GLIMPSES OF REPORT OF ‘THE COMPANIES LAW COMMITTEE’ – PART I

[Mr. M. GOVINDARAJAN]

The Companies Law Committee was constituted in June 2015 for examining and making recommendations on the issues arising out of implementation of the Companies Act, 2013. The Committee submitted its report to the Government on 01.02.2016.  The Committee had extensive consultations with stakeholders before making its recommendations. More than 2000 suggestions were received during the consultation process. The Committee kept in mind the need to bring in greater clarity in the Act and Rules in harmonizing the various provisions thereof while making its recommendations.  The Committee has proposed changes in 78 sections of the Companies Act, 2013, which along with consequential changes, would result in about 100 amendments to the Act.   The recommendations cover significant areas of the Act, including definitions, rising of capital, accounts and audit, corporate governance, managerial remuneration, companies incorporated outside India and offences/ penalties.

CHAPTER I - PRELIMINARY

Definitions

The Committee proposes the following changes in the Definition part:

1. Section 2(6) – ‘Associate Company’ – The committee recommended that for the purposes of this section the term ‘significant influence’ means a control of at least 20% of the total power or control of or participation in taking business decision under an agreement;
2. The Committee recommended that the term ‘joint venture’ may be assigned the same meaning as under Indian Accounting Standard 28 as part of the explanation to Section 2(6);
3. Section 2(30) – Debenture – The Committee felt that an exception be made for instruments covered under Chapter III D of RBI Act, 1934 in the term ‘debenture’ as defined in Section 2(3) of the Companies Act, 2013;
4. Section 2 (31) – Deposit - The Committee suggested for making the definition of ‘deposit’ less restrictive but at the same it felt that adequate prescriptive powers for excluding the amounts received by a company from the term ‘deposit’ have been provided in the definition and therefore no change is required;
5. Section 2(41) – Financial year – The Committee recommended that the first proviso to Section 2(41) be expanded to allow associates and joint ventures of a company incorporated outside India to apply for a different financial year to the NCLT;
6. Section 2(46) – Holding  Company – The Committee recommended that an explanation on lines of Explanation (c) to Section 2(87) to be included in this section;
7. Section 2(49) – Interested Director – The Committee is of the view that the definition of ‘interested director’ may be omitted;
8. Section 2(57) – Net Worth -  The Committee recommended that the phrase ‘debit or credit balance  of the profit and loss account’ to be included in the definition;
9. Section 2(71) – Public Company – The Committee felt that a subsidiary of a public company need to be regulated in the same manner as a public company.;
10. Section 2(76) – Related party – The Committee recommended that Section 2(76)(viii) be amended to substitute ‘company’ with ‘body corporate’ and should also include investing company or the venture of a company in sub-clause (viii) (A) thereof.  It also felt that the fifth and sixth Removal of Difficulty Orders of 2014 issued to plug unintentional loophole be brought into the Act through an amendment;
11. Section 2(85) – Small Company – The Committee recommended the replacement of the words ‘last profit and loss account’ with the words ‘last audited profit and loss account’ to take care of what seemed to be an inadvertent drafting error.  It also recommended the Removal of Difficulty Order to be given effect to through an amendment to the Act itself.  The review of the thresholds for small companies should be done by MCA at an appropriate time;
12. Section 2(87) – Subsidiary company – The Committee recommended that the term ‘total share capital’ be replaced with the term ‘total voting power’ as equity share capital should be the basis for determining holding/subsidiary status.  The Committee also recommended to have changes in the Rules;
13. Section 2(91) – Turnover – The Committee recommended to revise the definition as the gross amount of revenue recognized in the profit and loss account from the sale, supply or distribution of goods or on account of services rendered, or both, by the company during a financial year;

CHAPTER II – INCORPORATION OF COMPANY

1. Section 3 – Formation of Company – The Committee felt that suitable provisions should be made in the Act/rules to provide for consequences of number of members falling below the prescribed minimum i.e., fastening the continuing members with the liability for all the debts incurred by the company, till the prescribed minimum is restored.  Further the provision may also be made for the maximum period of 6 months within which the default shall be made good failing which the violation of law is triggered;
2. Section 4 – Memorandum – The Committee recommended that Section 4(1)(c) should be amended appropriately to allow companies the additional option to have a generic object clause i.e., ‘to engage in any lawful ct or activity or business as per the law for the time being in force;
3. Section 4(5)(1) – The Committee recommended that the period of name reservation should be reduced from 60 days to 20 days from the date of approval and simultaneously the fees for such reservation be reduced to ₹ 500/-;
4. Section 7 – Incorporation of company – The Committee felt that the requirements of Section 7(1)(c) could be replaced with self-declarations, as a wrong declaration carries a stiff punishment under the Act.  A certificate by both the parties stated therein ought to be retained as an additional check at the stage of incorporation of the company;
5. Section 12– Registered Office of the Company – The Committee felt that Section 12(1) may be amended to provide for a company to have its registered office within 30 days of its incorporation;
6. Section 12 (4) – The Committee recommended that the time limit for registering change in registered office be increased to 30 days;
7. Section 21 – Authentication of documents, proceedings and contracts – The Committee recommended an amendment to this Section to allow authorization on the signature of ‘any employee of the company duly authorized by the Board’;

CHAPTER III – PROSPECTUS AND ALLOTMENT OF SECURITIES

1. Section 26 – Matters to be stated in prospectus – The Committee recommended modifying Section 26(1) to empower SEBI to prescribe the contents in consultation with MCA.  Further MCA and SEBI may work out the minimum disclosure to be included in the prospectus so that the regulatory objectives of both the regulators are achieved while achieving the end purpose of reduction in the size of the prospectus;
2. Section 35 – Civil liability for mis-statements in prospectus – The Committee felt that it would be appropriate to hold experts liable for statements prepared by them, and which the directors relied upon as long as such experts were identified in the prospectus.   An amendment in the proviso was recommended;
3. Section 42 – Private Placement –  The Committee felt that the requirement under Section 42 and Rule 14 with regard to preparation and filing of Private Placement Offer Letter should be done away with and Form PAS – 4 should be discontinued.   In order to ensure that investor gets adequate information about the company which is making private placement, the disclosures made under Explanatory Statement referred to in Rule 13(2)(d) of Companies (Share Capital and Debenture) Rules, 2014 should be embodied in the Private Placement Application Form.  The important information provided in Form PAS – 4 can be shifted as disclosure requirement under Rule 13(2)(d).  In case of private placement of non convertible debentures within the ceiling specified under Section 180(1)(c), the Board resolution under Section 179 (3)(c) should provide for reasonable details about the proposed offer which should be specified in the application form in such cases;
4. The Committee recommended that subject to the limit on the number of persons who could be made the offer of securities as prescribed under Section 42(2), a company could, at the same time keep open more than one issue of securities (that is, of equity share or preference share or debenture) in a year to such classes of investors as may be prescribed by Rules in order to provide greater flexibility in raising capital/loans while not compromising on regulatory concerns. Section 42(3) would also need to be made explicit about the simultaneous offering of securities of different kinds, as currently prescribed in the Rules;
5. The Committee felt that Section 42(7) could be modified to require that all offers covered under Section 42 shall be made only to such persons whose names, father’s names, addresses, phone numbers and email IDs, if any, or any other information as may be prescribed by rules are duly recorded by the company prior to the invitation to subscribe. These details need not, however, be filed with the Registry. The said information, however, could be asked by ROC/Inspector during any of the proceedings under Chapter XIV of the Act. However, in order to ensure that companies are accountable and transparent during private placement process, a new rule may be inserted in Chapter 3 Rules to the effect that companies would initiate circulation of application form and collect monies only after the relevant resolution (i.e. Special resolution or the Board resolution) is filed with the Registry. Consequential change in Rule 14(3) could also be made. Once the basic details like names, father’s names, addresses, phone numbers and email IDs, if any, are kept by the company, the requirement for PAS-5 can also be omitted;
6. The Committee recommended that since Non-Convertible Debentures are pure borrowings and do not form part of equity capital, the proviso to Rule 14(2)(a) may be amended to prescribe that the relevant board resolution under Section 179(3)(c) would be adequate in case the offer under Section 42 is for debentures up to the borrowing limits permissible for Board under section 180(1)(c) of the Act. This would also align the requirements with that of section 180(1)(c). It was, however, felt that the said Board resolution should clearly mention (in the body of the resolution) that offer of debentures being approved by Board is through private placement under Section 42 and certain other minimum details as may be prescribed in the rules be provided in the Board resolution. Private companies (who have been given exemption from Section 117(3)(g) through section 462 notification) should either be required to file board resolutions under Section 179(3)(c) or pass a special resolution;
7. The Committee felt that since the requirement for filing of PPOL and list/details of proposed offerees (i.e. PAS-5) with Registry within 30 days of circulation of PPOL is being dispensed with, companies should be required to file return of allotment (PAS-3) within the prescribed timeline, and should be liable for penalties under Section 42 in case of non-compliance. Further, it could be provided in the Act/Rules that companies would not be allowed to utilize the monies raised through private placement unless such return of allotment is filed. The underlying objective is to ensure that private placement process is completed within a finite period of 90 days;
8. The Committee recommended that Section 42(1) may clearly provide that provisions of Section 42 and rules made there under shall also apply to offer of convertible securities referred to in Section 62(1)(c) read with Rule 13 of the Companies (Share Capital and Debenture) Rules, 2014;
9. The Committee felt that while the company should be mandated to get valuation done (in respect of equity and convertible securities), the report of the valuer should be made available to investors, and may not be filed/circulated. The company should retain the report with itself for making it available for regulatory purposes, as and when required. Further, Section 62(1)(c) and Rule 13(3) requiring price of securities to be decided in advance should be modified and provisions allowing pricing as per a formula (on the lines of RBI Regulation/FDI Policy) may be considered;
10. The Committee felt that in case of equity or mandatorily convertible securities the minimum investment size can be twenty thousand rupees with no linkage to face value so that it can include premium amount as well. However, for private placement of non-convertible preference shares or non-convertible debentures the minimum investment size could be one lakh rupees with no linkage to face value;
11. The Committee recommended that an accountable way of use of renunciation rights by shareholders needs to be prescribed. Reference was made to the principles contained in sections 755-756 of the English Companies Act, 2006, which could be used for regulation of private placement and preferential allotment under Companies Act, 2013 while making changes in Section 42/62 and rules made there under.

CHAPTER IV – SHARE CAPITAL AND DEBENTURES

1. Section 53(1) – Prohibition on issue of shares at discount – The Committee recommended that the word ‘discount’ may replace the words ‘discounted price’;
2. The Committee felt that to enable restructuring of a distressed company, when the debt of such a company is converted into shares in accordance with any debt restructuring guidelines specified by Reserve Bank of India (Strategic Debt Restructuring Scheme issued by RBI vide Circular dated 8.06.2015), a company may issue shares at a discount to a creditor referred to in, and as per guidelines;
3. Section 62 – Further issue of share capital – The Committee recommended that any mode of delivery would provide irrefutable/certain proof of delivery, be allowed.

CHAPTER V – ACCEPTANCE OF DEPOSITS BY COMPANIES

1. Section 73 – Prohibition on acceptance of deposits from public – The Committee felt that though the provision was a safeguard for depositors, it would increase the cost of borrowing for the company as well as lock-up a high percentage of the borrowed sums. Accordingly, the requirement for the amount to be deposited and kept in a scheduled bank in a financial year should be changed to not less than twenty percent of the amount of deposits maturing during that financial year, which would mitigate the difficulties of companies, while continuing with reasonable safeguards for the depositors who have to receive money on maturity of their deposits;
2. The Committee felt that the provisions of Section 73 (2)(d) along with relevant rules may be omitted;
3. The Committee recommended that the prohibition on accepting further deposits should apply indefinitely only to a company that had not rectified/made good earlier defaults. However, in case a company had made good an earlier default in the repayment of deposits and the payment of interest due thereon, then it should be allowed to accept further deposits after a period of five years from the date it repaid the earlier defaulting amounts with full disclosures;
4. The Committee recommended for allowing exemptions to such private companies from the upper limit, as promoters or their relatives or ‘Qualified Institutional Buyers’ (QIB), who had invested in the risk capital would already be aware of the business prospects of the company;
5. With a view to ease raising of funds for start-ups without additional compliance costs, the Committee recommended that limits with regard to raising of deposits from members for ‘start-ups’ which are private companies may be removed for the first five years from their incorporation by using Section 462 of the Act;
6. The Committee recommended that the provisions of Rule 19 of the Companies (Acceptance of Deposit) Rules, 2014 be provided in the Act;
7. Punishment for contravention of Section 73 or Section 76 – The Committee recommended that the minimum fine be modified to ₹ 1 crore or twice the deposit accepted, whichever is lower and the maximum amount as already prescribed.

CHAPTER VI – REGISTRATION OF CHARGES

1. Section 77 -  Duty to register charges etc., - The Committee recommended that Section 77(3) may provide for prescriptive powers to allow certain liens or securities or pledges to be exempted from filing;
2. Section 82 – Company to report satisfaction of charge – The Committee felt that, as it would generally be in a company’s interest to report satisfaction of charges, there should not be any regulatory concern in allowing similar timelines as allowed for registering a charge and therefore recommended for the same.