases, only certain parts of chapters and for that matter, parts of sections have been notified. The notified portions will need to be analyzed very closely to understand their exact implication. However, going by the nature of provisions notified, this is bound to evoke mixed reactions from various stakeholders.
Some of the key issues are follows:
1. The new definition of ‘subsidiary’ factors the component of preference share capital, resulting in creation of several unintended subsidiaries overnight, necessitating various compliances like consolidation of financial statements, etc. by the new ‘holding companies’. This aspect will be very significant particularly for PE investors whose preferred mode of investment is preference share capital.
2. In view of the express prohibition under Section 185 of the New Act, loans/guarantees, etc., cannot be provided by a company to its directors (including directors of holding company) or entities in which such directors are interested, which was allowed under the existing Companies Act, 1956, with the prior approval of the Central Government. This may hinder companies’ structuring plans to fund their projects/business requirements.
3. Private arrangements/contracts containing restrictive transfer conditions (like put option, call options etc.) have now been made enforceable pursuant to Section 58 of the New Act, putting an end to the existing ambiguity surrounding enforceability of the same.
4. Significantly, Section 470 of the New Act empowering the Central Government to remove difficulties in giving effect to the provisions of this New Act has also been notified. Whilst this will enable the Government to resolve unintended ambiguities surrounding the new law, caution will need to be taken to obviate taking positions which are inconsistent with the provisions of the New Act.
Sridhar Gorthi, Partner, Trilegal
“While in some ways it was only a matter of time, the sudden notification of 98 sections of the Companies Act, 2013 with immediate effect has taken many by surprise.
The first element of confusion is caused by the absence of any provision repealing corresponding provisions of the Companies Act, 1956. It is hoped that the Government will rectify this soon – some clarity on ‘grandfathering’ would also be welcome.
Take for example the fact that, overnight, holding subsidiary relationships have come into existence between various companies, since now even preference capital will be counted to determine this relationship. These companies would have to start complying with various provisions that were not inapplicable to them so far. Clearly, some more thought should have gone into the manner in which the new Act will be notified and implemented. Since many rules vital for the implementation of the key sections of the new Act were not yet drafted, it was clear that the new Act would be brought into effect in stages. However, a precise timetable for such phased implementation should have been announced so that companies could have planned accordingly. Also, in this interim phase, where parts of the new Act that have come into force, and the rest of the Companies Act, 1956 also continues to apply, there is a definite need for clarity to resolve inconsistencies that are bound to arise.
It would be ideal if the government could quickly conclude and finalize the remaining provisions (and relevant rules) such that the entire new law takes effect at the soonest, making life easier for all.”
Rajeev Uberoi, Group General Counsel & Group Head - Legal & Compliance, IDFC
“The Ministry of Corporate Affairs showing its aggressiveness towards the implementation of the Companies Act 2013 has today notified 98 sections of the Companies Act 2013 by way of notification dated 12th September 2013 and the rest of the Sections would be enforced in phases. The manner in which sections have been notified by the Ministry is also very interesting since in some notified section, certain sub-sections have not been notified now and that section is brought into force with exception for the un-notified sub-section. The sections pertaining to Public Offer and the process for the same has been notified whereas one pertaining to Private Placement has been kept on hold.
The major changes which are brought by the Companies Act are removal of the privileges which Private Companies enjoyed under the 1956 Act. Practically Private Companies are brought on par with Public Companies and almost all exemptions given under the 1956 Act have been removed. For example, Section 180 of the Companies Act 2013 (restriction on the Powers of the Board) is applicable to every company, whereas the corresponding Section 293 of the Companies Act 1956 was not applicable to the Private Companies.
The other sections that have come into force with effect are mostly procedure in nature and include those related to difference between public offer and private placement, powers of SEBI to regulate issue and transfer of securities, mandatory public offer of securities in demat form, as also civil and criminal liability for mis-statements in prospectus.
The norms detailing punishment for fraudulently inducing persons to invest money, the calling of extraordinary general meeting of shareholders, shareholder voting, ordinary and special resolutions and punishment for failure to distribute dividend have also been notified.
Besides, new definitions of CEO, CFO, company, company secretary, control, cost accountant, debentures, derivatives, director, dividend, ESOPs, experts, financial statements, financial institutions, global depository receipts, government company and holding company, have also been notified.
The Companies Act, 2013 comes as a welcome change for investors and other stakeholders as it promises to bring reforms in enforcement measures and mandates increased transparency and accountability. It mainly focuses on the social welfare and protection of the investors. It also endeavours to strengthen corporate governance and provides for provisions to ensure ethical and vigilant activities of directors and other professionals in the company. The Act promises to provide updated Company Law provisions with explicit concept of Global Practices. This exhibits a sheer commitment of the MCA towards introducing the fast track reforms across.”
Ajay Vaidya, Chief Legal & Compliance Officer, Kotak Mahindra
“Repealing existing provisions in the 1956 Act for substituted provisions in the 2013 act will remove uncertainty in compliances”
Ravi Kulkarni, Senior Partner, Khaitan & Co.
“Section 3 of the new Act allows the Central Government to notify different dates.”
“Having quickly gone through the provisions which have been notified, I find that these are provisions which are either procedural in nature or in which there is no change between the 1956 Act and the 2013 Act. Hence, I believe that the problem of overlap and inconsistency should not occur.”
“Therefore, for such of the provisions, which have been notified, we are not required to fall back on the 1956 Act. For other sections, the 1956 Act would apply. They will not repeal the 1956 Act till all sections are implemented and the related rules after comments are in place. In other words, both Acts are applicable, albeit for different provisions.”
“The provisions relating to the NCLT and the Appellate Tribunal which have been brought into force normally sections 407 to 414 seem to have obviously been brought into force to empower the Government to recruit the President/Members of these bodies so that these bodies can be made functional quickly.”
Rajiv Luthra, Managing Partner, Luthra & Luthra
“Most of the 98 sections including the definitions that have been notified yesterday are either simple and straight forward provisions or are similar to their counterparts in Companies Act, 1956, barring certain important definitions such as ‘private company’, ‘public company’, ‘interested director’ and provisions relating to shareholder meetings, foreign companies and National Company Law Tribunal. However, we are keen and looking forward for commenting on the draft rules which once finalized, will result in the notification of key provisions of the new Act.”
Ashok Gupta, Group General Counsel, Aditya Birla Group
"Under the Act, the government has the power to notify to sections in a phased manner like may other acts e.g. Competition law in the recent past. All the sections which are notified are the ones where no rules are required for their implementation. Other sections for which rules are required to be place will be notified only after rules are made final. It seems the Govt. is keen to implement the new Companies Act as the earliest being contemporary being focusing on governance, transparency, and accountability."