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Business Formation

The year welcomed the implementation of 15 major amendments in Companies Act, called as the ‘Companies (Amendment) Bill, 2016’ which was passed by the Lok Sabha on 27th July 2017 and by the Rajya Sabha on 19th December 2017. The major objective behind the proposed amendments was to address areas of disclosures, accountability investor protection, corporate governance. Today we will be looking into the proposed changes one by one.

The Companies (Amendment) Act, 2017 received the President’s assent on 3rd January 2018, proposing a slew of changes to strengthen corporate governance and make doing business in India easy. Some of the key changes introduced by the Amendment Act are as follows:

  1. Amendment in the Definitions: The Amendment Act has modified the definitions of terms like ‘Significant influence’, ‘Joint Venture’, ‘Holding Company’, ‘Subsidiary’, ‘Key Managerial Personnel’, and ‘Related Party’, etc.

 

  1. Relaxation in Incorporation: Members of a company can now be held severally liable for payment of debt in cases where the number of members falls below the required limit and the company continues to carry on the business for more than six months. The Amendment Act, 2017 has also extended the time limit given to a company to establish a registered office, after its incorporation, from 15 days to 30 days. Further, according to the Amendment Act, a duly authorized employee of the company can now sign any document/proceeding/contract requiring authentication by the company or on behalf of the company.

 

  1. Issuance of Shares: Issue of shares at a discount, which was earlier prohibited, is now allowed provided it is carried out in accordance with any guidelines/directions/regulations specified by the RBI. Further, the restriction over sweat equity shares not be issued within one year of commencement of business of the company has also been done away with.

 

  1. Private Placement Process: The process of issuance of shares through a private placement has been made simpler and multiple private placements have also been made possible.

 

  1. Declaration and Payment of Dividends: According to the Amendment Act, while calculating the profits of a company for declaration and payment of dividend, any amount representing unrealized gains, notional gains or revaluation of assets shall now be excluded.

 

  1. Harmonization with Regulatory Bodies such as SEBI & RBI: The Amendment Act has now empowered SEBI to prescribe the information required to be stated in the prospectus by a company. Additionally, the provisions which dealt with ‘insider trading’ and ‘forward dealing’ have been omitted as pre-existing SEBI regulations on the subjects are wide enough to cover all such instances.

 

  1. Corporate Social Responsibility (CSR): The words ‘any financial year’ have been replaced by the words ‘immediately preceding financial year’ for determining if a company had specified net worth/net turnover/net profit to constitute a CSR committee. The Ministry of Corporate Affairs has been empowered to prescribe any exclusion from the calculation of net profit of the company. Furthermore, now companies have been given freedom to spend the CSR amount in areas other than their local area of business.

 

  1. Changes Impacting Directors and Key Managerial Personnel (KMP): The Amendment Act has modified various provisions relating to Directors and KMP including, but not limited to, the definition of KMP, the residency requirement of a Director, etc. Vacation of office by a Director is no longer required in case of default by a company in filing financial statements or annual returns.

 

  1. Independent Director: An independent director is now permitted to have limited pecuniary relationships with the company without compromising his independence. He can now receive remuneration and make transactions with the company not exceeding 10% of his total income. In addition to this, the restriction on being appointed as an independent director in case he/she or his/her relative is a KMP or an employee of the company or its holding, subsidiary or associate company during any of the preceding three financial years will no longer apply.

 

  1. Loan Advanced to Director: The Amendment Act has also made possible for companies to advance a loan or give guarantee/security to entities in which a Director is interested subject to prior approval of the company by a special resolution; and utilization of the loan by the borrowing entity for its principal business activity.

 

  1. Loan and Investment by Companies: The Amendment Act, 2017 has clarified that a company is now allowed to give loan to its employees in excess of the specified limits without passing a special resolution, which was earlier mandatory.

 

  1. Conducting Business and Compliances: The Amendment Act has clarified that a company is not required to state its indebtedness in the annual return filed by it, which was earlier necessary. Every company is also required to place a copy of the annual return on its website. The Amendment also facilitates flexibility in convening Annual and Extraordinary General Meetings. The requirement relating to ratification of auditors by the members of the company at every AGM has been removed by the Amendment Act, 2017. Further, Government approval will no longer be required for payment of the managerial remuneration in excess of the specified limits.

 

  1. Audit Committee & Nomination and Remuneration Committee (NRC): The Amendment Act has stated that instead of listed companies only listed ‘public’ companies should be required constitute an Audit Committee and NRC. In addition, prescribed class of companies will also be required to constitute these committees. This means that a listed ‘private’ company will no longer be required to constitute the NRC.

 

  1. Relaxation on Default in Repayment of Deposit: Under the 2013 Act, a lifelong ban was imposed on a company from accepting deposits from its members for a default made in the past, even for reasons that were beyond the company’s control. The Amendment Act relaxes this stricture by introducing a cooling-off period of 5 years from the date of remedying the default.

 

  1. Punishment of Fraud: The quantum of punishment will now be imposed taking into account the size of the company, the nature of its business, public interest, nature and gravity of default, recurrence of default, etc. After the Amendment, the penalty for fraud, which involves an amount of Rs. ten Lakh or 1% of the turnover of the company, is imprisonment for a minimum term of 6 months which may be extended up to 10 years and a fine equal to the amount involved in the fraud, but which may extend to 3 times the said amount. On the other hand, frauds below the new threshold have a reduced punishment. Penal provisions for small companies and one person companies have also been reduced.

 


These amendments made by the Amendment Act, 2017 will come into force on such date as the Central Government may, by notification in the Official Gazette, appoint. Therefore, it is suggested that the companies should take note of these changes made to the 2013 Act so that they can effectively reap the benefits of the same.


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