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Cos Act Amendment Bill: Catering To The Needs Of India Inc

Published on Tue, Dec 23,2014 | 22:03, Updated at Tue, Dec 23 at 22:03Source : 

By: Sandip Khetan, Partner In A Member Firm Of Ernst & Young Global

Since the time of its incorporation in September of 2013, Companies Act 2013 (the 2013 Act), continues to be an area of challenge for the industry and the government alike in terms of understanding different rules and regulations and how to implement the same in a real corporate environment. Over last several months, to clarify matters on several aspects of its implementation, we continue to see series of clarifications and notifications being issued by the Ministry of Corporate Affairs on an ongoing basis. Some of these clarifications at times created more uncertainty in terms of the implementation aspect of the Act. However, certain matters created issues more than desired under Companies Act 2013. To address several issues in an unambiguous manner along with its agenda of ease of doing business in India, the Government decided to introduce/clarify some of the important matters as addressed below through this amendment.

Related Party transactions: -

One of the biggest issues facing corporate India is the manner in which they now need to deal with related party transactions. Most of the Indian corporates are organised through a web of companies or have done vertical or backward integration of their business through separate business entities. The 2013 Act introduced lot of requirements and more importantly if a related party transaction is not at arm’s length or in the ordinary course of business, then depending on certain materiality thresholds, it requires the company to obtain the consent of non-interested shareholders through special resolution.

o    Shareholder resolution: -The industry and the ministry experienced several challenges in implementation of the resolution requirement. Many a time’s non related shareholders use to come together and defeat the resolution which invariably resulted in the delay of business decisions. To ease the process of getting these approvals, the ministry has proposed to change the requirement to obtain the ordinary resolution as oppose to special resolution. Further it also exempted all related party transactions between holding companies and wholly owned subsidiaries from the requirement of approval of non-related shareholders.

o    Omnibus approval: - The Act also required for a company having an audit committee to get all related party transaction to be approved by such committee. This requirement created a difficult situation for lot of companies having lot of related party transactions and especially to deal with transactions which are not planned well in advance. The Act now allows the company to create a framework for such related party transactions and get them approved by the audit committee in advance so to avoid calling the meeting of the committee for every such transaction. The framework is developed in a manner similar to the requirement outlined by SEBI under the listing agreement. This will require the company to identify the related parties and the type of transactions with such related parties and the likely quantum and volume from such parties. Further it also requires them to specify the manner of determination of transaction value for such transaction. If audit committee has approved such framework, then the company can do the transaction and update the committee on an ongoing basis.

Reporting of Fraud

The Act and the related rules stated that every auditor who discovers fraud during the course of the audit should inform the company’s audit committee or in absence of the same to the board and then duly inform about such fraud to the government of India (GOI). All of this was required to be done within 60 days from the day of auditor being aware of such fraud.

o    The above requirement raised lot of questions than answers for the corporates and the auditors alike. After more than 8 months of this requirement, The Institute of Chartered Accountants of India (ICAI) is still to come out with a guidance note on clarifying several matters arising out of this for its members. Setting aside several issues in such reporting, one of the biggest challenge was to determine which all frauds needs to be reported to the GOI. Since there was no materiality defined in the Act or in the rules, every corporate and the auditor was struggling to comply with its requirements. It seems that the GOI has now recognised this difficulty and have introduced a provision for the materiality threshold above which any fraud is required to be reported to the government.

Inter-corporate loans

One of the significant challenges under the Act was the restriction in terms of giving loan to any person (including a Company) in which the directors of a company are interested. Through the rules MCA tried to exempt such restriction in between transaction between holding and subsidiaries companies. However lot of stakeholders expressed the risk of rules trying to override the provisions of the act and hence it was likely that the courts may disagree the rules. To mitigate such risk, one of the amendments is to align the permission as stated in the rules with the Act so that there is no conflict.            

Apart from the above, there are several other changes which are in relation to the removal of minimum paid up capital requirement, imposing restriction on inspection by third party of board resolutions as required to be filed by the Corporates, making the use of the common seal of the company optional or removal of bail restriction on several types of offences. Overall these changes are welcomed by the corporates and respective regulators; however as the timeline to ensure compliance with the Act (March 31, 2015) is approaching, a lot is still desired by the Corporate India to ensure that the requirements are either waived or deferred for the companies to have sufficient time, training and expertise to ensure compliance with all aspects of the Act.


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