Companies Act, 2013: Amended?
Published on Thu, Dec 18,2014 | 08:12, Updated at Thu, Dec 18 at 08:12Source : Moneycontrol.com
COMPANIES ACT, 2013: AMENDED?
By: Sai Venkateshwaran, Partner and Head of Accounting Advisory Services, KPMG
Within just over a year of enacting the Companies Act 2013, and nine months of operationalizing most of its provisions, the Lok Sabha today approved the first amendment to this Act primarily with the intent of improving the ‘ease of doing business’ in India. This amendment was considered by the Ministry of Corporate Affairs after taking into account the pressing issues and key challenges and that have been raised by corporates as well as professionals from their experience in implementing the Act.
While these amendments were certainly an urgent necessity, there wasn’t a realistic expectation that the Ministry of Corporate Affairs would actually get an amendment bill tabled and passed within such a short time of the Act being operationalized. It therefore comes as a great relief to corporates as they go about implementing the new law and gear up for the first year of reporting under the new law. However, there are still some areas where corporates continue to have concerns, and hope that a more comprehensive post implementation review of the Act will be undertaken to address these other issues.
Areas such as related party transactions, inter-corporate loans, and fraud reporting have had corporates struggling for a while now, trying to balance compliance with the new requirements without hampering business requirements. Some of these amendments will provide the necessary relief to corporates, and also bring certainty to certain other relaxations that were earlier provided through the rules accompanying the Act. In particular requiring only a simple majority to pass resolutions on related party transactions would come as a great relief to corporates, apart from other relief through exemption of transactions with wholly owned subsidiaries from shareholder approval process and also permitting the Audit Committee to provide omnibus approvals for year on recurring transactions with related parties. However, there still is divergence between some of the provisions of the Act and that of Clause 49 of the Listing Agreement; corporates continue to hope that these matters will get aligned at some point to ease implementation challenges. Similarly, the amendment which will require reporting of only material frauds to the central government would provide great relief to both corporates as well as auditors.
On the whole, it is a step in the right direction, and the pace at which the government has moved to amend the Act, should make up for the implementation challenges that corporates have faced over the past few months.
Analysis of the key amendments
Aligning the Rules with the Act
During the course of implementation of the Act, there were several requirements prescribed and certain clarifications provided through the Rules accompanying the Act. Some of these were seen to be having an effect of overreaching the requirements of the Act, and therefore, the amendment seeks to include these requirements within the Act itself. This is a welcome move and will reduce any potential for litigation resulting from a legal challenge of the requirements in the Rules. Matters that have been addressed in this area include the requirements for declaration of dividend, granting of loans to wholly owned subsidiaries in which directors are interested.
Related party transactions
The changes being proposed on related party transactions are largely to address concerns from corporates on implementation of the new requirements. In doing so, it seeks to partly align the requirements of the Act with the SEBI requirements whereas in some other aspects, it has sought to provide greater relaxation as compared to the SEBI requirements. The amendment exempting transactions with wholly owned subsidiaries and allowing companies to obtain omnibus approvals from the Audit Committee for related party transactions seeks to align the Act with similar changes that have been introduced by SEBI. However, on transactions that require shareholders’ approval, the SEBI requirements and those under the Act seem to be diverging further. SEBI requires a special resolution for material transactions and only non-related party shareholders are permitted to vote on such transactions, whereas as per the proposed amendments in the Act, only an ordinary resolution would be required, and all related parties who are not interested in the specific transaction would also be permitted to vote. However, this move seems to be emanating from the hardship being faced by corporates who may not have been able to get minority shareholders’ approval on proposed transactions. However, in the case of listed companies, the stricter of the two norms would apply.
On reporting of fraud by the Auditor to the Central Government, both the Act as well as the related Rules did not include any reference to materiality of the fraud involved. While this concept was considered in the draft rules, the final rules chose to remain silent, making it onerous for the auditor by requiring him to report all frauds to the Central Government. The amendment now seeks to restrict this reporting requirement to only material frauds, for which the thresholds would be prescribed. This would bring great relief to both corporates as well as auditors.
However, this now comes with a requirement that frauds below the materiality threshold need to be reported to the Audit Committee or the Board, and also disclosed in the Board’s Report. This may cause some concerns for corporates as several of the frauds falling below these thresholds will now need to be disclosed to the public through the annual report, and therefore the related rules will need to be seen as to the extent of these disclosures.
Confidentiality of board resolutions
The amendment also seeks to address the confidentiality and privacy concerns of businesses due to the requirement to file certain board resolutions with the Registrar of Companies, by prohibiting public inspection of such documents; however, industry might still have concerns over the requirement for filing such documents.
Further, with a focus on investor protection, the amendment seeks to bring in specific punishment for acceptance of deposits in violation of the more stringent requirements that have been prescribed under the new Act. Further, in cases where dividend is unclaimed for a period of seven years of more are required to be transferred to the IEPF (Investor Education and Protection Fund), the amendment removes the requirement of transferring the related equity shares to the IEPF if such dividends have been subsequent claimed.
The amendment also proposes to do away with the minimum share capital requirements for both public and private companies. Further, the requirement of having a common seal of the company, has also been made optional.
The government clearly has shown its intent of acting fast in addressing industry concerns on implementing the new law, and one hopes that this active engagement continues till the time the Act becomes ‘business as usual’ for corporate India.