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Re-Writing Company Law?

Published on Fri, Feb 12,2016 | 23:14, Updated at Mon, Feb 15 at 22:15Source : CNBC-TV18 |   Watch Video :

The Companies Act, 2013 is probably the most botched law we’ve seen in the 20 years and to think that it's the most important commercial law in the country! Remember, that it took governments and parliament almost a decade to rewrite the 1956 law. As a bill, it went back to the parliamentary committee twice and both times the committee was headed by a veteran BJP leader. The then UPA government rushed it through before the 2014 elections and 'rushed it through' means the rules were being notified till the last hour before they became effective! So far, only half the act has been notified, so for half the provisions companies are abiding by the 1956 law and its rules and for the other half, the 2013 law and its rules.

RE-WRITING COMPANY LAW?

COMPANIES LAW COMMITTEE
-    Set up in June 2015
-    Make recommendations on issues arising from implementation of Companies Act, 2013

RE-WRITING COMPANY LAW?

COMPANIES LAW COMMITTEE
-    Recommends changes in 78 sections
-    Recommends over 100 changes in the Act

When it came to power the BJP decided that the Companies Act 2013 was not good enough, even though it had supported the law in parliament. So, the new govt amended this half notified act once and then set up a committee to recommend more amendments. That committee report was released last week and it has recommended over 100 changes! So 10 years in the making, last minute haste, half notified, once amended and now the Companies Act may be in for a large scale rewrite! What would that rewrite entail? To discuss that, CNBC TV18's Menaka Doshi is joined by Bharat Vasani, member of the Companies Law Committee and General Counsel, Tata Group, corporate lawyer- Sanjay Asher, Senior Partner, Crawford Bayley and Senior Auditor - Dolphy Dsouza, Partner, EY.

Doshi: I am going to start by asking you to describe what the mandate of the committee was and the reason I ask is not because I do not know the mandate, but the committee has recommended 100 changes to the law. That is just short of a full rewrite. Why not just recommend a whole new law?

Vasani: I must clarify at the outset that the mandate was not to rewrite the Companies Act, 2013. In the first year of its implementation itself, the government received a huge feedback from various chambers of commerce directly from the industry and various stakeholders that there are a lot of pain points. And they wanted to address those pain points, they found that some of the provisions were just not workable like Section 185 and 186 to ask you for loans to directors. There was absolute prohibition. They realised that this was an overreaction to some of the corporate scandals that had happened at that time. So, the very first meeting which was chaired by Anjuly Chib Duggal, who later on because the finance secretary, it was very clearly told to us that we are not rewriting the act, we are just addressing the practical difficulties which we encountered in implementation of the act. And when we debate, it was not the objective. So, very substantive or conceptual issues like treasury stock buyback or introduction of provision for leverage buyout, nothing was discussed.

We just invited comments from all the stakeholders, we received more than 2,000 comments and our objective was only to look at the comments. None of us were individually allowed to make our own contribution, we had to look at those 2,000 comments.

Doshi: Would it not be fair for me to say that these 100 changes and I ask both of you gentlemen as well, these 100 changes effectively amount to a rewrite of the law, would you say that?

Asher: Absolutely, and I think we are going back to the 1956 law in many cases.

Doshi: Let us do one thing, let us get down to the fine print and we will examine all these objections that we have and find out where we have reached at the end of this exercise. Of course, these are all only recommendations and we yet have to see how many of these are accepted by the government and in fact legislated on. But let us start with the very first issue that Mr Vasani said was posing to be an operational issue for most large companies and groups and that had to do with loans to directors and then loans to companies, to inter-corporate loans and investments.

RE-WRITING COMPANY LAW?

LOANS TO DIRECTORS

Companies Act, 2013
Disallows loans to directors or  any person the director is interested in

Companies Law Committee  
Loans be permitted to directors…with prior shareholder approval

As far as loans to directors are concerned, the Companies Act disallowed loans to directors or any person that the director is interested in, your committee has recommended that these loans be permitted to directors or any person that directors are interested in as long as shareholders have approved them in advance.

There was a clear governance reason for why loans to directors had been disallowed by the Companies Act, 2013. Why have you suggested that that disallowment be done away with?

Vasani: Section 185, which put an absolute prohibition I thought was a drafting error. You cannot have an absolute prohibition that you cannot give a loan to any company in which your director is interested. There was no question of getting government approval. The old Section at least contemplated that if this loan is required to be given, you can go to the government of India and justify to the Ministry of Corporate Affairs that this loan is justifiable. Here, there was an absolute embargo. So, what we have now proposed is if you need to look at it in the context that in 2015, there was a short amendment bill which was passed, where this section was amended, to provide that loan by wholly owned subsidiary was kosher. But that was also not found to be workable, so we found that let us give it to any company in which director is interested so long as shareholders by 3/4 majority have approved it. So, we have gone back to the shareholders corporate democracy, if shareholders are fine with it, why should government object to it?

Dsouza: This recommendation is reasonable and good because a lot of companies operate through their subsidiaries for multiple reasons.

Doshi: And they have common directors on subsidiary?

Dsouza: Sometimes yes they do have common directors.

Doshi: Often these are not subsidiaries and these are companies in which the promoters are directors or there are common directors by some other reasons. Should not there be governance reasons for not allowing these?

Dsouza: For monitoring them, not for not allowing because then what you are doing is you are throwing the baby with the bath water.

Asher: I would agree with him and I would only supplement to say even the listing the new (Listing Obligations and Disclosure Requirements) LODR and the old listing agreement did mention that you had to have on material subsidiaries director of the holding company in which event how would you say just merely because there is a common director I cannot give him loan.

Doshi: So we have left it up to shareholders?

Vasani: We have left it to shareholders. You look at the jurisdictions, we did international comparison, which jurisdiction has back dated There is not a single jurisdiction which is back dated.

Asher: As long as it is armslength and then you are paying through the proper interest.

RE-WRITING COMPANY LAW?

INTER CORPORATE LOANS & INVESTMENTS

Companies Act, 2013
Only 2 layers of subsidiary companies permitted

Companies Law Committee  
Restrictions on layers be done away with + Declaration of beneficial interest
    
Doshi: The next one where the committee has recommended a change has to do with inter-corporate loans and investments. One of the things that the committee has recommended that the prohibition on more than two layers of subsidiary companies that was in the Companies Act, be done away with altogether. This again I understand is a case for operational ease because in many industries for instance in infrastructure, you might need more than two step down subsidiaries but again there were very clear reasons for why this restriction was put in.

Vasani: There is a corresponding change being done in some Section of the 187 which was old Section, the Section dealing with beneficial ownership of shares. We found that we have introduced sufficient safeguards and checks and balances that there is no need for us to restrict the layers and we found not only infrastructure companies, there are whole host of sectors where we believe that there is no need for the Ministry of Corporate Affairs to put artificial restrictions which takes away the structuring flexibility of companies.

It is very critical that you need to preserve structuring facility and one of the core principles given to us by the PMO, ease of doing business. We don’t want to bring in anything which will come in the way of ease of doing business. So, if you see large number of suggestions which are directed at this point of time, is it obstructing legitimate business activity, if it was so, we do it.

Asher: This particular recommendation was there in the JJ Irani Committee as well that don’t have restrictions on layers. You also had in the parliamentary standing committee, again the same recommendation was there. So, if it is coming for the third time I am sure we are all facing problems and there is no issue from a governance or any other point of view.

RE-WRITING COMPANY LAW?

RELATED PARTY TRANSACTIONS

Companies Act, 2013
Only ‘interested’ related party cannot vote

Companies Law Committee  
No related party can vote

Doshi: Speaking of governance, the committee has proposed that the government circular which says that only the interested related party cannot vote in a related party transaction, that be rescinded and in fact the original position be restored and that is that no related party can vote in a related party transaction related proposition or resolution. That is a huge win back in favour of governance.

Vasani: This was one provision where I think there was no resistance at all. Everybody was on board and it is also to bring it in-line with SEBI. SEBI has already said that all the related parties are prevented from voting. So, we realised that there are only two situations, unlisted closely held companies and joint ventures (JVs) where we may not have a situation where both the parties may be interested and how do you go about. So, we are carving out for those two specific situations.

RE-WRITING COMPANY LAW?

DEFINITION OF HOLDING COMPANY
- Clarify that a foreign company can be a holding company

Otherwise we felt that if you keep the circular alive there is a very nice way of bypassing the entire regulatory requirement. So, we thought it was better that we withdraw that circular. In fact there are two other changes made in the related party provisions which are tightening the provisions, tightening of the act. For example there was a drafting error in the definition of holding company. 56 Act contemplated holding company can be a body corporate, 2013 Act did not contemplate holding company to be a body corporate so technically I can argue that Unilever and Hindustan Lever are not related parties.

Doshi: Because one is a foreign company.

Vasani: Because one is a body corporate which is a foreign company which was not covered by the Act, so we have plugged that drafting lacuna also. It is not that everything was liberalised. This very clearly says that even a foreign body corporate, related party transactions provisions will get attracted now.

Dsouza: On the related party transactions, I think the materiality thresholds are actually very ridiculous because the requirement is 10 percent of turnover or Rs 100 crore whichever is lower. So, imagine a huge company with an Rs 80,000 crore turnover, even for smaller transactions relatively from their perspective, they have to go to minority shareholders for approval.  

There is also disharmony between the legislation. So, for example, under SEBI legislation, it is only 10 percent of turnover without any upper limit of Rs 100 crore and it is of consolidated turnover. So, this disharmony between the various legislations and the lower materiality thresholds is going to be creating confusion.

Vasani: We have not written here that in all the thresholds prescribed under the Companies Act are in for a comprehensive review and a decision was taken in this committee, we are meeting once again, all the thresholds are going to be substantially revised.

Doshi: You are strengthening my first question, why aren’t we just writing a new law because I can’t believe it?

Vasani: We are revising most of thresholds.

RE-WRITING COMPANY LAW?

DEFINITION OF ASSOCIATE, SUBSIDIARY

Companies Act, 2013
Significant influence means control of atleast 20% of ‘total share capital’

Companies Law Committee  
Significant influence means control of atleast 20% of ‘total voting rights’

Doshi: Speaking of definitional changes because you spoke of holding companies, there is another definitional change and an important one in that in the definition of associate and subsidiary where you have said that the Companies Act says significant influence means control of at least 20 percent of total share capital in determining whether it is a subsidiary or an associate and you have said let it not be total share capital, let it be total voting rights which seems to make sense because it does away with preference capital but I want to ask our two guests here whether they agree with this change of definition?

Asher: Absolutely and the thing they could have streamlined was that you have the definition in AS 18, you have in Accounting Standards so why not have the same definition everywhere otherwise you have again inconsistencies.

Dsouza: I have a big disappointment on this because I believe that control and subsidiary, significant and influence and associate, they have to be clearly separated. So, the definition right now that is being proposed is significant influences either participation in decision making or control of business decisions. If you control business decisions then there is no longer significant influence, it is actually controlling the company and that is no longer your associate, it is a subsidiary. So, that fundamental change has to be addressed.

Doshi: What would you have preferred that the committee recommend?

Dsouza: First the committee should have made a distinction between participative rights and protective rights and significant influence has to be determined as participation in decision making, not as control of business decision because then there is no difference between significant influence and control.

Doshi: If you read the committee report, there is a reference to this whole debate on protective rights and participative rights so I will let you answer that because I know that the committee thought through this very carefully.

Vasani: This was discussed at length and we also show that nowhere in the world, forget about India, any legislature of the world is able to define control very effectively. These are all fine nuances, I myself was of the view that perhaps the word in any other manner in the last part of the definition be taken away and we need not completely align the definition of control with SEBI takeover code because it is very exhaustive definition.

The feeling was that the controls are exercised in the modern world through so many different ways that they felt that it is better that we align our definition with SEBI takeover code and we don’t need to make any change at this stage. This was debated at great length.

RE-WRITING COMPANY LAW?

PRIVATE PLACEMENT
- Keep open more than one issue of securities at a time
- No special resolution required for NCD issue
- Fewer filings

Doshi: I want to move on then to the issue of raising of capital where the committee has recommended several changes to the private placement process as well as material changes. I will just bring up one because it is actually a few pages of changes; it is impossible to cover all of them in great detail, but one of the things you have said is that a company can keep more than issue of securities open at a particular given time and then there are a whole bunch of procedural changes. If you want to just in very brief tell us what is that the committee was attempting to do in many of these changes?

Vasani: Based on the representations received, there was a view that in overreaction to Sahara, this was the Sahara amendment, so in overreaction to that too many restrictions have been placed and people were finding it very difficult that you can’t open a second issue till the first issue is technically completely closed. So, the view was that we must facilitate raising of capital. The industry is going through difficult time, the national economy is going through difficult time, the world economy currently – this was discussed at length and what we can do that both the IPO and the private equity and the private placements, we can facilitate.

One of the view was that let us try to remove some of the procedural restrictions. So, we have not completely taken away all restrictions but the procedural part, the past four form and the past five forms that the private placement offer memorandum, we felt it was too much of a burden, too many filing, filings of valuation report so we said let us get away with this and keep it to the bare minimum and there was no harm if the two issues are simultaneously opened so long as your total number of subscribers do not exceed 200 in a year.

Asher: The good part of it is that you could have multiple issues in a single year; that is the best part of it. Otherwise, there were restrictions.

Doshi: Through a single approval I think if I understand that correctly?

Vasani: Yes. Not only that, as far as NCD is concerned, we have even given a go by to that that you don’t need annual review or renewal of the NCD resolutions. Once your total borrowing is within the limit specified in Section 180 then you have enough flexibility. Our objective was to bring in flexibility back on the table.

Dsouza: I think some of the changes are pretty good. So, for example, in the case of IPO, they have said that let SEBI determine what are the disclosures required. So, right now when we make disclosures in the prospective it is effectively disclosures of five years in accordance with consistent accounting policies and five years is too long really. So, we don’t have to have five years.

Doshi: SEBI requires two?

Dsouza: SEBI too requires five years because it is linked to the Companies Act. However, now, the proposal is let SEBI decide and my guess is SEBI would say look five years is too harsh, let us allow for three years of disclosure in accordance with the IND-AS or whatever the standards are.

Vasani: SEBI member – Mr Nagpal was of the view that SEBI is currently having a comprehensive relook at the entire IPO disclosure requirements to prune it and the Companies Act requirement would be exactly in-line with what SEBI is prescribing.

Doshi: Another place where you have done that is to propose that the provisions dealing with the restrictions on forward dealings by KMPs as well as the insider trading provision in the Companies Act 2013 be deleted because effectively SEBI’s regulations in this should be the ones that prevail and you didn’t need overlap in the Companies Act?

RE-WRITING COMPANY LAW?

Forward Dealing & Insider Trading
- Delete the provisions, refer to SEBI provisions

Vasani: There are two fundamental problems. 195 which dealt with insider trading, didn’t say it was meant for listed company. It was applicable to unlisted public companies and private companies and unfortunately the law laid down in that Section 195 was based on the old 1992 regulations of SEBI and not the new 2014 regulation. So, the problem was, there the carve out was ordinary course of business, here the carve out is legitimate corporate purpose.

So, we said that first of all the law is not aligned. Second thing the unlisted companies there is no market, there is no price discovery, there is no question of insider trading. So, why are we trying to legislate something which is not applicable to unlisted companies and private companies. As far as listed companies are concerned, SEBI said that we have a very comprehensive and tight regulation so why do we need to legislate. So, after a prolonged debate, we thought both these sections were completely unnecessary in the Companies Act.

Doshi: So you are all in agreement that these two sections needed to go and the proposal is to do away with that.

Dsouza: Absolutely.

RE-WRITING COMPANY LAW?

Internal Financial Control
- Auditor reporting obligations on internal financial controls should only be in reference to financial statements

Doshi: This change that the committee has recommended will gladden your heart. The committee has said with regards to reporting on internal financial control, that auditor reporting obligations on internal financial controls should only be in reference to financial statements and not all financial controls in a company. I think this was a wording change that the auditor fraternity had been asking for ever since the enactment of the 2013 act. Now it has finally been sort of in black and white put down by the committee.

Dsouza: There are two types of control. One is the business controls and the other is the financial controls. So, typically business control would mean does your product have an FSSAI stamp on it. Now that is something that really auditors don’t deal with, they will look at more financial statements and financial controls. However, the other thing that I would like to mention here is as far as directors are concerned, they are responsible for all controls, business controls as well as financial controls. There should be no exemption as far as directors are concerned.

Doshi: There is no exemption proposed.

Dsouza: There is no exemption proposed but the problem here is when the directors make an assertion that business controls and financial controls are in place, there is a huge level of work and documentation is required by the director and the people that work for those directors to say that the business controls are in place. So, there is a lot of administrative effort that the directors will have to put in because of the 2013 Act just to make that assertion.   

Doshi: That too should have been done away with is your point?

Dsouza: Absolutely.

Vasani: The directors have expressed serious concerns that how can they confirm that they have laid down internal financial controls and they are operating effectively and satisfactory so there was a very strong representation coming from the body of independent directors that they are finding it extremely difficult to certify.

Doshi: Why have you ignored that? 101 versus 100 changes would not have changed anything much.

Vasani: That was the majority view.

RE-WRITING COMPANY LAW?

Remuneration of KMP
- No Govt approval needed for exceeding prescribed limits as long as shareholders approve
- Replace special resolution with ordinary resolution for approving remuneration of professional directors

Doshi: Final point I want to bring up and that has to do with remuneration of key managerial personnel and the committee has recommended that wherever this remuneration exceeds limits laid down in the act as long as you have shareholder approval, you don’t need to go to government for approval. There are other relaxations you have sought, for instance company that is not making profits, again, you don’t need to go back to government for approvals. Essentially you are saying if shareholders have approved you don’t need government?

Vasani: We have made a distinction now, promoter director, you can do a special resolution but professional director who has no stake in the company or his stake is less than 2 percent and he has the domain knowledge of the industry then ordinary resolution. So, we have also tried to address the situations like Tata Motors where we have a problem that the special resolution is difficult to get passed sometimes.

Doshi: But you did manage to pass the second time around when you made the explanation available to your shareholders.

Vasani: But it creates a lot of difficulties and lot of complaints have received that it is difficult because you are not allowed to vote on some of the resolutions. So, the best part was that let us make it ordinary for professional directors and let us to leave to the shareholders.

Doshi: But in many promoter run companies the professional directors are people picked by the promoters, everybody is not a Tata Group.

Vasani: They need to beat the criteria laid down in the act and let us leave it to the shareholders.

Doshi: But a simple resolution will mean the promoters vote will drive it through.

Vasani: What is the value addition by referring the file to the ministry?

Asher: I think it is a very welcome measure.

Doshi: Last bit, this irked me a little bit and I am not sure if everybody here would agree. The committee has asked for companies to have a more generic object clause that they can put in which is to engage in any lawful activity or business then why have an object clause at all because it sort of defeats the whole purpose. So, before I come to you for an explanation I am going to get views. Do you have an objection to this?

RE-WRITING COMPANY LAW?

OBJECTS
- Allow companies to have a more generic object clause
- ‘To engage in any lawful activity or business…’

Dsouza: Yes I have, I do not really agree with this change because let us say if I am investing in a software company, I am investing in software. I am not expecting the software company to start buying and selling property because otherwise I would not have invested in that.

Doshi: And the moment you allow for this kind of generic object clause to be included, every company will put that into their prospectus.

Asher: I would agree and then you do not have any mechanism as to from software, if I am trying to do from real estate, earlier at least there was a mechanism that it was not two year main objects or the business which you are doing, go back to the shareholders, pass a resolution, take their approval and then commence that business.

Doshi: And, now the Companies Act, 2013 says you have to even give dissenting shareholders an exit for which SEBI has finally has after two years come out with a process.

Asher: And now, if you are saying that you have generic object clause, which to my mind is not acceptable.

Vasani: The view was that the English Companies Act, world over is regarded as the landmark legislation in terms of balancing the requirements of corporate world and the governance requirements. If you look at Section 31 of the English Companies Act, it specifically permits these kind of a generic object clause. So long as you do something which is legal and permissible, the old concept of doctrine of ultra wires and all the thing, they find that they have lost relevance in the modern world and Companies Act provides that in case the company changes the objects, the shareholders who do not agree with the new objects have a right to exit and most of these objects will be there in the IPO offer document.

Doshi: But if you this generic object.

Vasani: IPO offer document, you will have to write the objects and if you have taken the money from the public and if you change the objects.

Doshi: What if you use this generics objects clause then?

Vasani: The issue is that the generic object clause, it will be reproduced in the articles of the company with the people who subscribed to the shares of the company, to know that the company has a generic object clause, so it has the flexibility to do, but I suppose, there are several other checks and balances. So, the feel was that objects clause need not be one more obstacle in the way of company wanting to diversify its business.

Doshi: Do you think that it is better to make all these as amendments or should be just rewrite the 2013 Act?

Vasani: I think it will take another 10 years, so better make these amendments and live the life. Let us be more practical. If you rewrite the Companies Act again, but otherwise, Section 465, repeal has still not been notified then bring back the 1956 Act, but do not rewrite the Companies Act. For five years if you feel that the industries need to do business more easily, bring back the 1956 Act.

Asher: But, even in 1956 Act, after 1956, there were amendments in 1960 and 1965. In the 1960 and the 1965 amendments were as very many as what have happened in the last two years or what are proposed to be made.
 
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