The Companies Bill, 2009 was introduced on August 3rd 2009. The Standing Committee presented its report on August 31st 2010. The central government withdrew this Bill in the winter session of 2011. It re-introduced the Companies Bill 2011 on December 2nd 2011. We present four tables below to help the Standing Committee on Finance in examining this Bill. Table 1 - Recommendations of the Standing Committee on the Companies Bill 2009 that were not incorporated in the Companies Bill, 2011 Table 2 - Some recommendations of the Standing Committee on the Companies Bill, 2009 that were partially incorporated in the Companies Bill, 2011 Table 3 – Some provisions in the Companies bill 2011 that were not present in the Companies bill 2009 Table 4: Recommendations given by the Standing Committee on the Companies Bill, 2009 that were incorporated in the Companies Bill, 2011
Table 1: Recommendations of the Standing Committee that were not incorporated in the Companies Bill, 2011
Key Issues and Clause No. in the Companies Bill, 2009 Clause 2(1)(k) - Body Corporate Fraud not defined Clause 2(1)(zzi) – Officer who is in default Clause 2(1)(zzp) & (zzs) – Private Company Clause 2(1)(zzs) – Public Company Clause 13(1) – Alteration of Articles Clause 24(3) – Offer of invitation for subscription of securities Standing Committee Recommendations Definition should include Limited Liability Partnership Definition of fraud to be included Promoter should be included as a new category and persons advising the Board in a professional capacity should be excluded Capitalisation threshold of private company and public company should be higher as the Bill also proposes new forms like small companies and One Person companies with lower capitalisation Definition should be amended to exclude “private company, one person company or a small company” Amendments to smoothen the process of conversion of one form of company to another Time period for allotment of securities should be reduced from 70 days to 15 days in tune with the SEBI norms and there should be a provision for payment of interest on share application money remaining unpaid beyond the stipulated period The clause should be made applicable to both public as well as private companies With both postal as well as electronic voting system in place, proxies may be discontinued Consent of directors present instead of consent of all directors
Clause 34(4) – Allotment of securities Clause 94 – Proxies Clause 110(1) – Declaration of Dividend
Key Issues and Clause No. in the Companies Bill, 2009 Clause 117(1) – Financial statement Clause 117(5) – Exemption to unlisted companies Clause 123(8) – Audit Committee
Standing Committee Recommendations Non-applicability of this clause to banking companies should be clearly mentioned The ministry should re-consider exempting unlisted companies from preparing detailed consolidated financial statements of all subsidiaries The Audit Committee shall ensure and monitor that the independence criteria has been fulfilled by the auditor of the company throughout his tenure Providing safeguards on the remuneration of auditors To clarify the time period within which the Board is to forward the resignation to the Registrar Conviction under SEBI Act, Securities Contract (Regulation) Act, Depositories Act and for committing fraud, forgery etc may also be considered as a disqualification for persons to be appointed as Managing or whole time Directors An individual shall not be Chairman as well as the MD or CEO of the company at the same time A new clause to empower the government to initiate proceedings for disgorgement of assets and properties of the directors who have taken undue advantage or benefit. The Standing Committee recommended that the words ‘undue advantage or benefit’ should be deleted as they dilute the provision. Other stakeholders particularly other creditors could be allowed to file an application for revival and rehabilitation of a company, not just any secured creditor Proposed adding an enabling proviso for holding a joint meeting of members and creditors Proposed changing the time period for delivering the documents to the Registrar to 90 days from 30 days Define the term “continuing offence”
Clause 125 – Remuneration of Auditors Clause 149 – Resignation of the Director Clause 174(4) – Those disqualified from being appointed as managerial personnel Appointment of Key Managerial Personnel Clause 195 – Action to be taken in pursuance of Inspectors Report: Disgorgement of properties of directors who have indulged in fraud Clause 230 - Application for revival and rehabilitation Clause 281 – Meeting of creditors Clause 342 (1) – Documents etc. to be delivered to Registrar by foreign companies Clause 409 – Punishment where no specific penalty is provided
Table 2: Some recommendations of the Standing Committee that were partially incorporated in the Companies Bill, 2011
Key Issues and Clause No. in the Companies Bill, 2009 Clause 146 – Number of Directorships Standing Committee Recommendations Remarks
Appointment and Qualification of Directors Maximum number of companies in which one may become director should be reduced to 10 from the proposed 15 in the case of public companies, and 5 from 7 in the case of listed companies Partially implemented. Public companies reduced to 10 but no mention of listed companies. Proviso removed – Clause 165 in the new Bill 2
Key Issues and Clause No. in the Companies Bill, 2009 Clause 250 – Company Liquidators and their appointments Clause 265 – Power and Duties of Company Liquidator
Standing Committee Recommendations Winding up A time frame of 15 days should be prescribed for the company liquidator to file a declaration relating to independence Drafting changes in sub clause (1)(a), (e), (g), (j), (l), (m), and sub clause 3
A time frame of seven days has been prescribed.
All drafting changes made except those to sub clause (1)(a) which states that the company shall have the power to carry on the business so far as may be necessary for the beneficial winding up of the company. Words were replaced by “to be detained”
Clause 276 – Arrest of person trying to quit India or abscond
Replace the words “to be arrested and kept in custody” with the words “may be detained”
Table 3: Some provisions in the Companies Bill, 2011 that were not present in the Companies Bill, 2009 in the Companies Bill, 2011
Key Issues and Clause No. in the Companies Bill, 2011 Clause 23 – Public offer and private placement New provisions Remarks
Prospectus and Allotment of Securities A public company may issue securities through prospectus, private placement, and rights issue or bonus issue. A private company may issue securities only through private placement. Public offer is the offer of sale of securities to the public by an existing shareholder. Share capital and debentures Clause 63 – Issue of bonus shares A company may issue fully paid up bonus shares to its members out of its free reserves, securities premium account and capital redemption reserve account. Acceptance of Deposits by Companies Clause 76 – Acceptance of deposits from public by certain companies A public company may accept deposits from persons other than its members subject to certain conditions which include obtaining a rating from a credit rating agency to inform the public at the time of invitation of deposits to ensure adequate safety. In case of secured loans a charge should be created on the assets of the company which is not less than the amount of the deposits accepted. This was recommended by the Standing Committee. This was recommended by the Standing Committee.
Key Issues and Clause No. in the Companies Bill, 2011 Clause 93 – Return should be filed with the Registrar in case the promoters’ stake changes
Management and Administration Every listed company shall file a return with the Registrar informing him of the change in the number of shares held by the promoters and top ten shareholders within 15 days of such change.
Accounts of Companies Clause 130 – Reopening of accounts on court’s or Tribunal’s orders Clause 131 – Voluntary revision of financial statements or Board’s report Clause 135 – Corporate Social Responsibility A company shall not re-open its books of account unless an order is made by a court or Tribunal. If the Directors of the company feel that the financial statement does not comply with certain provisions, they may prepare revised financial statement or report after obtaining approval of the Tribunal. Every company which has a net worth of Rs 500 crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting three or more directors of which at least one is an independent director. The Board shall ensure that the company spends at least two per cent of the average net profits of the company made during the three immediately preceding financial years. Some companies as may be prescribed shall be required to have an internal auditor who shall either be a chartered accountant or a cost accountant or any such professional decided by the Board. The central government may prescribe the manner and intervals for the audit to be conducted. Audit and Auditors Clause 140 – Removal, resignation of auditor and giving of special notice Clause 150 – Manner of selection of independent directors and maintenance of data bank of independent directors An auditor appointed may be removed from his office before the expiry of his term only by a special resolution of the company. Appointment and Qualification of Directors An independent director may be selected from a data bank containing names, addresses, and qualifications of persons who are eligible and willing to act as independent directors. The central government may prescribe the manner and procedure of selection of independent directors. A listed company may have one director elected by such small shareholders in such manner and with terms and conditions as may be prescribed. This was recommended by the Standing Committee. Some changes to provisions to Section 225 of the Companies Act 1956. This was recommended by the Standing Committee.
Clause 138 – Internal Audit
This was recommended by the Standing Committee.
Clause 151 – Appointment of Director elected by small shareholder
Similar to the provisions of Section 252 (1) of the Companies Act 1956.
Key Issues and Clause No. in the Companies Bill, 2011 Clause 197 – Overall maximum managerial remuneration
Appointment and Remuneration of Managerial Personnel The total managerial remuneration payable by a public company to its directors, including managing director and whole time director, shall not exceed 11 per cent of the net profits for a financial year. In cases where the company has inadequate or no profits, the central government or the company may fix the limit for remuneration. A class of companies as may be prescribed shall give a secretarial audit report given by a company secretary in a manner that may be prescribed. Some of the functions include reporting to the Board about compliance to ensure the company complies with applicable secretarial standards. Inspection, Inquiry, and Investigation Clause 211 – Establishment of Serious Fraud Investigations Office (SFIO) Clause 212 – Investigation into affairs of company by SFIO Clause 218 – Protection of employees during investigation The central government may by notification establish an SFIO to investigate frauds relating to a company. The body shall consist of a director and experts from other fields as specified. The Bill states the process of investigation into frauds relating to company by the SFIO. During the pendency of any proceeding against an employee of a company the body corporate shall obtain approval of the Tribunal for the action proposed against the employee. Compromises, Arrangements, and Amalgamations Clause 230 - Compliance with Accounting Standards While formulating compromise or arrangements, a new proviso included to ensure that an auditor’s certificate is required. Winding up Clause 277 – Intimation to company liquidator, provisional liquidator, provisional liquidator and Registrar Clause 284 – Promoters, directors, etc to cooperate with Company Liquidator Clause 287 – Advisory Committee When the Tribunal makes an order for appointment of provisional liquidator or for the winding up of a company, it shall within a period not exceeding seven days from the date of passing of the order cause intimation to be sent. Promoter is added to this Clause. This was “two weeks” in the Companies Act 1956. This was recommended by the Standing Committee. This was recommended by the Standing Committee. This was recommended by the Standing Committee. Similar to the provisions of Section 198 of the Companies Act 1956. Similar to the provisions of Section 637 AA of the Companies Act 1956. This was recommended by the Standing Committee.
Clause 200 – Central government or company to fix limit with regard to remuneration Clause 204 – Secretarial audit for big companies
Clause 205 – Functions of the Company Secretary
This was recommended by the Standing Committee.
Committee of Inspection is changed to Advisory Committee.
Key Issues and Clause No. in the Companies Bill, 2011 Clause 366 - 374
Companies authorized to register under this act Permits registration of companies that have been formed by an Act of Parliament or a Law passed. Winding up of unregistered companies Clause 375 - 378 Provides for winding up of unregistered companies Government Companies Clause 395 – Annual reports where one or more state governments are members of companies A new clause where the central government is not a member of a government company, the state government/s which is/are members of that company shall prepare an annual report within the prescribed time frame. Special Courts Clause 442 – Mediation and Conciliation Panel The central government shall maintain a panel of experts having qualifications for mediation between the parties during the pendency of any proceedings before the Tribunal. Miscellaneous Clause 447 – Punishment for fraud Any person who is found guilty to be guilty of fraud, shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud. If in the proceeding for negligence, default etc. against the officer of a company, it appears to the court that he or she is liable in respect of the negligence but that he has acted honestly and reasonably, the court may wholly or partly relieve him of his liability on such term as it may think fit. The central government may by notification alter any of the rules, regulations, Tables, forms and other provisions contained in the Schedules to this Act. This corresponds to section 633 of the Companies Act 1956. This corresponds to section 620 of the Companies Act 1956. This corresponds to sections 583, 584, 589 of the Companies Act 1956. This corresponds to sections 565, 574, 575, 576, 577, 578, 586, 587 and adds some obligations to it.
Clause 463 – Power of court to grant relief in certain matters
Clause 467 – Power of the central government to amend Schedules
Table 4: Recommendations given by the Standing Committee that were incorporated in the Companies Bill, 2011
Key Issues and Clause No. in the Companies Bill, 2009 Clause 1(4)(b) - Applicability of the Bill Standing Committee Recommendations Applicability The Clause should be clarified. The provisions of the Bill should only be applicable in respect of matters where any Special Act is silent. If both Acts are silent, then it should be covered by the Companies Bill. Any ambiguity between the different provisions of the Bill and other Special Act should be completely removed. Definitions Clause 2(1)(a) - Abridged Prospectus Clause should be amended to specify that salient features should be as may be specified by SEBI. Amendment to exclude a fully paid up shareholder from the liabilities of contributory. Definition of controlling interest to be replaced by control. Remove the definition since it is covered under the definition of ‘officer in default’. Financial Institution should be defined in an inclusive manner so as to include all financial institutions including scheduled banks and NBFCs. Provisions may be made for empowering the Tribunal to grant exemption to class of companies. Whole-time Directors should also be recognised as KMPs. Clause 2(1) Clause 1(4)(e) Clause No. in the Companies Bill 2011
Clause 2(1)(z) - Contributory
Clause 2(1)(za) - Control or Controlling interest Clause 2(1)(ze) - Deemed Director Clause 2(1)(zo) - Financial Institution
Clause 2(27) Implemented Clause2(39)
Clause 2(1)(zq) - Financial Year
Clause 2(41); exemption granted to companies implemented outside India Not expressly included, but the Clause provides that KMP includes definition of ‘any other officer as may be prescribed’ Clause 2 (54); The provision now stipulates “a director occupying the position of managing director, by whatever name called.” Clause 2(54) Clause 2(64): The definition includes “any amount of money credited as paid-up in respect of shares of the company”. -
Clause 2(1)(zza) - KMP
Clause 2(1)(Zzd) - Managing Director
The need for having more than one MD in a company should be suitably reflected in the definition.
Clause 2(1)(zzl) - Paid up Share Capital
The definition should include the amount capatalised on issue of bonus shares, shares issued against consideration other than cash and other arrangements.
Key Issues and Clause No. in the Companies Bill, 2009 Clause 2(1)(zzy) - Related Party
Standing Committee Recommendations Director and Key Managerial Personnel should be included in the definition of ‘related party’. A broader definition should be formulated instead of listing out all the relatives in the statute The definition should be amended to include a company in which the holding company holds voting power through two or more subsidiary companies as well as a company which shall deem to control the Board of Directors of another company. Incorporation of Companies Necessary modifications should be made in the clause providing that in the event of the death of a member of the one person company, a person who has given his written consent shall become the member of the one person company. Necessary modifications may be made by adding the words “in such form as may be prescribed’ after the words ‘of such provisions’. Certificate of compliance should be given by both the professional as well as the Director/Manager/Secretary of the Company. The clause should be modified to ensure that the Bill has an overriding effect over the memorandum or articles of association of the company or provisions of any agreement executed by the Company or any resolution passed by the Company. The clause may be brought in conformity with the corresponding provision in the Civil Procedure Code by including it in the Clause. Prospectus and Allotment of Securities The Committee recommended that an offer of sale to the public should be deemed to be a prospectus issued by the Company. There should be harmony between the different regulators and therefore the existing jurisdiction of SEBI as a sectoral regulator should be preserved.
Clause No. in the Companies Bill 2011 Clause 2(76)
Clause 2(1)(zzz) - Relative
2(1)(zzi) - Subsidiary Company
Clause 3(1) -Formation of a Company
Clause 6(5) - Articles
Clause 7(1)(b) - Incorporation of a company
Implemented - Clause 7(1)(b)
Clause 9 – Effect of Memorandum and Articles
Clause 19 (1) - Service of Documents
Clause 22 - Power of SEBI to regulate issue and transfer of securities
Key Issues and Clause No. in the Companies Bill, 2009 Clause 23(1)(a)(xi) - Matters to be stated in prospectus
Standing Committee Recommendations Committee recommended that the statement to be made in the prospectus regarding management perception of risk factors should be specific and not overstated. It should not be ambiguous. The clause should be modified to provide that the prospectus should contain information on the source of promoter’s contribution and the main objects of the public offer.
Clause No. in the Companies Bill 2011 Clause 26(1)(ix)&(xiv)
Clause 23(1)(b) - Financial Information in the Prospectus
Necessary modifications should be made to allow companies which have been in existence for less than five years to make a public issue. The disclosure in the prospectus regarding the auditor reports on the financial position of the company should be more relevant. A new Clause be inserted restricting a company from varying the terms of the contracts or objects mentioned in the Prospectus without the prior approval of the shareholders. Share Capital and Debentures The Committee recommended that the Ministry may re-examine its position with respect to shares with differential voting rights. The Bill removed shares with differential voting rights as a category and provided only preference shares and equity shares as share capital. Suitable modifications should be made on the lines of the existing 1956 Act. That provides for a time period of 21 days within which an application may be dissenting shareholder. The Ministry had proposed to amend the clause to provide that the premium, if any, payable on redemption shall be provided out of the profits of the Company”. The Bill should be amended to reflect the changes suggested by SEBI. SEBI had suggested that as the clause relates to rectification, it needs to be inserted in the provisions relating to rectification. The Committee recommended that a suggestion to include a specific enabling provision allowing companies to issue bonus shares may be considered.
Proviso to Clause 26(1)(b)(ii)
Clause 23(1)(b)(iii) - Auditor’s Report
Implemented with certain modifications - proviso Clause 26 (1)(b)(iii) Clause 27(1)
23(1)(c) - Statement on Compliance in the Prospectus
Clause 37 - Kinds of share capital
Clause 42(2) - Variation of Shareholder’s rights
Proviso to Clause 48(2)
Clause 49(2) - Issue and redemption of preference shares
Clause 50(7) - Transfer and transmission of securities
Clause 56 (1) - Further issue of share capital
Clause 62 and Clause 63(1)
Key Issues and Clause No. in the Companies Bill, 2009 Clause 59(3) - Reduction of share capital Clause 63 - Prohibition of buyback in certain circumstances
Standing Committee Recommendations Include a proviso suggested by it to the Clause for ensuring adherence to the accounting standards. Buy back should be permitted if the default mentioned in clause 63(c) is remedied and certain period (three years) has lapsed after the such default has ceased to subsist. A special resolution should be passed at a general meeting for converting the debentures into shares. All public companies should be permitted to issue secured debentures. Acceptance of Deposits by Companies
Clause No. in the Companies Bill 2011 Proviso to Clause 66(3)
Proviso to clause 70(1)(c)
Clause 64(1) - Debentures
Proviso to clause 71(1)
Clause 68 - Damages for fraud with respect to public deposits
The Committee had recommended that the new clause suggested by the Ministry which allowed companies having a net worth of more than 500 crores and a turnover of not less than 1000 crores to accept public deposits may be implemented. It also recommended that deposits should be secured by creation of a charge on the company’s assets and that penal interest should be a deterrent for the defaulting companies. The requirement should be to obtain a high credit rating and not the highest credit rating. Registration of Charges
Implemented - Clause 76(1). The net worth requirement will be prescribed.
Clause 69 - Duty to register charges
The Committee recommended that a creditor may be allowed to inspect the company’s register of charges without any payment of fees. Management and Administration Disclosure of holdings by FII should be mandated. Declaration and Payment of Dividend Interim dividend should be permitted to be declared out of the surplus in the P&L account as well as profits of the financial year in which such interim dividend is sought.
Clause 82 – Annual return
Clause 92 and Clause 93
Clause 110(3) - Interim dividend
Clause 123 (3)
Key Issues and Clause No. in the Companies Bill, 2009 Clause 110(6) – Non declaration of dividend
Standing Committee Recommendations A company shall not declare any dividend on its equity shares so long as the failure to declare the dividend continues (on grounds of both prohibition on acceptance of deposits from public and repayment of those Implemented before commencement of the Act). Fund should be utilized for refund of unclaimed mature dividends, unclaimed application money on any security etc. To include unclaimed mature debentures etc. and to delete this section as it is mentioned earlier. Accounts of Companies Altering the language and adding a Proviso that the items contained in the financial statement be contained in the definition of such items contained in the accounting standards. The NACAAS should not only be a body for setting accounting standards but also be a quasi regulatory body and should have a clear role and responsibilities. The CEO should be authorised to sign the financial statement only if he is a member of the Board. Matters affecting the financial state of the company be included as is in the existing Companies Act (1956). Insertion of Corporate Social Responsibility (CSR) Enable listed companies to send copies of financial statements be included within the Clause. Penalty should be looked into to differentiate between procedural mistakes and fradulent acts. Audit and Auditors The rotation shall be brought under the statute.
Clause No. in the Companies Bill 2011 Clause 123 (6)
Clause 112 – Investor Education Protection Fund (IEPF) Clause 113 – Amount lying in previous funds to become part of IEPF
Clause 125 (3)
Clause 125 (e) Proviso
Clause 117(1) – Financial statement
Clause 129 (1)
Clause 118 – National Advisory Committee on Accounting and Auditing Standards (NACAAS) Clause 120(1) – Financial statement, Board’s report Clause 120- Financial statement, Board’s report
Clause 132 (4)
Clause 134 (1)
Clause 120 -Financial statement, Board’s report Clause 121 – Right of a member to copies of the audit balance sheet Clause 122 – Copy of Financial Statement to be filed with the Registrar Clause 123 – Rotation of the Auditor
Clause 135 Clause 136 (1) Proviso
Clause 137 (3) Upper limit remains the same – 10 lakh. The lower limit altered. Clause 139 (3) (a), although the central government may prescribe rules for companies to rotate the auditors Clause 139 (8) and (9)-It has to be filed within 30 days
Clause 123(5) – Casual vacancy
Amendments with regard to time limit within which casual vacancy arising out of resignation of an auditor should be filled.
Key Issues and Clause No. in the Companies Bill, 2009 Clause 126 – Auditors reports and accounting standards
Standing Committee Recommendations To clearly state the information sought and obtained (or not obtained) from the company and the effect of that to the financial statement of the company. Non-rendering of certain services to ensure independency – to include subsidiaries as well. Stringent proposals stipulating joint and individual liability of the audit firm. Appointment and Qualification of Directors Replace these terms with ‘resident in India’. To be clarified – the number of directors who shall be liable to retire at the AGM and otherwise in general. Alter the clause to add “25% of the total votes cast either by the show of hands or on poll”. Minimum number of shareholders with a minimum level of share capital specified to move the motion to remove a director, no deposit should be collected. Particulars of directors should include details of securities held by them. Meeting of boards and its Powers
Clause No. in the Companies Bill 2011 Clause 143 (3)
Clause 127 – Auditor not to render certain services Clause 130 - Punishment for contravention Clause 132 (3) – Director - Ordinarily resident in India Clause 133(6) – Retirement of Directors Clause 141 – Right of persons other than retiring directors to stand for Directorship Clause 150 – Removal of a Director
Clause 144 (ii)
Clause 147 (2) and (3)
Clause 149 (2) Clause 153 (6)
Clause 160 (1)
Clause 169 (1) and (2)
Clause 151 – Register of Directors and key managerial personnel and their shareholding Clause 154 (2) – Meetings of the Board Clause 161 – Prohibitions and Restrictions regarding Political contributions Clause 163 – loan to Director Clause 165 – Investments of Company to be held in its own name Clause 167(1) – Register of contracts or arrangements in which directors are interested Clause 173 – Prohibition of Insider Trading
Clause 170 (1)
Modifications to provisions to eliminate possibilities of misuse of the option of video conferencing. Increase the limit from 5% to 7.5% of the average net profits. Explanation of the term ‘or to any other person in whom he is interest’. Inclusion of proposals related to investment of a company in its own name. Signature of the Register by all directors to be retained from the existing Act. Definition of insider trading to be included.
Clause 173 (2)
Clause 182 (1) proviso
Clause 185 (1) Clause 187 (2) Clause 189 (1)
Key Issues and Clause No. in the Companies Bill, 2009 Clause 175 - Ceiling on Managerial Remuneration
Standing Committee Recommendations An overall outer ceiling on managerial remuneration should be prescribed. A formula maybe evolved keeping in view the growth in corporate profits and other related factors. The words permission of the company should be clarified.
Clause No. in the Companies Bill 2011 Clause 197 and Clause 198
Appointment and Remuneration of Managerial Personnel
Clause 178(3) - KMP shall not hold office in more than one company at the same time. A KMP can be a Director in any company with the permission of the company Clause 183 - Investigation into the affairs of a company 188(4), 188(7), 189, 191(1) Procedure, Power etc. of Inspectors, Strengthening inspection/investigation process, protection of employees during investigation, freezing of assets of a company Clause 191(1) - Freezing of Assets of a company
Proviso Clause 203(3)
Inspection, Inquiry and Investigation SFIO should be strengthened and be made a part of the statute rather than prescribe it in rules. Ministry made the required proposals to the Committee which were agreed to by the Standing Committee. Clauses 210, 211 & 212
Implemented - Clause 217(4), (5), (9), (11), (12), 218 & 221
In order to discourage frivolous or vexatious complaints the Tribunal should only entertain complaints from such person who is either a shareholder with prescribed shareholding or creditor. Clause may be reconsidered on the grounds on legal tenability. The scope of offence and of penalties should be increased.
Clause 194 - No suit or proceeding till submission of final report Clause 200 - Penalty for furnishing false statements, mutilation, destruction of documents during course of inspection, inquiry or investigation Clause 201(3) - Advertisement for calling meeting of creditors Clause 201(4) - Voting for adoption of the compromise or arrangement Clause 201(5) - Authorities to whom notice should be sent for compromise or arrangement Clause 203(2)(c) - Report on impact of compromise on each class of shareholders
Implemented - Clause deleted Clause 229(a). It now includes tampering or unauthorized removal of documents.
Compromises, Arrangements and Amalgamations Notices should be sent individually to creditors rather than by advertisements. Postal ballot and proxies should be permitted. The words "sectoral regulators" should be added. Addition of non promoter shareholders in the impact report. Clause 230(3) Clause 230(4) Clause 230(5)
Key Issues and Clause No. in the Companies Bill, 2009 Clause 203(3) - Accounting Standards for compromise or arrangement
Standing Committee Recommendations In addition to the accounting standards, the Committee recommended opt out mechanisms for investors at the time of merger in line of regulations made by SEBI. The term foreign company should be clarified. A foreign company may or may not have a place of business in India. Prior approval of RBI needed for merger and amalgation under this Clause. The orders of the Tribunal should also cover "allotment of shares" and "restriction on the transfer of the shares of the Company". Consent should be required only in cases of agreements which do not involve MD, Director or Manager of a Company. Registered Valuers
Clause No. in the Companies Bill 2011 Clause 232(h), proviso of (j)
Clause 205(2) - Amalgamation of a Company with a foreign company
Clause 234(1), (2)
Prevention of Oppression and Mismanagement 213(2)(d) - Power of Tribunal to issue orders Clause 242(2)(d)
Implemented - Clause 242(2)(f)
Clause 218 - Valuation of Registered Voters
Recommended that the words "any other asset" and “liabilities” be incorporated in the scope of valuation. Reconsider provisions with regard to the concerns expressed by law firms. These included making the right to seek a stay order available only after determination of the company as a sick company.
Revival and Rehabilitation of Sick Companies Clause 229 – Determination of sickness Clause 257: Two concerns have been addressed - (1) References by the government and public financial institutions to the Tribunal have been allowed. (2) The tribunal has been empowered to permit a company to function without interference if it believes that the company can recover by itself and repay its debts. Clause 263 Clause 265
Clause 238 – scheme to be binding Clause 240 – Winding up of company on report of company administrator Clause 247 – Petition for winding up
Proposed inclusion of binding effect of scheme on employees of the company. Proposed inclusion of the words “within 15 days” in order to stipulate the time frame. Winding Up Substitute incorrectly drawn reference to 246(1)(d) in Clause 247(1)(g) with 246(1)(c). Restrict the power of the Registrar to file winding up petition to circumstances enumerated under Clause 246(1) (a), (c) and (f) only.
Clause 247 (1)(c)- Incorrect reference has been substituted. Power of registrar has been restricted to circumstances under Clause 271(1) (a) (c), (e) and (f)
Key Issues and Clause No. in the Companies Bill, 2009 Clause 249 – Directions for filing statement of affairs
Standing Committee Recommendations The Tribunal should be allowed to grant additional 30 days to a company to file its objections on cases of winding up in situations of contingency or special circumstances. A time frame of 15 days should be prescribed for the company liquidator to file a declaration relating to independence. Proposed that the “Committee of Inspection” be renamed as “Advisory Committee”. Committee recommended drafting changes in sub-clause (1)(a), (e), (g), (j), (l), (m) and sub-clause 3. Suggested consideration of drafting changes to 274(2) and 274(5)(b). Suggested drafting changes to 275(1) and 275(7). Proviso should be added for continued corporate state and corporate powers of the company till its dissolution. The declaration should be filed within a week. The words “whether movable or immovable” should be added. The 30-day time period for the official liquidator to call upon the creditors should commence from the date of his appointment.
Clause No. in the Companies Bill 2011 Proviso Clause 274(1)
Clause 250 – Company liquidators and their appointments
Clause 275(6)- A time frame of seven days has been prescribed Clause 287
Clause 262 – Committee of inspection
Clause 265 – Power and duties of Company Liquidator
Clause 290: All drafting changes except those to subclause (1)(a) have been Implemented Clause 299
Clause 274 – Power to summon persons suspected of having property of company etc. Clause 275 – Power to order examination of promoters, directors etc. Clause 284 – Effect of voluntary winding up Clause 285 – Appointment of company liquidator Clause 337(1) – Sale of assets and recovery of debts due to company Clause 338 – Settlement of claims of creditors by official liquidator
Clause 310 Clause 362 Clause 363
Companies Incorporated Outside India Clause 347 – Fee for registration of documents Clause 349 – Dating of prospectus and particulars to be contained therein “and with additional fee” should be deleted. “can be inspected” should be added. Clause 385 Clause 387
Key Issues and Clause No. in the Companies Bill, 2009 Clause 367 – Power to modify act in its application to nidhis
Standing Committee Recommendations Nidhis The Committee expressed its desire that clause 367 be reviewed to clearly lay out the role of the central government in regulating Nidhis. It also emphasized that the regulatory mechanism applicable to Nidhis in terms of notifications issued by the Ministry should be firmed up on the basis of RBI’s advice. Committee expressed the need for changes to these provisions as indicated by the Ministry in order to constitute and operationalize the NCLT and its appellate tribunal. Miscellaneous Committee recommended the redrafting of the clause keeping in mind the suggestion of the ICSI. The ICSI suggested that punishment for repeated default (twice the fine for such default and imprisonment if any) should be imposed if the offence is repeated within a period of three years. After three years, another default should be treated as a first time offence. Committee recommended empowering a Member of a company to complain against wrongful possession of property and/or cash. It also recommended that the refund of property or cash should not be restricted only to the property or cash amount but should also include the benefits derived from such property or cash. The Committee recommended that exemptions available to different forms of companies specified in the bill should be provided for and clearly stated in the respective provisions and not to be notified later. The Committee recommended the retention of Clause 422 with some clarification regarding the formation of LLPs.
Clause No. in the Companies Bill 2011 Clause 406 stipulates that Nidhis have to comply with rules as prescribed by the central government for their regulation.
National Company Law Tribunal and Appellate Tribunal Clause 370, 373, 374 & 378 Clause 407-434
Clause 410 – Punishment in case of repeated default
Clause 451- Repeating an offence within a period of three years is punishable with twice the fine for such an offence and imprisonment if any.
Clause 411 – Punishment for wrongful withholding of property
Clause 421 – Power to modify certain provisions of act in their application to private company, one person company and small company
Clause 422 – Prohibition of association or partnership of persons exceeding certain number
Clause 464, but there is no clarification regarding formation of LLPs.
Countdown to Companies Act, 2013
Impact on Transactions and Corporate restructuring
The wait is finally over – The Companies Bill, 2012 is just a step away from becoming an Act. The Bill which was approved by Lok Sabha on 18th December 2012 is approved by Rajya Sabha on 08th August 2013 and will become an Act post President’s assent and notification in the Gazette of India. The new legislation promises to bring easy and efficient way of doing business in India, better governance, improves levels of transparency, enhance accountability, inculcating self compliance and making Corporates socially responsible. The Companies Bill, 2012 (‘the Bill’) will replace more than half a centuary old Companies Act, 1956 with some sweeping changes including those in relation to corporate restructurings, mergers and acquisitions. Some of the key changes to look for are in merger/demerger processes, cross border mergers, fast track mergers between small companies and holding – subsidiaries, and provisions relating to minority shareholders’ protection and exit. We believe that the new Act will help in reducing shareholders’ litigation and making corporate restructuring process smooth and efficient.
Sneak preview of key provisions relating to Transactions and Corporate restructurings
• National Company Law Tribunal: A dedicated forum to deal with company law matters including mergers, demergers, capital reduction, etc. It will facilitate speedy disposal of cases. One person company: A private company with only one member or director, enjoying exemption from various filings, meetings, compliances etc. This is a welcome move in line with the concept followed globally. It is beneficial for sole proprietors. Restriction on number of investment companies: Investment through more than two layers of investment companies is not permitted. Fast track merger: A provision proposing speedy mergers between certain companies, viz., small private companies and holding and wholly-owned subsidiaries. Cross-border mergers: Merger between Indian companies and foreign companies with prior approval of the RBI is permissible. Purchase of minority shareholding: Majority shareholders who have, inter-alia, acquired majority stake (at least 90%) through amalgamation, share exchange, conversion etc. to compulsorily notify their intention to buy-out minority shareholders. Shareholders’ democracy: Concept of class actions suits introduced. Threshold for raising objections to the scheme of arrangement by minority shareholders’/creditors’ has been prescribed.
Section I: Compromise, arrangement and amalgamation (including demerger) (Clause 230 to 240 of the Bill)
The clauses contain provisions for compromise or arrangement between company and its shareholders and/or creditors including merger or demerger of companies/undertakings. The Bill deals with the following types of merger (including demerger): • • Merger of companies Merger of small private companies and merger between holding and its wholly-owned subsidiary (Fast track merger) Merger of Indian company and Foreign company (Cross Border Merger) Merger in public interest
Note: Provisions discussed herein below in relation to merger equally applies to demerger unless otherwise specified.
Merger of companies
Amendments or new provisions Introduction of National Company Law Tribunal for approving mergers, demergers etc. Remarks • Single forum to decide on the matters relating to Compromise, arrangement and amalgamation (including demerger) No more approval of High Court required
Merger / demerger process - Robust and transparent Decision of merger or demerger to be considered in a board meeting only Dispensation of creditors’ meeting possible • Discretion available with National Company Law Tribunal to grant dispensation subject to receiving confirmation of at least 90% creditors in value • • • • Scheme cannot be approved by Board by passing a ‘resolution by circulation’ Brings uniformity in practice followed by different high courts while granting approval Consent required by way of affidavit from each creditors No explicit provision for dispensation from shareholders’ meeting Notice to accompany the following: • • • Copy of Valuation report Statement explaining details of compromise/arrangement Statement explaining impact of such compromise/arrangement on stakeholders
Filing of notice of shareholders’ or creditors’ meeting with various statutory authorities • Notice to be filed with the income tax department, RBI, ROC, OL, CG, SEBI, stock exchanges (wherever applicable), CCI or any other regulators likely to be affected Regulators to make representation within 30 days - else deemed ‘no objection’
Auditors’ certificate on accounting treatment
Ensures accounting treatment in the scheme is in compliance with Accounting Standards Provisions brought in line with those applicable to listed companies as per the listing agreement Gives equal opportunity of vote to all the stakeholders Practice followed by different courts codified into law
Shareholders or creditors can now vote through postal ballot for approval of the scheme of arrangement Set-off of fees paid on authorised capital by transferor company • Set-off of fees paid, if any, on authorised share capital by dissolving transferor against any fee payable by transferee company on its authorised share capital post amalgamation
Minimum threshold for raising objection to the scheme of arrangement
Limits frivolous litigations by few small shareholders or creditors
Amendments or new provisions • Persons holding at least 10% of shareholding or 5% of the total outstanding debt as per the latest audited financials eligible to raise objections
Remarks • Will result in efficiency in implementation of the scheme
Protection of shareholders’ interest National Company Law Tribunal empowered to provide for exit offer to dissenting shareholders Purchase from minority shareholders • Majority shareholders (holding at least 90% of equity share capital) who have acquired majority stake through amalgamation, share exchange, conversion of securities or for any other reason to compulsorily notify their intention of buying out minority shareholders Purchase price to be ascertained on the basis of the valuation done by a registered valuer • • National Company Law Tribunal to provide appropriate directions for exit mechanism for dissenting shareholders Provides an exit option to minority shareholders in unlisted companies as well SEBI delisting regulations1 provide that purchase price for minority shareholders should be determined as per reverse book building Instructions may be required to bring uniformity with SEBI delisting regulations Permits mergers subject to exit offer by unlisted transferee company to shareholders’ deciding to opt out Pricing to be in accordance with predetermined pricing formula or at a fair value (shall not be less than price arrived as per the relevant SEBI regulations) Applicability of the SEBI delisting regulations may need to be considered Creation of Treasury shares no longer permissible (i.e., holding shares in trust)
Merger/demerger of listed company with unlisted company
• Companies not to hold shares in their own name or in the name of any trust, whether on its behalf or on behalf of any of its subsidiary or associate companies (Treasury shares) Other relevant amendments Buy back in a scheme of compromise or arrangement • Any buy-back of shares in a scheme of arrangement need to be compliant with the buy-back conditions prescribed under clause 68 of the Bill • •
May not be possible to exceed limits specified for buyback through scheme of arrangement
SEBI (Delisting of Equity shares) Regulations, 2009
Fast track merger
Amendments or new provisions Remarks
The Bill provides an option of simplified and fast track process of merger /demerger in cases of specified small companies and between holding and its wholly-owned subsidiary. Under this process merger/demerger will be approved by Central Government and there will be no requirement to approach National Company Law Tribunal. Applicability Small private companies Small company is defined to mean a ‘private company’ meeting either of the following requirements: • Paid-up capital does not exceed INR 5 million (or higher amount as may be prescribed which shall not be more than INR 50 million or Turnover as per its last profit and loss account does not exceed INR 20 million (or higher amount as may be prescribed which shall not be more than INR 200 million) • All types of companies whether public or private eligible • Benefit of fast track merger or demerger not available to small public companies
Holding and its wholly-owned subsidiary Key conditions Notice to ROC and OL or persons affected by the scheme, inviting objections to scheme within 30 days Approval of scheme • • At a general meeting by members holding at least 90% of the total number of shares By majority representing 9/10th in value of creditors or class of creditors in meeting or approved in writing
Merging companies to file a declaration of solvency with ROC Registration of scheme by CG. On registration transferor company is deemed to be dissolved.
Amendments or new provisions Remarks
The Companies Act, 1956 permits merger of foreign companies with companies registered in India but not vice-versa. The Bill permits merger of Indian company with foreign companies as well. Applicability Between companies registered under this Act and companies incorporated in notified countries Approving authority • • • National Company Law Tribunal Prior approval of the Reserve Bank of India also required Other approvals or process same as merger or demerger discussed earlier • List of countries yet to be notified
Other amendment(s) • Merger scheme may also provide for consideration in form of cash or Indian depository receipts (IDR) or partly in cash or partly in IDR
Section II: Capital reduction, buy-back and redemption of shares
Key amendments Capital reduction (clause 66 of the Bill) As per the Companies Act, 1956 a company may reduce its share capital subject to confirmation of such reduction by the court. The Bill has made few amendments in relation to this provision as under: Approval of National Company Law Tribunal required Capital reduction not permitted in case of default in repayment of existing/fresh deposits or any interest thereon Requirement for auditor’s certificate that accounting treatment on capital reduction is compliant with relevant AS National Company Law Tribunal to send notice of application of capital reduction received from the company to CG, ROC and SEBI (whenever applicable) and creditors of the company and consider their representation, if any No objection presumed where none of the above persons make any representation within three months of receipt of notice from National Company Law Tribunal Penalties imposable for certain noncompliance Buy-back (clause 68 of the Bill) As per the Companies Act, 1956, companies desiring to buy-back shares from its shareholders may do so up to 25% of its total paid-up equity capital and free reserves in a financial year post obtaining shareholders’ approval through a special resolution. However, buy-back of up to 10% of equity shares can be done with the board’s approval (in which case next buy-back can be affected after a period of 365 days). The key amendments introduced by the Bill are as follows: Decision of buy-back to be considered only in board meeting Minimum gap in two buy-back offers • No offer for buy-back shall be made within a period of one year from the date of preceding • Decision cannot be considered by passing a resolution by circulation Approval of High Court not required Remarks
Key amendments buy-back Buyback not permitted in case of default in repayment of deposits / redemption of debentures, preference shares/repayment of term loans, any interest thereon, etc.
Buyback not permitted till expiry of 3 years after such default is remedied
Redemption of preference shares (clause 55 of the Bill) Period of redemption • Preference shares may be issued by companies for more than 20 years for funding infrastructure projects subject to annual redemption of prescribed percentage of shares, at the shareholders’ option Inability to redeem preference shares (or payment of dividend on such shares) • Companies which are not able to redeem any preference shares (in accordance with terms of issue) or pay dividend due on such shares may redeem the same with further issue of equivalent amount of preference shares (including the dividend due thereon) with the consent of: • 3/4th in value of such preference shares Approval of National Company Law Tribunal
Some of Infrastructure projects prescribed are Power generation, trading & distribution of power, Transportation (roads, national highways and other road related services, rails, ports etc.), telecommunications services etc. Redemption of preference shares by companies with inadequate profits may be possible
Persons who do not consent to redemption as above needs to be discharged
Section III: Sale or lease of undertaking by a company (clause 180 of the Bill)
Amendment or new provision Remarks
As per the Companies Act, 1956 a public company proposing to dispose of its business undertaking or (substantially the whole of such undertaking) is required to seek prior approval of its shareholders by passing an ordinary resolution. The Bill in this respect has brought the following key changes: Applicability All types of companies Definitions/clarifications Specific definition of ‘undertaking’ and ‘substantially the whole of the undertaking’ provided in the bill’ • Undertaking defined to mean such undertaking in which the company has investment exceeding 20% of its net worth as per audited balance sheet of the preceding financial year or an undertaking which generates 20% of the total income of the company during the previous financial year ‘Substantially the whole of the undertaking’ in any financial year means 20% or more of the value of the undertaking as per the audited balance sheet of the preceding financial year Approving authority • Approval of members by way of a special resolution • Approval through special resolution instead of ordinary resolution provided under the Companies Act, 1956 • Transfer of undertakings not meeting the threshold criteria may not require shareholders’ approval • No more exemption to private companies
Section IV: Shareholders’ rights
This section has been divided under the following heads: • • Preferential issue of shares or convertible securities (clause 62 of the Bill) Bonus shares and dividend (clauses 63 and 123 of the Bill) Amendment or new provision Preferential issue (clause 62 of the Bill) As per the Companies Act, 1956 preferential allotment requires shareholders’ approval by way of a special resolution. However, these provisions are presently not applicable to private companies. Remarks
The Bill has brought the following key changes : Applicable to all companies • No more exemption to private companies
Pricing of shares • In case of preferential allotment pricing needs to be in accordance with valuation report obtained from a registered valuer subject to such conditions as may be prescribed
Issue of shares at a price different than that determined by the registered valuer may not be questionable
Bonus shares and dividend (clause 63 and clause 123 of the Bill) Specific provision inserted under the Bill on bonus shares • Bonus shares cannot be issued out of revaluation reserves • • Provision in line with the SEBI (Issue of Capital and Disclosure requirements) Regulations
No mandatory transfer of profits to reserves prior to declaration of dividend
No locking of funds in general reserves
Section V: Loans and investment by companies (clause 186 of the Bill)
Key amendments/new provisions Remarks
As per the Companies Act, 1956, public companies intending to make investments by way of subscription or acquisition of shares or extend loan or guarantee, etc. to other persons may do so with requisite shareholders’ approval where the prescribed threshold of higher of either (a) 60% of paid up share capital and free reserves or (b) 100% of free reserves is exceeded. The Bill proposes to bring significant changes under the provision as follows: Applicability All companies • All private companies enjoying exemption under the Companies Act, 1956 from such provisions will now need t0 comply with it
Restriction on making investment Restriction on making investment through more than two layers of investment companies • Investment through more than two layers of ‘investment companies’ not permitted (‘investment company’ means a company whose principal business is acquisition of shares, debentures or other securities) Exemptions • Acquisition of a company incorporated outside India if such overseas company already has investment subsidiaries beyond 2 layers Subsidiary company from having any investment subsidiary for the purpose of meeting the requirement under the law, rules or regulations
Impact on multi-layered holding structures?
Loans and guarantees by companies No more exemptions for transactions (loans) between holding and wholly-owned subsidiaries • Interest free loans between holding wholly owned subsidiary not possible irrespective of it being public or private company (Rate of interest on loans cannot be lower than the prevailing yield of one, three, five or ten year Government Security closest to the tenor of the loan)
Section VI: SICK companies (clause 253269 of the Bill)
Amendment or new provision Remarks
As per the existing applicable provisions, a company can be declared sick if its net worth is eroded completely/ potentially as prescribed under the Sick Industrial Companies Act, 1985 (SICA). The Bill seeks to amend the existing provisions applicable to sick companies and amongst other, has changed the applicability as well as the exiting criteria for determining sickness from ‘net worth erosion’ to ‘inability to pay debt’. Some of the key amendments are: Applicable to all companies • • Criteria to determine sickness • A company may be declared sick if it fails to pay the amount of debt on demand by the secured creditors representing 50% or more of the outstanding debt Applicable to all companies and not only to industrial undertakings The power of BIFR will now vest with the NCLT
Application for intimating sickness and revival measures - process • Sickness application Secured creditor can file an application to NCLT on default (of payment of debt etc.) for determination that the company be declared sick NCLT to pass order within 60 days from receipt of application - declaring whether the company is a sick company or not. Revival measures Company or any of its secured creditors can make application to the NCLT for determination of revival measures ( if the company is declared as sick) Application to be made within 60 days of sickness order received from NCLT
NCLT RBI ROC OL CG SEBI CCI BIFR
National Company Law Tribunal Reserve Bank of India Registrar of Companies Official liquidator Central government Securities Exchange Board of India Competition Commission of India Board for Industrial & Financial Reconstruction
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The Companies Bill, 2009
Highlights of the Bill
The Bill was introduced in the Lok Sabha on 3rd August, 2009.
The Bill shifts the onus of regulation and oversight over management away from the government and towards shareholders. It provides for stricter standards of approval by shareholders over some types of management decisions. The Bill allows for certain types of companies to be subject to a less stringent regulatory framework. It seeks to strengthen corporate governance by including new provisions related to independent directors and auditors. It gives greater powers to creditors to supervise a rescue plan and restrict the powers of management in the rehabilitation of a sick company. The Bill establishes a National Company Law Tribunal to administer provisions with respect to company law. It increases penalties and provides for special courts to try offences under the Act. Shareholders and creditors can file class action suits against the company for breaching provisions of any Act. The composition and powers of the National Company Law Tribunal are similar to those introduced by a 2002 amendment to the Companies Act. The constitutional validity of that amendment is being examined by the Supreme Court. The Bill permits certain financial relationships between independent directors and the company, which can lead to conflicts of interest. Some provisions in the Bill, such as those covering independent directors and the delisting of companies, conflict with provisions under the SEBI Act and its regulations. The Bill provides for a number of issues currently specified in the Act, to be specified by the government in the rules. The government has not issued draft rules to the Bill so the impact of any possible change cannot be estimated. Fines have been increased and the range of offences which are punishable by imprisonment has been widened. The Bill does not require proof of intent to commit an offence as a condition for criminal prosecution. This differs from the recommendation of the Irani Committee.
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Recent Briefs: The Motor Vehicles (Amendment) Bill, 2007 June 25, 2009 The Protection and Utilisation of Public Funded Intellectual Property Bill, 2009 May 13, 2009
Key Issues and Analysis
Chakshu Roy [email protected]
Avinash Celestine [email protected]
August 18, 2009
PRS Legislative Research
Centre for Policy Research Dharma Marg Chanakyapuri Tel: (011) 2611 5273-76, Fax: 2687 2746 www.prsindia.org
New Delhi – 110021
The Companies Bill, 2009
PRS Legislative Research
PART A: HIGHLIGHTS OF THE BILL 1
The Companies Act, 1956 provides the legal framework within which companies function. It defines the relationship between the management of a company, the shareholders who own the company, other stakeholders, and the government. The Act has been amended 24 times since 1956. Bills which attempted a comprehensive revision of company law were introduced in 1993 and 1997 but these lapsed. Some sections of the Companies (Second Amendment) Act, 2002 are yet to be notified. Another amendment Bill, proposing significant changes to the law, was introduced in the Rajya Sabha in 2003. In 2004, the Ministry of Corporate Affairs issued a concept paper on a new company law and constituted an Expert Committee under the Chairmanship of Dr. J.J. Irani to suggest a framework for such a law to replace the existing Act. 2 The Committee submitted its report in May, 2005. The 2003 amendment Bill was withdrawn in October, 2008 and a new Bill was introduced. However that Bill lapsed with the dissolution of the 14th Lok Sabha. It was reintroduced without significant changes in the August, 2009. This brief is based on the 2008 Bill. Three committees chaired by Justice V.B. Eradi (2001), Shri Naresh Chandra (2002) and Dr. J.J. Irani (2005) have recommended changes to different aspects of company law and corporate governance. 3 The proposed Bill incorporates some of these recommendations.
The Bill replaces the 1956 Act and consolidates a number of its provisions. It allows for a number of issues, currently specified in the Act, or its schedules, to be specified in the rules. On a range of issues, it shifts the onus of regulation and oversight over management away from the government and towards shareholders. On some issues, the Bill provides for tighter control by shareholders over management decisions by requiring 75% majority of shareholder approval rather than a simple majority. In cases where companies in financial distress have to be rehabilitated, the Bill gives much greater powers to creditors to supervise a rescue plan and restrict the powers of company management. It seeks to strengthen corporate governance by introducing new provisions related to independent directors and auditors. The Bill increases penalties and establishes special courts to try offences.
Types of Companies
• • • The Bill specifies the minimum criteria for the formation of different types of companies (see Table 1). The Bill does not specify a minimum limit for paid-up capital. The Bill defines an ‘associate’ company as one in which another company controls between 26% and 50% of voting power, and does not control its board of directors. One person companies, dormant companies and small companies are subject to a less stringent regulatory framework. Table 1: Types of Companies
Company Public Company Private Company One Person Company Small Companies Charitable Company Dormant Companies At least seven shareholders. Between two and fifty shareholders. One shareholder. Non-public companies with a paid up capital of less than Rs 5 crore or turnover less than Rs 20 crore. Cannot be a holding or subsidiary company, charitable company, or that registered under any special Act. At least one person; only for specified objectives. Dividends cannot be paid. Those formed for future projects/ to hold assets or intellectual property, and which have no significant accounting transactions; or Companies which do not carry on any business or operation for 2 years or have not filed financial statements in that time. Sources: The Companies Bill, 2009, PRS Criteria for formation
• The Bill establishes the National Company Law Tribunal (NCLT) to administer various provisions of company law and adjudicate disputes between companies and their stakeholders. It also establishes an Appellate Tribunal to hear appeals against orders made by the NCLT. The Bill provides for special courts to try offences. The NCLT may ask the government to investigate a company on an application made by 100 or more shareholders of the company, or those who hold 10% or more of voting power. The Bill introduces the concept of class action lawsuits by shareholders or creditors.
August 16, 2009
The Companies Bill, 2009
PRS Legislative Research
Incorporation of Companies
• • The Bill introduces a new concept – entrenchment. This provision allows for articles of association of the company to include highly restrictive conditions for some amendments to some specified articles. At the time of incorporation of the company, the Bill requires that the directors disclose their interest in other companies. Persons convicted of any offence in connection with the incorporation or management of a company may not be able to incorporate a company.
Raising of Funds by a Company
• • • • • • False statements made in a prospectus issued for raising capital are punishable. The Bill extends this liability to experts (such as merchant bankers or lawyers) who make misleading statements in the prospectus. The Bill prohibits the issue of irredeemable preference shares. All preference shares, except those used to finance specified infrastructure projects, must mature within 20 years. The Bill allows only management or employees to be offered shares at a discount. Such sweat equity shareholders enjoy the same rights as other equity shareholders. A company may issue debentures (bonds) which can be converted to equity. Only specified types of companies will be allowed to issue secured debentures, which are backed by the assets of the company. Companies are barred from taking public deposits, except from shareholders.
Administration of the Company
The Bill provides that at least one of the directors of a company should be resident in India for at least 182 days in a calendar year. Independent directors shall comprise at least one third of the boards of listed companies with a paid up capital above a prescribed limit. The Bill defines the duties of directors. The Bill introduces the concept of key managerial personnel (CEO, CFO, MD and Company Secretary). Companies with share capital above prescribed limits should have whole time key managerial personnel. The Bill prohibits directors and key managerial personnel from insider trading.
Accounting and Audit
• The Bill establishes the National Advisory Committee on Accounting and Auditing Standards. The committee will submit recommendations to the government on the formulation of accounting standards, after consulting the Institute of Chartered Accountants of India. Creditors, debtors, shareholders, guarantors, or those in other business relationships with the company, or their relatives or partners, cannot be appointed as auditors. The approval of 75% of shareholders of the company is needed to remove an auditor before the completion of his term. Auditors cannot provide certain services to companies they audit. These include accounting and book keeping services, internal audit, and management services.
Mergers, Compromises and Arrangements
• A company, its shareholders, or its creditors can propose a compromise or arrangement by applying to the NCLT, which shall order a meeting of the company. Such compromises or arrangements may include a share-split, debt restructuring, mergers or takeovers, or a reduction in share capital, but cannot include a buyback of securities. For issues directly related to shareholders, objections can only be made by those who together hold 10% or more of shares. In the case of creditors, only those who hold 5% or more of debt can object. The arrangement must be approved by a 75% vote of shareholders, or creditors, as the case may be. All arrangements must be sanctioned by the NCLT. Where assets and liabilities of a listed company are being acquired by an unlisted company, the latter shall continue to remain unlisted. A merger between two small companies or between a holding company and its subsidiary must be approved by a special resolution at a general meeting and by 75% of creditors by value of both companies.
August 16, 2009
The Companies Bill, 2009
PRS Legislative Research
PART B: KEY ISSUES AND ANALYSIS
We analyze the main features of this Bill under five broad themes: Constitutional Validity: The Bill provides for adjudication of company matters by the National Company Law Tribunal set up by the Act. However, a similar body set up under a under a 2002 amendment to the Companies Act currently faces a legal challenge in the Supreme Court. Corporate Governance: The Bill requires companies above a certain size to appoint independent directors to their boards. While such directors are not supposed to have significant financial relationships with the company, the criteria proposed in the Bill for the appointment of directors are such that conflicts of interest are possible. Conflict with other laws: Some provisions in the Bill conflict with provisions in the SEBI Act and its rules. Implementation: The Bill provides for a number of issues, such as the format of financial statements, which are currently specified in the Act itself, to be specified by the government in the rules. The government has not issued draft rules to the Bill, so it is not known whether there would be significant changes from the prevailing system. Corporate Restructuring: The Bill makes changes to the law on mergers and the rehabilitation of sick companies.
The Bill establishes a National Company Law Tribunal and an Appellate Tribunal. The composition and powers of the tribunal under the Bill are similar to those of the NCLT as established by the 2002 amendment to the Companies Act. Appeals from the Appellate Tribunal lie with the Supreme Court (and not High Courts). The constitutional validity of the relevant amendment faces a challenge on the issue of barring appeals to the High Court. A three-judge bench of the Supreme Court said in May 2007 that the question to be determined was “whether such 'wholesale transfer of powers' as contemplated by the Companies (Second Amendment) Act, 2002 would offend the constitutional scheme of separation of powers and independence of judiciary, so as to aggrandize one branch over the other.” 4 The matter is pending before a constitutional bench of the Supreme Court.
The Bill requires public listed companies above a prescribed size to reserve a third of all seats on the board for independent directors. It requires that independent directors (or their relatives) not do business with the company which amounts to more than 10% of the turnover of the company in the past two years. Permitting financial transactions with the company up to this point creates a potential conflict of interest. The listing agreement under the SEBI Act prohibits independent directors from a material financial relationship with company but does not define the term ‘material’. Unlike the 1956 Act, the Bill limits the number of directors on the board of a company to twelve, excluding the nominees of lending institutions. Specifying a cap goes against the stated objective to “provide a framework for responsible selfregulation” by allowing decisions to be left to shareholders.
Statement of Objects and Reasons
Related Party Transactions
The 1956 Act restricts transactions between a company and its directors, and certain other entities, on the grounds of possible conflict of interest. Government approval is required in most cases. The Bill restricts such transactions only for public companies but broadens the definition of a related party to include managers of the company. The approval of shareholders, rather than the government is now required (see Table 2). Table 2: Comparison between Companies Act, 1956 and the Bill with respect to Related Party Transactions
Subject Companies Act, 1956 All companies. Definition covers directors and their relatives and firms and private companies in which they are involved. Central government approval in most cases. Only public companies. Also includes (a) managers and relatives and those accustomed to Act according to the advice of the director or manager. (b) public companies in which the director/ manager, along with their relatives, hold more than 2% of capital. (c) subsidiary/associate/holding company or a company which shares a common holding company. Board approval; 75% shareholder approval for companies above a prescribed size. Companies Bill, 2008 Companies covered Definition of related parties
Clause 166 Clause 2 (1) (zzy)
Sources: Companies Act, 1956; Companies Bill, 2009; PRS
August 16, 2009
The Companies Bill, 2009
PRS Legislative Research
Audit and Inspection of Companies
The Bill prohibits auditors from providing certain services, such as accounting and financial services, to companies they audit in order to prevent conflict of interest. While prohibiting the same range of services as specified in the Bill, the 2003 Amendment Bill (now withdrawn) also allowed the government to add to the list of prohibited services. The 2008 Bill does not give the government the flexibility to notify other prohibited services. The Bill does not require that the partners of a firm which audit the company be rotated on a periodic basis. The Naresh Chandra Committee had recommended compulsory rotation of audit partners of a company every five years. 5 The Irani Committee, however, had suggested that such decisions be left to shareholders of the company. 6
Conflict with Existing Laws and Regulations
The SEBI Act, 1992 prohibits insider trading in the securities of a listed company. It does not define the term ‘insider’. It prescribes a penalty of Rs 25 crore or three times the profits made from such trading, whichever is higher, for those insiders found guilty of the offence. 7 The Bill bans only directors or key managerial personnel from insider trading. It prescribes a penalty of Rs 5 lakh to Rs 1 crore or imprisonment up to five years, or both, for those found guilty of the offence.
The Bill requires all listed companies above a prescribed size to reserve a third of all seats on the board for independent directors. Clause 49 of the listing agreement under the SEBI Act, which companies sign with stock exchanges, require those companies with a non-executive chairman to reserve one third of all seats on the board for independent directors. Those companies with an executive chairman must reserve half of all seats on the board for independent directors. 8
Delisting of Companies
Clauses 201 (3)(6) and 203(3)(h)
Companies whose shares trade on stock exchanges are subject to stricter standards of oversight and governance. Companies can move to ‘delist’ themselves from an exchange only if they meet certain criteria specified under the SEBI Act. 9 Only companies listed for three years can delist themselves. Existing shareholders must approve the delisting. The price to be paid to such shareholders for their shares must be determined through a process specified by SEBI. The Bill does not restrict the types of companies which can delist themselves. The approval mechanism, as well as the price to be paid to existing shareholders is also to be determined by a method different from that specified by SEBI.
The Bill provides for a number of issues to be specified in the rules. These include disclosures made in the prospectus, the form of financial statements, the matters to be included in an auditor’s report and the minimum size of those listed companies who are required to appoint independent directors. Any substantial changes made in the rules may require auditors, accountants, company secretaries and stakeholders to modify their systems. The government has not released draft rules so it is not possible to estimate financial implications.
Mergers and Amalgamations
Under the Companies Act, mergers between companies have to be approved by the relevant High Court. Amendments introduced in 2002 to the Act brought such mergers under the jurisdiction of the NCLT. However some of the relevant amendments have yet to be notified. The constitutional validity of the NCLT has also been challenged (see section on Constitutional Validity on page 4). The Bill maintains the changes introduced by the 2002 amendment. As compared to the 1956 Act, the Bill restricts the conditions under which shareholders or creditors can object to a merger. It allows for a faster merger process for certain types of companies. However, the Bill does not implement the recommendation of the Irani Committee that approval for a merger be given within a certain time frame.
Revival and Rehabilitation of Companies
The Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) defines a sick or insolvent company and attempts to put in place a process by which such companies can be revived. 10 The Eradi Committee pointed to endemic delays in the restructuring process, often caused by company promoters themselves, and called for the repeal of SICA. 11 An Act to repeal SICA was passed in 2003 but has not yet been notified. 12
August 16, 2009
The Companies Bill, 2009
PRS Legislative Research
The government also enacted the Companies (Second Amendment) Act, 2002, based on the recommendations of the Eradi committee report and which was intended to provide for the revival of industrial companies under the supervision of the NCLT. However the relevant amendments have not yet been notified. The Bill redefines a ‘sick’ company and also gives much greater control over the assets of a sick company to creditors, who have a greater say in approving a revival plan. The company is barred from selling its assets during the revival process. The NCLT has to approve a revival plan within a fixed period of time.
Penalties and Offences
The Bill widens the range of offences which are punishable by imprisonment. The Irani Committee had recommended that officers in default should be criminally liable only when they authorise, actively participate in, and knowingly permit or fail to take active steps to prevent the default. 13 The Bill does not require proof of intent to commit an offence as a condition for criminal prosecution. The Naresh Chandra Committee had recommended that penalties should be related to the sums involved in the offence. It proposed that fees (especially late fees) should be related to the size of the company in terms of its paid up capital and free reserves, or turnover. 14 The Bill increases the amount of the fine but does not link the amount of the fine with the size of the company.
Table 3: Further comparisons between the Companies Act, 1956, Irani Committee report and the Bill
Subject Clause 37 Clauses 175, 2(1)(zm) Shares with differential rights Remuneration to Management Companies Act, 1956 Allowed. Total remuneration paid to directors / managers of a public company cannot exceed 11% of net profits. Govt approval needed for remuneration if company not making profits. Employee stock options can be issued to directors/officers/employees of company. Recognise such agreements so as to avoid possible conflict between company law and contract law. Sources: The Companies Bill, 2009; Irani Committee Report; Companies Act, 1956; PRS Recognition of joint ventures No provision; such agreements are covered by contract law. Irani Committee No change. Provide clarity where needed in the rules. Amount of remuneration to be left to shareholders. Definition of what comprises remuneration to be prescribed in rules. Companies Bill, 2009 Shares with different rights as to dividend/voting not allowed. As recommended by Irani Committee. Employee stock options can also be issued to directors/officers/employees of holding company or subsidiary. Not implemented.
Notes 1. This Brief has been written on the basis of the Companies Bill, 2009, which was introduced in the Lok Sabha on August 3, 2009. 2. Concept Paper on Company Law, Ministry of Corporate Affairs, www.mca.gov.in/MinistryWebsite/dca/common/conceptpaper.pdf. 3. Committee on Law Relating to Insolvency of Companies (Chairman: Justice V. Balakrishna Eradi), 2001; High Level Committee. on Corporate Governance (Chairman: Naresh Chandra), 2002; Committee on Company Law (Chairman: J. J. Irani), 2005. 4. Union of India vs. R. Gandhi, Civil Appeal No. 3067 of 2004. Judgement delivered on 18th May, 2007. 5. See Naresh Chandra Committee Report, Recommendation 2.4. 6. See Irani Committee Report, Chapter IX, paragraph 25. 7. The Securities and Exchange Board of India Act, 1992, Section 15G. 8. Clause 49 of the Listing Agreement. See SEBI Circular No. SEBI/CFD/DIL/CG/1/2004/12/10 dated October 29, 2004. 9. Securities and Exchange Board of India (Delisting of Securities)Guidelines 2003, http://www.sebi.gov.in/guide/guide2003.pdf. 10. Sick Industrial Companies (Special Provisions) Act, 1985. 11. See Eradi Committee Report, Chapter 5, paragraph 9. 12. The Sick Industrial Companies (Special Provisions) Repeal Act, 2003. 13. See Irani Committee Report, Chapter XII, paragraph 12. 14. See Naresh Chandra Committee Report, Recommendation 5.4.
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August 16, 2009