EXEMPTION TO GOVERNMENT COMPANIES


On 5th June 2015, Ministry of Corporate Affairs posted here a draft notification to be published in Official Gazette announcing some exemption to Not for profit Companies.

As there is no effective date is announced in the Notification, this notification shall come into effect on the date of its publication in the Official Gazette.

[UPDATE 19th June 2015: MCA uploaded copy of Official Gazette dated 5th June 2015, in which this Notification is published. Meaning that; These exemption came into force from that date]

The Notification is issued in exercise of power conferred by Clauses (a) and (b) of Sub – section (1) and sub – section (2) of 462 of the Companies Act, 2013. A copy of this notification has been laid in draft before both Houses of Parliament as required by sub-section (2) of section 462 of the Companies Act, 2013.

Paragraph 2 of the Notification cast a condition on the Government Companies:

“The Government Companies, while complying with such exceptions, modifications adaptations, as specified in column (3) of the aforesaid Table [Given in Paragraph 1 of the Notification], shall ensure that the interests of their shareholders are protected.”

This is a subjective condition and may complicate litigations. This may also open for Secretarial Standards and Circulars.

Now, we discuss exemption granted under Paragraph 1 of the Notification.

Name of Company [Section 4(1)(a)]:

In case of government Company, The memorandum of a company shall state the name of the company with the last word “Limited” in the case of a public limited company, or the last words “Private Limited” in the case of a private limited company.

No government shall contain words “private limited” in its name even if it is in fact a private company.

Transfer and Transmission of Securities [Section 56(1)]:

After the proviso to sub – section (1) of Section 56 two provisos shall be inserted.

The provisions of this sub-section, in so far as it requires a proper instrument of transfer, to be duly stamped and executed by or on behalf of the transferor and by or on behalf of the transferee, shall not apply with respect to bonds issued by a Government company, provided that an intimation by the transferee specifying his name, address and occupation, if any, has been delivered to the company along with the certificate relating to the bond; and if no such certificate is in existence, along with the letter of allotment of the bond.

The provisions of this sub-section shall not apply to a Government Company in respect of securities held by nominees of the Government.

Declaration in respect of beneficial interest in any share [Section 89]:

Section 89 shall not apply in case of Government Companies.

Investigation of beneficial ownership of shares in certain cases [Section 90]:

Section 90 shall not apply in case of Government Companies.

Annual General Meeting [Section 96(2)]:

In case of Government Company, sub – section (2) shall be modified.

Every annual general meeting shall be called during business hours, that is, between 9 a.m. and 6 p.m. on any day that is not a National Holiday and shall be held either at the registered office of the company or at some other place within the city, town or village in which the registered office of the company is situate such other place as the Central Government may approve in this behalf”.

Declaration of Dividend [Section 123]:

Second proviso to sub – section 123(1) shall not apply to a Government Company in which the entire paid up share capital is held by the Central Government, or by any State Government or Government or by the Central Government and one or more State Government.

Second proviso provide that, where, owing to inadequacy or absence of profits in any financial year, any company proposes to declare dividend out of the accumulated profits earned by it in previous years and transferred by the company to the reserves, such declaration of dividend shall not be made except in accordance with such rules as may be prescribed in this behalf.

Further Sub – section (4) of Section 123 shall also not apply to a Government Company in which the entire paid up share capital is held by the Central Government, or by any State Government or Government or by the Central Government and one or more State Government.

Section 123(4) requires that the amount of the dividend, including interim dividend, shall be deposited in a scheduled bank in a separate account within five days from the date of declaration of such dividend.

Financial Statement [Section 129]:

According to Section 129(1), the financial statements shall give a true and fair view of the state of affairs of the company or companies, comply with the accounting standards notified under section 133 and shall be in the form or forms as may be provided for different class or classes of companies in Schedule III.

This provision shall not apply to the extent of application of Accounting Standard 17 (Segment Reporting) to the Government Companies engaged in defence production.

For ready reference, Foreign Direct Investment in Defence Sector also possible and private sector companies may also be in defence production.

Director’s Report [Section 134(3)]:

Clause (e) of sub – section (3) of Section 134 shall not applicable to government companies.

This clause require in case of a company covered under sub-section (1) of section 178, company’s policy on directors’ appointment and remuneration including criteria for determining qualifications, positive attributes, independence of a director and other matters provided under sub-section (3) of section 178 be disclose in the Director’s report. According to Section 178(3), the Nomination and Remuneration Committee shall formulate the criteria for determining qualifications, positive attributes and independence of a director and recommend to the Board a policy, relating to the remuneration for the directors, key managerial personnel and other employees.

Board of Directors [Section 149]

Section 149(1)(b) and first proviso to Section 149(1) shall not apply to Government Companies.

Consequently, there is no maximum number of directors in case of Government Companies. However, by virtue of second proviso, there is still requirement of Women Directors.

Section 149(6)(a) shall be modified as under for Government Companies:

An independent director in relation to a company, means a director other than a managing director or a whole-time director or a nominee director — (a) who, in the opinion of the Board Ministry or Department of the Central Government which is administratively in charge of the company, or, as the case may be, the State Government, is a person of integrity and possesses relevant expertise and experience.

Section 149(6)(c) is not applicable to Government Companies.

According to Section 149(c), an independent director in relation to a company, means a director other than a managing director or a whole-time director or a nominee director — (c) who has or had no pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year.

Appointment of Directors [Section 152]:

Sub – section (5) of Section 152 dealing with consent of directors shall not apply in case of a Government Company where such director is appointed by the Central Government or State Government as the case may be.

I do not find it helpful. How can a person be appointed as director without his consent?

Sub – section (6) and (7) of Section 152 dealing respectively with rotation of directors and vacancy of retiring director, shall not apply to –

(a) a Government Company in which the entire paid up share capital is held by the Central Government, or by any State Government or Governments or by the Central Government and one or more State Governments;

(b) a subsidiary of a Government company, referred to in (a) above, in which the entire paid up share capital is held by that Government company.

Right of persons other than retiring directors to stand for directorship [Section 160]:

Section 160 shall not apply to –

(a) a Government Company in which the entire paid up share capital is held by the Central Government, or by any State Government or Governments or by the Central Government and one or more State Governments;

(b) a subsidiary of a Government company, referred to in (a) above, in which the entire paid up share capital is held by that Government company.

Appointment of directors to be voted individually [Section 162]:

Section 162 shall not apply to –

(a) a Government Company in which the entire paid up share capital is held by the Central Government, or by any State Government or Governments or by the Central Government and one or more State Governments;

(b) a subsidiary of a Government company, referred to in (a) above, in which the entire paid up share capital is held by that Government company.

Option to adopt principle of proportional representation for appointment of directors [Section 163]:

Section 163 shall not apply to –

(a) a Government Company in which the entire paid up share capital is held by the Central Government, or by any State Government or Governments or by the Central Government and one or more State Governments;

(b) a subsidiary of a Government company, referred to in (a) above, in which the entire paid up share capital is held by that Government company.

Disqualifications for appointment of director [Section 164]:

Section 164(2) shall not apply to –

(a) a Government Company in which the entire paid up share capital is held by the Central Government, or by any State Government or Governments or by the Central Government and one or more State Governments;

(b) a subsidiary of a Government company, referred to in (a) above, in which the entire paid up share capital is held by that Government company.

Sub – section (2) of Section 164 deals with eligibility of re – appointment of a person who is director of a company defaulted in certain filing and repayments.

Accordingly, where a government company defaulted under this Section, a director in such company remains eligible for appointment elsewhere. This is good for post retirement employment of government officers.

Register of directors and key managerial personnel and their shareholdings [Section 170]:

This Section shall not apply to a Government Company in which the entire share capital is held by the Central Government, or by any State Government or Governments or by the Central Government or by one or more State Governments.

Members’ right to inspect [Section 171]:

This Section shall not apply to a Government Company in which the entire share capital is held by the Central Government, or by any State Government or Governments or by the Central Government or by one or more State Governments.

Audit Committee [Section 177(4)]:

Clause (i) of Sub – section (4) of Section 177 shall be modified for Government Companies:

Every Audit Committee shall act in accordance with the terms of reference specified in writing by the Board which shall, inter alia, include,— (i) the recommendation for appointment, remuneration and terms of appointment recommendation for remuneration of auditors of the company.

Nomination and Remuneration Committee [Section 178]:

Sub – section (2), (3) and (4) of Section 178 shall not apply to Government Company except with regards to appointment of “Senior Management” and other Employees.

This means Nomination and Remuneration Committee shall have no role with regards to Directors.

Loan to Directors [Section 185]:

Section 185 shall not apply to Government Company in case the company obtains approval of the Ministry or Department of the Central Government which is administratively in charge of the company, or, as the case may be, the State Government before making any loan or giving any guarantee or providing any security under the section.

Loan and investment by company [Section 186]:

Section 186 shall not apply to –

(a) a Government company engaged in defence production;

(b) a Government company, other than a listed company, in case such company obtains approval of the Ministry or Department of the Central Government which is administratively in charge of the company, or, as the case may be, the State Government before making any loan or giving any guarantee or providing any security or making any investment under the section.

Related Party Transaction [Section 188]:

First and second proviso to sub –section (1) of Section 188 shall not apply to –

(a) a Government company in respect of contacts or arrangements entered into by it with any other Government Company;

(b) a Government Company, other than a listed company, in respect of contracts or arrangements other than those referred to in clause (a), in case such company obtains approval of the Ministry or Department of the Central Government which is administratively in charge of the company, or, as the case may be, the State Government before entering into such contract or arrangement.

Appointment of managing director, whole-time director or manager [Section 196]:

Sub–sections (2), (4) and (5) shall not be applicable to government companies.

These sub-sections respectively deals with term of managing directors, whole – time directors and managers; remuneration and approval by general meeting.

Managerial Remuneration [Section 197]:

Section 197 dealing with maximum remuneration shall not apply to Government Companies.

Appointment of Key Managerial Personnel [Section 203]:

A sub – section after sub – section (4) shall be inserted.

“(4A) the provisions of sub-sections (1), (2), (3) and (4) of this section shall not apply to a managing director or Chief Executive Officer or manager and in their absence, a whole – time director of the Government Company.”

There shall not be any requirement of a managing director or Chief Executive Officer or manager and in their absence, a whole – time director in case of Government Companies.

Offence to be non – cognizable [Section 439]:

Sub – section (2) of Section 439 shall be modified as:

No court shall take cognizance of any offence under this Act which is alleged to have been committed by any company or any officer thereof, except on the complaint in writing of the Registrar, a shareholder of the company, or of a person authorised by the Central Government in that behalf.

Interestingly, issued draft notification wrongly mentioned Chapter XXIX for Section 439, Section 439 belong to Chapter XXVIII dealing with Special Courts. This is just an example of all mess, what we are facing all this time.

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.

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One response to “EXEMPTION TO GOVERNMENT COMPANIES

  1. Pingback: Index of Companies Law Posts | AishMGhrana

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