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The Companies Law Committee's Report!

Published on Wed, Feb 03,2016 | 07:48, Updated at Wed, Feb 03 at 14:24Source : 

By: Yogesh Sharma, Partner, Grant Thornton India LLP

The Companies Act, 2013 ('the Act') introduced significant changes in company law in India, especially in relation to accountability, disclosures, investor protection and corporate governance. Several representations were made on the practical difficulties faced during implementation of the Act.  With an intent to make recommendations on issues arising from the implementation of the Companies Act, 2013 and suggestions made by various committees including high level committee on CSR and law commission of India, MCA constituted Companies Law Committee (CLC) which issued its report proposing several changes to the Act to address the much awaited clarifications/implementation issues, remove inconsistencies between the Act and Accounting standards/ SEBI requirements and to further ‘ease of doing business’.  As per the report, the recommendations would result in changes in 78 sections, and more than 100 changes in the Act.

Some of key proposals included in the report are discussed below.

The overall managerial remuneration payable by a public company cannot exceed eleven per cent of the net profits of that company except with the approval of the shareholders and the Central Government. Similar approvals are required for companies having inadequate or no profits. The report recommends simpler regulatory regime by proposing removal of government approval for managerial remuneration with few additional disclosures. This would be in sync with international practices and reduce procedural delays.

Interesting to note that despite strong representation, no changes have been proposed in the auditor rotation requirements which reiterate the commitment of the legislation to promote auditor objectivity. Further three years transition period for rotation should be counted from AGM to AGM and not from commencement of the Act.

Reporting obligations of auditors on internal financial controls to be with reference to financial statements only, which is in line with the views taken by the ICAI in its guidance note on internal financial controls and a big relief for auditors since their responsibilities cannot be at par with the responsibilities of directors which is wider.

The report recommends removal of restrictions on layering of subsidiaries since it was likely to have a substantial bearing on the functioning, structuring and the ability of companies to raise funds. Effectively, companies will be permitted to make investment through more than two layers of investment companies as per the report.

The Act specifies 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. Even minor pecuniary relationships were covered due to this provision even though such transactions may not impact independence of directors. The report proposes to introduce a threshold for pecuniary relationships in relation to qualification for an independent director. This would further ease the implementation of provision for appointment of independent director by companies.

The definitions of various terms are proposed to be amended / clarified. A subsidiary company is defined as a company in which holding company controls the composition of the board of directors or exercise or controls more than one-half of the total share capital. Changes have been proposed to address practical problems and replace the term ‘total share capital’ with total voting power. Similarly the term associate company would be defined to clarify that it covers company in which other company has a significant influence i.e. control of at least twenty percent of the total voting power or control of or participation in taking business decisions under an agreement. Joint venture would be construed in the same manner as under Indian Accounting Standard 28 and would facilitate convergence.

Threshold has been proposed for punishment for fraud to avoid misuse of provision; frauds involving amounts below specified limits which do not involve public interest to be given differential treatment and compoundable. Penalty/fine proposed to be reduced in case of non-compliance with various sections of the Act.

Few changes have been proposed in financial reporting area which includes exemption to place standalone financial statements of step down overseas subsidiary on website if that overseas subsidiary has prepared CFS in statutory format as per the law of jurisdiction and placed on website. Further, the overseas subsidiaries while placing on website/attaching to Indian holding company’s financial statements may submit/attach the financial statements as per the statutory/GAAP requirements of local jurisdiction.

The Committee also recommended certain changes specifically for encouraging start-ups which include reducing compliance burden on account of private placement procedure, permitting start-ups to raise deposits for its initial five years without any upper limits, to issue ESOPs to promoters working as employees etc.

These are indeed welcome changes and indicate that the regulator continues to aim at smooth implementation of the Act. While these are recommendations, we expect the MCA to finalise/ adopt them soon and provide the much needed relief.

Attachments : Media Article - report of CLC - Yogesh Sharma Partner Grant Thornton India LLP.docx

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