By Sudipta Bhowmick, KIIT School Of Law, Bhubaneswar.

The new Companies Act, 2013 has been operationalized for only nine months, yet a new Companies Amendment Bill, 2014 has been passed by the Lower House on 17th December, 2014 to ‘ease the doing of business’. After the Companies Act, 1956, it took 57 years to replace the old one with new. Therefore, it has come as a great relief for corporates, auditors, shareholders who addressed their concerns regarding prolonged procedures, reporting of fraud etc. and saw them as amendments in this Bill.

THE BACKGROUND: PONZI IN PARADOX

India is one of the fastest growing economies in the world. The high potential of the Indian market driven by an emerging middle class, cost competitiveness and a huge pool of talent makes it one of the most attractive destinations for investment.[1] Yet, India’s overall rank in ‘ease of doing Business’ has dropped from 131st in 2013 to 134th in 2014.[2] Also, India had figured at the lowest among the BRIC countries pertaining to key parameters[3] in starting up business. Among the South Asian Countries, the average number of procedures to start a business is 7 whereas, it is 12 in India.[4] Hence, “nobody will come in India to set up business if such an environment persists.”[5]

Now-a-days the words ‘Ponzi Scheme’ and ‘Chit Fund’ are used interchangeably. But a prominent difference always exists between them. In one hand, Ponzi Scheme means a form of fraud which promises to return more money to the investors with little risk in a little span of time, whereas Chit Fund is a company registered under the Companies Act, 1956, the Reserve Bank of India, 1934 and the Chit Fund Act, 1982. But, recently Saradha Realty Ltd. tarnished the history of Chit Fund by stealing the public money worth Rs. 1200 Crores and drew the much needed attention of legislators regarding illegal use of deposits by the companies.

Under these significant instances Companies Amendment Bill, 2014 has been prepared to come into force from April 1, 2015.

PROVISIONS IN COMPANIES AMENDMENT BILL, 2014:

Here are the 14 provisions of Companies Amendment Bill, 2014:

  1. Omission of minimum paid-up share capital:

According to sections 2(68) and 2(71) of the Companies Act, 2013 minimum paid-up share capital required for private company and public company are 1 lakh and 5 lakh respectively. These limits of paid-up capital have been removed in new Amendment Bill, 2014. Hence, Company can be incorporated with any capital like limited liability partnership and also it will lower the registration cost.

  1. Making Common Seal optional:

After the Amendment, Common Seal prescribed under sections 12, 46 and 105 of the Companies Act, 2013 will be optional to lower the procedural difficulties in the matters of company.

  1. Prescription of Specific Punishments for Deposits accepted:

Where a company accepts deposit in contravention of the manner or the conditions prescribed under section 73 or section 76 or rules made there under or if a company fails to repay the deposit or part thereof or any interest due thereon within the time, then (a) the company shall be punishable with fine which shall not be less than one crore rupees but which may extend to ten crore rupees; (b) every officer of the company who is in default shall be punishable with imprisonment which may extend to seven years or with fine which shall not be less than twenty five lakh rupees but which may extend to two crore rupees, or with both.

  1. Prohibiting public inspection of Board resolutions filed in the Registry:

Companies are required to file copy of every resolutions with Registrar within 30 days of passing such resolution in form No. MGT-14[6]. Under Section 399 of the Companies Act, 2013 documents filed with Registrar are public documents and public can inspect those with nominal fees. This public inspection of Board Meetings has been prohibited in new Amendment to maintain the Board confidentiality.

  1. Inclusion of provision for writing off past losses/depreciation before declaring dividend for the year:

This provision was prescribed in the rule 3[7] of Companies (Declaration and Payment of Dividend) Rules, 2014 and was missed in the statute. By this Amendment this will be brought in the Companies Act.

  1. Rectification of the Requirement of transferring Equity Shares:

This provision will rectify the anomaly of Section 125 of the Companies Act, 2013 which provides for transferring equity shares for which unclaimed dividend has been transferred to the IPEF.

  1. Prescription of Thresholds beyond which Fraud shall be reported to the Central Government:

In the current Companies Act, 2013 auditors of the company have to report to the Central Government any kind of fraud or illegality.[8] But after the Amendment, measuring amount of fraud will be reported to the Central Government. Petty ones will be reported to the Company. Hence, Government can cure bigger scams by taking proper steps.

  1. Exemption u/s 185 (Loans to Directors) provided for loans to wholly owned subsidiaries and guarantees/securities on loans taken from banks by subsidiaries:

This provision will be codified into the statute for ample caution yet of its existent in Section 185 of Companies Act,2013 read with the rule 10[9] of Companies (Meeting of Board and its Powers) Rules ,2014.

  1. Empowering Audit Committee to give omnibus approvals for related party transactions on annual basis:

Aligning with the clause 49 of SEBI rules new Amendment will substitute the section 177[10] of the Companies Act, 2013 by empowering the Audit Committee to give omnibus approval for related party transactions.

  1. Replacement of ‘special resolution’ with ‘ordinary resolution’ for approval of related party transactions by non-related shareholders:

According to Section 188 of the Companies Act, 2013 for approval of related party transactions special resolution is needed. But after this Amendment, it will not be difficult to get the resolution passed because ordinary resolution will be required for approval of non-related shareholder.

  1. Exempt related party transactions from the requirement of approval of non-related shareholders:

The requirement of approval of non-related shareholders under section 188 of the Companies Act, 2013 will be exempted in relation to related party transactions to facilitate the whole transaction by enabling the voting right to related party.

  1. Bail restrictions to apply only for offence relating to fraud u/s 447:

This provision is already existent in the statute but this amendment will clarify more.

  1. Winding Up cases to be heard by 2-member Bench instead of a 3-member Bench:

As per Companies Act, 2013, cases regarding rehabilitation, restructuring and winding up are disposed of by 3-member bench.[11] This 3-member bench will be substituted by 2-member bench to avoid the practical difficulties in the new Amendment.

  1. Special Courts to try only offences carrying imprisonment of two years or more.

The burden on Special Courts will be lessened by this Amendment. Special Courts will try only offences carrying imprisonment of two years or more. The provision[12] of Companies Act, 2013 enumerates that these Courts will try all offences irrespective of punishments.

Companies Act is considered to be the Gita in the Indian Corporate world. These amendments will solidify the ground of Companies Act, 2013 in corporate matters. Also, Federation of Indian Chambers of Commerce and Industry (FICCI) has applauded the amendments introduced, and have issued a statement: “In the interest of a facilitative regulatory climate in the country, FICCI hopes that the Bill would attain quick passage in the Rajya Sabha as well.”[13]

References:

[1] https://www.kpmg.com/…/KPMG-CII-Ease-of-doing-business-in-India.pdf

[2] Why is India slipping in ease of doing business rankings? BUSINESS STANDARD Nov. 10, 2013 available at http://www.businessstandard.com/article/printerfriendlyversion?article_id=113111000706_1

[3] India has faltered on various key parameters such as starting a business, dealing with construction permits, getting electricity, registering property, paying taxes, trading across border, enforcing contracts or resolving insolvency regarding Ease of Doing Business.

[4] Supra Note 2.”The average number of procedures for starting a business is seven among South Asian economies, it is 12 for India. The average time taken to start a business in South Asia is 16.4 days, while it is 27 days for India. An entrepreneur in India has to deal with 35 procedures to get a construction permit, while in South Asia it is less than half at 16. An SME businessman in India would take 1,420 days to enforce a contract. The South Asia average is 1,075 days.”

[5] Lok Sabha passes amendments to Companies Act to improve business climate BUSINESS TODAY Dec.17 2014 available at http://businesstoday.intoday.in/story/lok-sabha-approves-passes-amendments-to-companies-act/1/213616.html

[6] Section 117, The Companies Act, 2013

[7] “No Company shall declare dividend unless carried over previous loses and depreciation not provided in the previous year or years are set off against the profit of the company of the current year.”

[8] Sec 143(12), Companies Act, 2013

[9] Exemption u/s 185 (Loans to Directors) provided for loans to wholly owned subsidiaries and guarantees/securities on loans taken from banks by subsidiaries

[10] Audit Committe provides for approval of any subsequent modification of transaction of the Company with related parties by the Committe.

[11] Section 419(4), Companies Act, 2013

[12] Section 436, Companies Act, 2013

[13] http://trak.in/tags/business/2014/12/18/companies-act-2013-amendment/