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

[Mr. M. GOVINDARAJAN]

CHAPTER VII - MANAGEMENT AND ADMINISTRATION

1. Section 89 – Declaration in respect of beneficial interest in any share – The Committee recommended to amend the act to mandate the following:

• To provide a definition of beneficial interest in a share and beneficial ownership in a company.  The existing definition under SEBI Circular/Guidelines and the Prevention of Money Laundering Act may be used as a basis for the definition in the Act.   The Rules issued under the United States Security Exchange Act of 1934 define beneficial ownership in a security, which can be used a basis for the definition of beneficial interest in a share;
• Companies and individuals may be obligated to obtain information on beneficial ownership.   In this regard companies may be empowered to seek information from members and in case of failure to supply the required information, apply sanctions in the form of suspension of rights against the beneficial interests subject to adequate safeguards;
• Companies would also be mandated to maintain registered of beneficial owners and provide the information to the registry (MCA 21).   Periodic updating may also be mandated.  Data privacy concerns may be addressed by making only part of the field information available to be public;
• Companies not complying with the requirements may be liable to fine and criminal prosecution.

2. Section 92 – Annual Return – The Committee recommended that prescriptive powers for separate Annual Return format for small companies and one person companies, with lesser details may be included in the Section;
3. The  Committee recommended that the requirement of filing an extract of annual report as part of Board’s report may be omitted and instead the web address/link of the Annual Return filed by the company and hosted on its website, if any, should be provided in the Board’s Report and information with regard to shareholding pattern be provided as part of Section 134 requirements;
4. The Committee recommended to omit the requirements under Section 93 to file a return with the Registrar with respect to change in the number of shares held by promoters and top ten shareholders of such company within 15 days of such change;
5. Section 94 – Place of keeping and Inspection of registers, returns etc., - The Committee suggested that personal information of shareholders may not be made available publicly;
6. The Committee recommended the requirement of providing the Registrar with an advance copy of a proposed special resolution as under Section 94(1) be done away with, since it did not serve any purpose, particularly because the special resolution was in any case to be filed as per Section 117 (3)(a);
7. Section 96 – Annual General Meeting – The Committee did not agree to allow AGMs to be convened abroad if 75% or more of members of the company reside abroad on the ground the companies incorporated in India hold at least the AGM in India to establish territorial nexus;
8. The Committee recommended to allow private companies and wholly owned subsidiaries of unlisted companies to convene AGMs at any place in India provided approval of 100% shareholders is obtained in advance.  This requires amendment to Section 96(2) so that exemption can be provided to such class of companies;
9. Section 101 – Notice of Meeting – The Committee recommended that the requirement of 95% of votes exercisable for a general meeting at a short notice be applicable only to the EGM. 
10. Section 100 – Calling of extraordinary general meeting  - The Committee recommended that the explanation to Rule 18(3) be deleted and an explanation be incorporated at the end of Section 100 mandating that EGM shall be held only in India, as well as provide for exemptions to wholly owned subsidiaries of companies incorporated outside India;
11. The Committee did not agree to the suggestion to allow acceptance of proxy till the beginning of the general meeting referred to the Standing Committee’s recommendations on proxies because of apprehensions about their possible misuse;
12. Section 110 – Postal Ballot – The Committee decided to amend Section 110, such that Rule 22(16) of the Companies (Management and Administration) Rules, 2014 would provide that if a company is required to provide for electronic voting, then the same items could be covered  in its General Meeting too;
13. Section 117 – Resolutions and agreements to be filed – The Committee recommended that while the filing requirement ought to continue, MCA may address the concerns of companies by adequately publicizing the provisions in the MCA 21 system to ensure confidentiality of such filed information;
14. The Committee recommended for the deletion of Section 117 (3) (e);
15. The Committee recommended that the resolution altering the Articles need not be embodied in, or annexed to the Articles of Association in cases where the amendment in the form of a foot note to the resolutions made, is incorporated in the Articles of Association itself.  The Committee recommended that a clarification to this effect be issued;
16. The Committee considered the suggestion that providing information by banks may violate their confidentiality obligations towards their customers, and recommended that an exemption be considered for banks;
17. Section 118 (10) – Secretarial Standards – The Committee recommended that ICSI should re-examine and revise the Secretarial Standards in consultation with all the stakeholders.   The issues received from stakeholders should also be taken into account during re-examination.  As it is a new concept, this requirement may be reviewed after 1 – 2 years;

CHAPTER VIII – DECLARATION AND PAYMENT OF DIVIDEND

1. Section 123 – Declaration of dividend – The Committee recommended that the provisions of Section 123 (3) be amended in such a way as to allow declaration of interim dividend from out of the profits of the current financial year, generated till the date of declaration, including brought forward surplus in the P&L account and the same could be declared anytime up to convening of AGM for the said financial year;

CHAPTER IX – ACCOUNTS OF COMPANIES

1. Section 129 – Financial Statements – The Committee recommended that where a Consolidated Financial Statement was statutorily required to be prepared as per the law of the jurisdiction in which the overseas subsidiary is established and is placed on the website in the statutory format, there should be no requirement for standalone financial statements of the step down subsidiaries to be placed on the website as per the 4^th proviso to Section 136(1) and included in their salient features that are required to be attached.  There should be no exemption in other cases;
2. The Committee felt that to ensure the same treatment for the consolidation of accounts under the Accounting Standards and the Act, the reference to ‘associates’ and ‘joint ventures’ under this section ought to be amplified/clarified, to be in accordance with the applicable accounting standards;
3. The Committee felt that providing some clarity on the auditors’ reporting requirement (with respect to reporting on the Internal Financial Controls and CARO and for overseas subsidiaries), for the convenience of stakeholders, in the form of guidance from ICAI to its members should be helpful;’
4. Section 130 – Re-opening of accounts – The Committee felt that while a Court/Tribunal always had the inherent power to call/give notice to any concerned party in the process, it would be appropriate if a provision was specifically made in the Section enabling the Court/Tribunal to give notice to any other party/person concerned, in addition to those specifically referred to in the provision;’
5.  It was felt by the Committee that the applicability of provisions of Section 130 for the re-opening of accounts could be restricted to eight years, unless a longer period is required through a specific direction issued by the Central Government, under Section 128 (5);
6. Section 132 – National Financial Reporting Authority – The Committee recommended that NFRA should be established early;
7. Section 134 – Financial Statement, Board’s report etc., - The Committee noted that since the appointment of a managing Director was not mandatory for all companies, the words ‘if any’ may be inserted after the words ‘managing director’ in Section 134 (1);
8. The Committee felt that while some of the disclosures in the Board’s Report under the Companies Act, 1956 was insufficient and had become redundant, there was a need to fine-tune the current requirements, without reducing the information content of the Report. Form MGT-9 be omitted with details regarding shareholding, etc. to be specifically prescribed under section 134(3). Salient points of the CSR Policy, Remuneration Policy may be included in the Report and the detailed documents/policies provided on the website of the company, if any, and web address or link of these documents/policies provided. Changes in the policies should be specifically highlighted in the salient points. Disclosures with regard to loans or investments under section 186 and particulars of contracts with related parties under section 188, if provided in the financial statements, may be only referred, and salient points discussed, in the Board’s Report. Disclosure requirements under Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 may be pruned.  For small companies, separate format for the Board’s Report may be prescribed.;
9. The Committee recommended that it needs to be harmonized so that the Report is structured; repetition is avoided and made more readable;
10. Section 135 – Corporate Social Responsibility – The Committee recommended that the composition of CSR Committee is not required to appoint independent directors be prescribed as ‘having two or more directors’;
11. For determining the threshold of specified net worth or turn over or net profit to constitute CSR Committee, the Committee recommended that the words ‘any financial year’ in Section 135 (1) may be replaced by ‘preceding financial year’;
12. The Committee felt that the requirement with respect to CSR are new provisions, all companies should be given the required flexibility for a reasonable period, say five years, to experience the implementation of this provision;
13. The Committee decided not to recommend for exemption of Section 8 companies from the CSR provisions of the Act;
14. Section 136 – Right of member to copies of financial statement –  The Committee recommended that the requirement of Section 136 should be limited to listed companies.  It did not agree to the suggestion that for listed companies, item (a) of 4^th provisio to Section 136 would apply only in respect of Indian subsidiaries and item (b) ought to continue to be applicable to all companies including unlisted companies;

CHAPTER X – AUDIT AND AUDITORS

1. Section 139 – Appointment of auditors – The Committee felt that it would be advisable to omit the provisions with respect of ratification, as it defeats the objective of giving five year term to the auditors and further this would remove the inconsistency in the Act;
2. The Committee felt that if the auditor was unwilling to continue at any stage before completion of his five year term it should be treated as a case of resignation and the provisions of Section 139(8) for the filling up such casual vacancy arising due to resignation should apply.  This may be made explicit in the section itself;
3. Rotation of auditors – The Committee felt that Rule 6 ought to provide clarify that the three years’ transition period would be counted from AGM to AGM and not from the commencement of the Act;
4. The Committee is against increasing the  threshold to reduce the cover of private companies for rotation of auditors;
5. The Committee noted that any relaxation to Section 141 (3)(i) read with Section 144 would compromise independence of auditors.   However clarity needs to be provided by suitably amending this clause;
6. Section 143 – Powers and duties of auditors – The Committee recommended a change in the first proviso to Section 143 (1) to provide that the auditor of a holding company to have a right to access to the accounts and records of the associate company and joint venture company, whose accounts are required to be consolidated;
7. The Committee recommended that the reporting obligations of auditors should be with reference to the financial statements;
8. Reporting Fraud by auditor – The Committee noted that the form ADT – 4 which specified the manner of reporting fraud, should be modified to allow an auditor to explain his comments;
9. Section 147 – Punishment for contravention – The Committee recommended that Rule 9 of Companies (Audit and Auditors) Rules, 2014 should be introduced in the Act;

CHAPTER XI – APPOINTMENT AND QUALIFICATION OF DIRECTORS

1. Section 149 – Company to have Board of Directors – The Committee recommended that, in view of the difficulties being faced, the test of materiality for the purpose of determining whether pecuniary relationship could impact the independence of an individual to be an independent director may be introduced;
2. Section161 – The Committee felt that a definition of ‘nominee director’ should specifically be included as a definition clause;
3. The Committee recommended that in case of appointment of independent directors and directors recommended by the Nomination and Remuneration Committee, the requirements of Section 160 ought to be dispensed with;
4. The Committee recommended that there should be a prohibition in the Act for appointing a director of a company as an alternate director in the same company;
5. The Committee recommended for excluding the directorship in a dormant company for reckoning the limit;
6. Section 167 – Vacation of office of director – The Committee recommended that the vacancy of an office should be triggered only where a disqualification is incurred in a personal capacity and therefore, the scope of Section 167 (1)(a) should be limited to only disqualifications under Section 164 (1);
7. The Committee recommended that a disqualification under Section 164 (2) be only applicable to a person who was a director at the time of the non compliance, and in case of a continuing non compliance, there should be a period of six months’ time allowed for a new Director to make the company compliant;

CHAPTER XII – MEETINGS OF BOARD AND ITS DIRECTORS

1. Section 173 – Meeting of Board – The Committee recommended providing flexibility to allow participation of Director through video conferencing, subject to such participation is not being counted for the purpose of quorum.   However, such Directors, though not counted for the purposes of quorum may be entitled to sitting fees;
2. The Committee recommended that since Section 184 (2) and Section 174 (3) are related sections with respect to interested directors, related exemption to enable such participating interested directors for the purposes of quorum, should be given to private companies using power to exempt under Section 462 of the Act;
3. The Committee recommended that as provided in SEBI (Listing Obligation and Disclosure Requirements) Regulations, 2015 related party transactions between a holding company and its wholly owned subsidiary companies need not require the approval of the Audit Committee for the transactions not requiring Board approval under Section 188 and Section 177 be amended accordingly;
4. The Committee recommended review of the existing thresholds, and thereafter consider granting exemptions under Section 462, if required;
5. Section 180 – Restrictions on powers of Board – The Committee recommended that ‘securities premium’ be also included for the purpose of recognizing the borrowing limits, along with company’s paid up share capital and free reserves, since it was a part of the capital of a company;
6. The Committee recommended that ‘body corporates’ be included under the ambit of the provision of Section 184 (5) to align it to Section 184 (2), where the words ‘body corporate’ have been used to evaluate the interest of a Director;
7. Loan to Directors – The Committee recommended that it may be considered to allow companies to advance a loan to any other person in whom director is interested subject to prior approval of the company by a special resolution.   The loans extended to persons, including subsidiaries, falling within the restrictive purview of Section 185 should be used by the subsidiary for its principal business activity only, and not for further investment or grant of loan;
8. The Committee recommended that the restrictions on layering as contained in Section 186 (1) be omitted.  Further ‘principal business’ of an investment company may be clarified in the Explanation below sub section (13) of Section 186 on the lines of RBI’s stipulation;
9. The Committee recommended that the provisions of Rule 13 (1) of the Companies (Meetings of the Board and its Powers) Rules, 2014 relating to aggregation of loans and investments for the purpose of calculating the limits under Section 186 (2) might be provided in the  Act itself and consequential changes in the Rules may also be made;
10. The Committee recommended for the insertion of an ‘explanation’ to clarify the exclusion of employees from the requirement of Section 186 (2);
11. The Committee recommended that the Removal of Difficulty Order for Section 186 (11) with regard to Insurance and Housing finance companies, etc., issued in January 2015, subject to legal clarification, may be included in the sub section itself through an amendment.  The language of Section 372A (8) of the Companies Act, 1956 may be used;
12. Related party transactions – The Committee recommended that the Circular No. 30/2014 issued by MCA clarifying requirements of second proviso to Section 188 (1) had been misinterpreted and hence, should be withdrawn;

CHAPTER XIII – APPOINTMENT AND REMUNERATION OF MANAGERIAL PERSONNEL

1. The Committee recommended the following:

• The Schedule may be amended to substitute the requirement to pass special resolution by shareholders with an ordinary resolution, in cases where the managerial person was not a promoter and a professional with a domain knowledge /relevant experience and was not related to any director or promoter of the company and did not hold more than 2% of the paid up equity share capital of the company or its holding company;
• The limits of yearly remuneration prescribed in the schedule be enhanced;
• The requirement for government approval may be omitted together and necessary safeguards in the form of additional disclosures, audit, higher penalties etc., may be prescribed instead;

2. The Committee recommended the amendment of Section 198 (4)(1), to include brought forward losses of the years subsequent to the enactment of Companies (Amendment) act, 1960;
3. The Committee opined that flexibility would be desirable for the companies to designate other whole time officers of the company as ‘key managerial personnel’;
4. The Committee recommended that the Board can be empowered to designate other whole time officers of the company as managerial personnel and that the definition of ‘key managerial personnel’ in Section 2(51) may also be accordingly modified;
5. The Committee recommended enabling a whole time key managerial personnel, holding  necessary qualification, to hold more than one position in the same company at the same time;
6. The Committee recommended that a company should also file information on the resignation of the  KMP in the Registry;
7. The Committee recommended to done away with the requirement  in Schedule V that a Managing Director/Whole Time Director should have been resident in India for previous one year;