THE COMPANIES AMENDMENT BILL 2014: PART 2 OF 3

The Companies Amendment Bill 2014 has been introduced and passed in Lok Sabha recently. This blog post has intention to analyse proposed changes in the Companies Act 2013.

Most important massage, this amendment prepares a best case for drafting skill development programmes in India. I am reading here this Bill clause by clause. This will be a three part series and part 2 of 3 is present here.

To amend sub-section (1) of section 123 of the said Act to include provisions for writing off past losses/depreciation before declaring dividend for the year [Clause 10 of the Amendment Bill]

A forth proviso is being added to the effect that no company shall declare dividend unless carried over previous losses and depreciation not provided in previous year or years are set off against profit of the company for the current year.

This is a correction and in line with settled law relating to declaration of dividend in India.

To amend sub-section (6) of section 124 of the said Act for rectifying the requirement of transferring equity shares for which unclaimed/unpaid dividend has been transferred to the Investors Education and Protection Fund even though subsequent dividend(s) has been claimed [Clause 11 of the Amendment Bill]

This is a correction again. It is clarified and now in case any dividend is paid or claimed for any year during the period of seven consecutive years, the share shall not be transferred to Investor Education and Protection Fund.

Now Section 124(6) shall read as:

“All shares in respect of which dividend has not been paid or claimed for seven consecutive years or more shall be be transferred by the company in the name of Investor Education and Protection Fund along with a statement containing such details as may be prescribed:

Provided that any claimant of shares transferred above shall be entitled to claim the transfer of shares from Investor Education and Protection Fund in accordance with such procedure and on submission of such documents as may be prescribed.

Explanation.—For the removals of doubts it is hereby clarified that in case any dividend is paid or claimed for any year during the said period of seven consecutive years, the share shall not be transferred to Investor Education and Protection Fund.”

To amend sub-section (3) of section 134 and sub-section (12) of section 143 of the said Act to incorporate enabling provisions to prescribe thresholds beyond which fraud shall be reported to the Central Government [Clauses 12 and 13 of Amendment Bill]

This amendment insert following new clause (ca) after existing clause (c) of Section 134(3):

“(ca) details in respect of frauds reported by auditors under sub-section (12) of section 143 other than those which are reportable to the Central Government;”

This results in requirement of reporting details of frauds which are not reportable to Central Government under Section 143(12) in the auditors’ report. At present Section 143(12) does not talk about any fraud which is not reportable to Central Government but Rule 13 of the Companies (Audit and Auditors) Rules 2014 is. Hence there is a consequential amendment to Section 143(12) is also being proposed. Existing sub – section (12) is being substituted with following sub – section:

“(12) Notwithstanding anything contained in this section, if an auditor of a company in the course of the performance of his duties as auditor, has reason to believe that an offence of fraud involving such amount or amounts as may be prescribed, is being or has been committed in the company by its officers or employees, the auditor shall report the matter to the Central Government within such time and in such manner as may be prescribed:

Provided that in case of a fraud involving lesser than the specified amount, the auditor shall report the matter to the audit committee constituted under section 177 or to the Board in other cases within such time and in such manner as may be prescribed:

Provided further that the companies, whose auditors have reported frauds under this sub-section to the audit committee or the Board but not reported to the Central Government, shall disclose the details about such frauds in the Board’s report in such manner as may be prescribed.”

This report in Auditors’ Report is really good step for governance and transparency. Without this, Boards may not be “motivated” to take action against fraudsters and report their action to shareholders. However, we have to see, how many frauds dig out, reported and action taken. Any further comment is out of scope for this blog post.

To amend clause (iv) of sub-section (4) of section 177 of the said Act to provide provision empowering Audit Committee to give omnibus approvals for related party transactions on annual basis [Clause 14 of the Amendment Bill]

Presently, Section 177(4)(iv) read to the effect that:

Every Audit Committee shall act in accordance with the terms of reference specified in writing by the Board which shall, inter alia, include — (iv) approval or any subsequent modification of transactions of the company with related parties;

Now following proviso is being inserted in this clause:

Provided that the Audit Committee may make omnibus approval for related party transactions proposed to be entered into by the company subject to such conditions as may be prescribed.

This proviso enables omnibus approval of related party transactions. Omnibus is Latin term denoting “for all” in general sense. This term here may denote “all inclusive approval” but may be subject to judicial interpretation in absence of proper dictionary meaning. This proviso is also not clear about limits on inclusions, type of inclusion. Yes, omnipresent “as may be prescribed” also present in this clause.

To amend Section 185 of the said Act to provide for exemption u/s 185 (Loans to Directors) provided for loans to wholly owned subsidiaries and guarantees/securities on loans taken from banks by subsidiaries [Clause 15 of the Amendment Bill]

This amendment is to support government which has already revealed in the Companies Rules 2014. Following two clauses and one proviso is being inserted after clause (b) of sub – section 185(b):

“(c) any loan made by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company; or

(d) any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company:

Provided that the loans made under clauses (c) and (d) are utilised by the subsidiary company for its principal business activities.”

The effect is that a holding company may give guarantee or provide security to any of its subsidiary, whether such subsidiary is wholly owned subsidiary or not, but a holding company may not advance any loan to its subsidiary unless it is a wholly owned subsidiary.

I do not see any logic. Whether loan at first place and guarantee or security at second place, have any different end consequences. In case subsidiary (including wholly owned one) fail to repay loan to a bank or financial institution, holding company will suffer same amount of loss.

In next part of this series we will further discuss the on the Companies Amendment Bill 2014.

Please note: I welcome your comments and feedback. This blog post is not a professional advice. Readers may share this post on social media by using buttons given here.