REPORT OF THE COMPANIES LAW COMMITTEE – 2

On 1^st February 2016, Ministry of Corporate Affairs uploaded the report of Companies Law Committee on its website here. In second post on this report, we will discuss recommendations of the committee related to Definitions in the Companies Act, 2013.

Before reading further, I would like to disclose that I was part of two groups; Task Force on Companies Law and Research Group on Companies Law constituted by the Institute of Company Secretaries of India. All view here are personal and not of these groups or ICSI.

I might have missed few points either because of no opinion or no comfort. I request, please feel free to add value of their views in comment section. No editing will be there as long as language is professional and parliamentary.

Replace “total share capital” with “total voting power” [Section 2(6), (87)]

There is a good recommendation to replace word “total share capital” with “total voting power”.

There is apprehension mentioned in whatsapp messages received that after this only equity share capital shall be considered for significant influence. But picture is most complex. Total voting power shall include preference shares when they carry voting power and also bring celerity where equity share with differential voting right has more or less voting right.

Body Corporate to be Holding Company [Section 2(46)]

The Committee, therefore, recommended that an Explanation (on the lines of Explanation (c) to Section 2(87)) be included in Section 2 (46).

This is significant correction. Presently business entity incorporated outside India is not holding company for the purpose of this Act, even though they are wholly owned by these foreign entities.

Listed Company not modified [Section 2(52)]

The Committee felt that while the definition of the term ‘listed company’ need not be modified, the thresholds prescribed for private companies for corporate governance requirements may be reviewed. In addition, specific exemptions under section 462 of the Act could also be given to listed companies, other than the equity listed companies, from certain corporate governance requirements prescribed in the Act (paragraph 12.9 of Part I and 12.3 of Part II of the report may also be referred to).

This is great win for governance. There was lobbying for making difference for listed public company and listed private companies. However, I will try to oppose any relaxation for listed private companies under section 462 because being listed is their well informed and calculated decision. Same time, the Companies Act, 2013 does not impose any significant burden to listed private companies, additional to listing requirement.

Net worth [Section 2(57)]

The Committee recommended for the phrase ‘debit or credit balance of the profit and loss account’ to be included in the definition.

Whether this suggestion should be there or not is one of much debated point. This proposed amendment seems logical, but this has very different impact on different sections. This recommendation needs more deliberation (section and clause wise) before going before parliament.

I request readers for detailed deliberation on this point in comment section of this post.

No change in officer who is in default [Section 2(60)]

The Committee felt that sufficient defences were already provided for Independent and Non-Executive Directors under Section 149(12) of the Act and as such no amendment was required in Section 2(60).

There was apprehension, that this provision may reduce supply of independent and non – executive directors. I agree with committee that there are sufficient defenses. This is better if we have less supply of ornamental directors.

MCA circular dated 29^th July 2011 may be reissued but this just give superficial satisfaction and peace of mind. Warning: Prosecution has duty to prove guilt but Indian bureaucracy love to arrest rather than to prove anyone guilty. Change in this mindset is required not the circular.

Related Party to include body corporate [Section 2(76)

The Committee recommended that Section 2 (76) (viii) be amended to substitute ‘company’ with ‘body corporate’ and should also include investing company or the venturer of a company in sub-clause (viii)(A) thereof.

This is certainly good suggestion and correction in position, presently, only “company” not “body corporate” is considered as related party. This effectively excludes companies incorporated outside India as unwanted privilege to multi – nationals.

Layer of Subsidiaries [Section 2(87)]

Section 2 (87) of the Act also contains a proviso that prescribes the class/classes of subsidiary companies that shall not have layers of subsidiaries beyond a prescribed number.  The Committee, felt that proviso to Section 2(87) is likely to have a substantial bearing on the functioning, structuring and the ability of companies to raise funds when so notified and hence recommended that the proviso be omitted.

This committee recommended deletion of proviso to Section 2(87) in bold letter but keep downplayed on corresponding check of Register of Beneficial Ownership, which would address the need to know the ultimate beneficial owners in complex corporate structures.

I recommend, such exemption only if a subsidiary and all its holding companies have such Register of Beneficial Ownership and its copy available for public inspection.

Please note: This blog invite readers to share their comments, suggestions, hardship, queries and everything in comment section. This blog post is not a professional advice but just a knowledge sharing initiative for mutual discussion.