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TMI BlogMEETINGS OF BOARD AND ITS POWERS - Proposed Amendments in the Companies Act, 2013X X X X Extracts X X X X X X X X Extracts X X X X ..... MEETINGS OF BOARD AND ITS POWERS - Proposed Amendments in the Companies Act, 2013 - News and Press Release Dated:- 2-2-2016 - News - Participation through video-conferencing 12.1 The participation of directors, through video-conferencing, is governed by Section 173(2). The proviso to the sub-section also delegates the authority to prescribe matters that may not be dealt with through video conferencing to the Central Government. Accordingly, Rule 4 of the Companies (Meetings of Board and its Powers) Rules, 2014 specifies matters which shall not be dealt with in any meeting held through video conferencing or other audio-visual means. The Committee was of the view that the requirement completely bars participation in these specified matters of the Board meetings through video conferencing, which unnecessarily restricts wider participation even if the necessary quorum as specified in Section 174 is physically present. The Committee, therefore, recommended that flexibility be provided to allow participation of Directors through video conferencing, subject to such participation not being counted for the purpose of quorum. However, such Directors, though not counted for the purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses of quorum, may be entitled to sitting fees. Interested directors: exemptions from section 174(3) to private companies 12.2 Private companies have been exempted from the prescription under Section 184(2) barring participation of interested directors in Board meetings. The Committee recommended that since Section 184(2) and Section 174(3) are related sections with respect to interested directors, related exemption under Section 174(3) to enable such participating interested Directors for the purposes of quorum, should be given to private companies using the power to exempt under Section 462 of the Act. Audit Committee 12.3 The audit committee under Section 177(4)(iv) is required to approve or modify transactions of the company with related parties. The suggestions received appear to imply a lack of clarity among stakeholders on the extent of responsibility entrusted to the Audit Committee including on whether it had independent approving powers or has to pre-approve and give its recommendations to the Board. The Committee observed that the Audit Committee has been specifically mandated to approve or modify all related party transactions. This has to be, how ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ever, read harmoniously with the provisions of Section 188, which entrust the Board and the shareholders with the responsibility of approving specified related party transactions. The Committee further observed that while some of these transactions, which are not related party transactions, they would be within the purview of the management/executive, and some would also fall within the responsibilities of Board. The Committee also referred to the recommendations of the J J Irani Committee that all matters relating to appointment of auditors, examination of the auditor s report along with financial statements prior to consideration and approval by the Board, related party transactions, valuations and other matters involving conflicts of interest should also be referred to the Board only through the audit committee , and the provisions specifically requiring the prior approval of the Audit Committee under SEBI Regulations. Internationally also, the trend is to assign approval of such transactions to Committees consisting of disinterested members of the Board, etc. The Committee recommended that the existing requirement for the Audit Committee to pre approve all related party tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsactions, subject to approval by Board or shareholders as required under Section 188 should continue. For transactions not covered under Section 188, the Audit Committee may give its recommendation to the Board in case it is not approving a particular transaction. 12.4 The Committee received a suggestion to allow ratification by the Audit Committee within three months from the date on which such transaction was entered into, without obtaining the prior approval of the Audit Committee, inadvertently. The Committee observed that subject to safeguards, it would be similar to the flexibility provided under Section 188 to the Board and the shareholders. However, concerns of possible misuse of this flexibility would need to be suitably addressed by prescribing an upper threshold of Rupees One Crore on such transactions . 12.5 In addition, the Committee recommended that, as provided in the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 related party transactions between a holding company and its wholly owned subsidiaries need not require the approval of the Audit Committee for transactions not requiring Board approval under section 188, and Section 177 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be amended accordingly. 12.6 The Committee also discussed the applicability of corporate governance requirements such as Section 177, 178, etc. to dormant companies having no business activities or employees. In this regard, the Committee observed that whilst it is unlikely that these provisions are applicable to dormant companies, a clarification be issued stating that dormant companies are exempt from the requirement to constitute Audit Committee. Nomination and Remuneration Committee 12.7 As per the current provisions of Section 178(2), the Nomination Remuneration Committee (NRC) is required to carry out evaluation of every director s performance. It is felt that, as Independent Directors are required to carry out review of performance of non-Independent Directors and the Board as a whole separately as per Schedule IV requirements, the Board is also required to carry out its evaluation (refer Section 134(3)(p)), carrying out another set of performance evaluations by the Nomination and Remuneration Committee is avoidable. The Committee recommends that the NRC should instead prescribe a methodology to carry out evaluation of performance of individual Director ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, Committee(s) of the Board and the Board as a whole , and the Board should carry out the performance evaluation as per the methodology either by itself, by the NRC or by an external party as laid down in the methodology. The performance review by the Independent Directors, as presently required in Schedule IV, may also form part of the methodology. Schedule IV may be amended accordingly. The provision may be reviewed after three years. 12.8 The proviso to Section 178(4) prescribes that the remuneration policy should be disclosed in the report of the Board. In this regard, the Committee felt that it would be sufficient for the company to place the remuneration policy on the website of the company, if any, and to disclose only the salient features of the policy in the Board s report along with the web link/address. 12.9 The Committee also considered the suggestion to modify Section 177 and 178 to provide exemptions to private companies, which have listed their debt instruments as per SEBI Debt Listing Regulations. The Committee recommended review of the existing thresholds, and thereafter consider granting exemptions under Section 462, if required. Filing of board ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resolutions 12.10 Section 179(3) read with Section 117 prescribe filing of board resolutions with the ROC in the prescribed form MGT 14. Section 117(3)(g) has already been amended to restrict availability of such documents for public inspection and provides that private companies are exempted from this filing requirement. The comments received in the public consultation process suggest that the requirements of filing MGT-14 need to be relaxed on account of confidential Board resolutions becoming public which has already been addressed by the Amendment. The Committee felt that adequate publicity of the steps taken within MCA21 to ensure that these documents are not freely accessible would allay the concerns of stakeholders. Restrictions on powers of Board 12.11 The Committee while dealing with the powers of the Board to borrow money under Section 180(1)(c) also referred to Section 293(1)(d) of the Companies Act, 1956. After due deliberation, it recommended that securities premium be also included for the purpose of recognising the borrowing limits, along with the company s paid-up share capital and free reserves, since it was a part of the capital of a company. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Prohibitions and restrictions regarding political contributions 12.12 The Committee deliberated on the recommendations made by Law Commission of India in its 255th Report for amending section 182 of the Act (Prohibitions and restrictions regarding political Contributions) to empower a larger group of people, such as the company s shareholders, in deciding how to use the funds of a company for political purposes. The Committee felt that a wider consultation with industry chambers, political parties and other stakeholders should be taken up by the Ministry before taking a final decision on changes recommended in the 255th Report. Disclosure of Interest by Director 12.13 The Committee while deliberating on the suggestions to prescribe a limit of thirty days under Section 184(1) for a Director to disclose any change in his interest, instead of at the first Board meeting after such change, did not agree to the suggestion, as in its opinion it could lead to gaps and hence, might not be desirable. It also observed that the requirement for disclosure in body corporates under Section 184(2) of holdings by one or more Directors, was the same as in the Companies Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1956; and that the suggestion to change this provision due to difficulties in implementation was not acceptable. The Committee further recommended that body corporates be included under the ambit of the provision of 184(5), to align it to Section 184(2), where the words body corporate have been used to evaluate the interest of a Director. Loans to Directors, etc. 12.14 The Committee acknowledged that there are difficulties being faced in genuine transactions due to the complete embargo on providing loans to subsidiaries with common directors, but at the same time there is no doubt that the route has been misused in the past for siphoning of funds by controlling shareholders. The Committee noted that limited relaxation has already been provided to private companies not having other body corporates invested in them and therefore any further relaxation should be subject to greater safeguards. The Committee, therefore, 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. Further, loans extended to persons, including subsidiaries, f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alling 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. 12.15 The Committee also felt that there was no rationale as to why the interest rate prescribed in the proviso (b) to Section 185(1) should not be aligned with the rate prescribed under Section 186(7). Thus, it recommended that this be aligned, keeping in mind further changes suggested to the provision, in the succeeding paragraphs dealing with other issues in Section 186. Loan and Investment by Company 12.16 The Committee felt that the layering restrictions on investment companies under Section 186(1) may become too obtrusive and impractical in the modern business world. Regulatory concerns arising out of earlier scams were also noted. The Committee noted that while companies that became a subsidiary of another investment company due to any corporate action such as the non-subscription of a rights issue from the layering requirements, etc. could be exempted, it would not address the core issue that there may be several legitimate business justifications for use of a multi layered structure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , and such restriction hampers the ability of a company to structure its business. The Committee felt that sufficient safeguards have been built into the oversight mechanism of SEBI and Stock Exchanges, and the recommendations on Beneficial Ownership register requirements should dispel the regulatory concerns. Keeping this in mind, the Committee recommended that the restrictions on layering as contained in the section 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 stipulations. 12.17 The Committee further recommended that the provisions of Rule 13(1) of the Companies (Meetings of Board and its Powers) Rules, 2013 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. 12.18 The Committee felt that the occurrence of the word person in sub-section (2) of Section 186 unwittingly seems to cover employees, and suggests that it would be appropriate to clarify the usage of the word person in that sub-section, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the employees given loans as a part of conditions of service or pursuant to any approved scheme for all employees by the company, should not, unwittingly, be covered under this Section, as this Section was meant to cover inter-corporate loans. The Committee, therefore, recommended for the insertion of an explanation to clarify the exclusion of employees from the requirement of the sub-section/clause. 12.19 The Committee also deliberated on the suggestion to exempt the application of Section 186, except sub-Section (1), to wholly owned subsidiaries and suggests that the provisions of Rule 11 with regard to wholly owned subsidiaries may be brought into the Act . Further, consequential changes in the Rules may also be made in this regard. However, the Committee did not agree to the suggestions that interest free loans may be specifically allowed to wholly owned subsidiaries. 12.20 The Committee considered the suggestion that it may not be appropriate to apply Indian interest rates bench marks prescribed under Section 186(7) to loans given by companies to foreign entities. It felt that the company should be looking at the effective yield against the loan given by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it and such yield, irrespective of whether a loan is given to a company incorporated outside India, should not be less than the prescribed rate under Section 186(7). 12.21 The Committee noted that while Section 186(11)(b)(iii) provides exemption to investment in shares allotted in pursuance to rights issues by Indian companies under Section 62(1)(a) of the Act, similar exemption be also extended to investments in rights issues made by body corporates (companies incorporated outside India). The exemption provision may be aligned with Section 372A(8) of the Companies Act, 1956 in this regard. Further, 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. Language of Section 372A(8) of the Companies Act, 1956 may be used. Related party transactions 12.22 The Committee noted that the circular no. 30/2014 issued by the MCA, clarifying requirements of second proviso to Section 188(1) had been misinterpreted, and hence, should be withdrawn. Further, as all parties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in case of joint ventures and closely held public companies may be related parties, not allowing them to vote may be impractical and such cases may be specifically excluded from the requirements of the second proviso. Prohibition on forward dealing and Insider trading of securities 12.23 The Companies Act 2013 vide Sections 194 and 195 restrict forward dealing by directors and KMPs and insider trading by any person including directors and KMPs respectively. The aforesaid provisions are seemingly applicable in respect of both private and public companies. Prima facie, Section 195 seems to be applicable to private companies and restricts insider trading. However, it can be argued that since the securities in private companies would not be marketable, as a market in securities in the absence of an alternative market platform would mean a stock market on which securities of different companies are listed for the purpose of trade, they would not qualify as securities within the meaning of Section 195, and thus would exclude private companies from the ambit of the said provision. On the same basis, it would be unjustified to apply the insider trading regulations to private com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... panies. It can also be argued, on the basis of legislation in some jurisdictions, that there are valid reasons for including the insider trading prohibitions in company law in addition to securities law, and these flow from the fiduciary responsibilities of the directors who may abuse their position and use confidential information, which have come to them through their position, for personal profit and not act in the best interests of the company. However, insider trading prohibitions can be problematic in the context of the rights of first refusal that are frequently contained in the shareholders' agreements of private companies. The Committee deliberated on the issues involved and noted that SEBI regulations are comprehensive in the matter (and also apply to companies intending to get listed), and in view of the practical difficulties expressed by stakeholders, sections 194 and 195 may be omitted from the Act. - News - Press release - PIB Tax Management India - taxmanagementindia - taxmanagement - taxmanagementindia.com - TMI - TaxTMI - TMITax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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