Highlights of the Companies Law Committee Report, 2016

The Companies Law Committee (“CLC”) has on 1st February, 2016 submitted its recommendations to the Government on amendments to both the Companies Act, 2013 (“Act”) and the Company Rules (“Rules”). It has proposed changes in 78 sections of the Act, which along with consequential changes, would result in about 100 amendments to the Act. It has also proposed approximately 50 amendments to the Rules. The recommendations cover significant areas of the Act, including definitions, raising of capital, accounts and audit, corporate governance, managerial remuneration, companies incorporated outside India and offences/penalties.

Some of the Key recommendations are listed in the table below:

Sr. No.

Category of Change & Section

Description of changes recommended

Definitions (S.2): “Associate Company”, “Subsidiary” & “Joint Venture” – definitions to be modified to ensure that ‘equity share capital’ is the basis for deciding holding-subsidiary relationship rather than “both equity and preference share capital”.
Incorporation of Companies (S.4,7): Process to be made easier and allow greater flexibility to companies. An unrestricted objects clause to be allowed in the Memorandum of Association dispensing with detailed listing of objects, self-declarations to replace affidavits from subscribers to memorandum and first directors; changes also in various Forms.
Prospectus & allotment of securities (S. 26): 

Private placement: (S.42)

Disclosures in the prospectus required under the Act and SEBI Regulations to be aligned, with a view to make these simpler, by allowing prescriptions to be as per SEBI Regulations.Process to be substantially simplified, doing away with separate offer letter, making valuation details public, details/record of applicants to be kept by company and to be filed as part of return of allotment only, and reducing number of filings to Registrar.
Management and administration: Declaration of beneficial ownership (new section):Recognition of the concept of beneficial owner of a company proposed in the Act. Register of beneficial owners to be maintained by a company, and filed with the Registrar.Postal ballot (S.110): Mandatory requirement of taking up some items only through postal ballot to be relaxed in case of a company that is required to provide electronic voting at its General Meetings.
Accounts of companies: Re-opening of accounts (S. 130):To be limited to 8 years.Financial statements, Board’s report, etc (S.134, Rules): Disclosures in the Directors’ Report to be simplified and duplications with SEBI’s disclosure requirements and financial statements to be removed while retaining the informative content for shareholders.
Consolidated financial statements (S. 129, S.136): Provisions with regard to consolidation of accounts to be reviewed and those with respect to attachment of standalone accounts of foreign subsidiaries to be relaxed in certain cases.
Audit and auditors: Appointment of auditors (S.139): Requirement for annual ratification of appointment/continuance of auditor to be removed.Powers and duties of auditors and auditing standards (S.143): Auditor to report on internal financial controls with regard to financial statements.

Disqualification of auditors (S. 141): Change in the definition of term ‘relative’ for determining disqualification of auditor.

Independent directors, Audit committee, nomination and remuneration committee (NRC) (S. 149, 177, 178): Increased threshold for unlisted companies for compliance in context of requirement for Independent Directors (IDs), Audit Committee and NRC.Test of materiality to be introduced for pecuniary interest for testing independence of ID; thresholds for relatives’ pecuniary interest to be revised to make it more practical.
Loans to directors (S.185): Companies may give loans to entities in which directors are interested after passing special resolution and adhering to disclosure requirement.
Loans and investment by company [S.186 (1)]: Restriction on layers of subsidiaries and investment companies to be removed
Related party transactions (Section 188): All related parties would be prohibited from voting any related party transaction irrespective of the fact whether they are party to the transaction or not. Additionally, related parties in case of joint ventures and closely held public companies where they are not allowed to vote, to be specifically excluded from the requirements of the second proviso to Section 188(1)**currently requires ‘no member of the company shall vote on such special resolution to approve contracts or arrangements which may be entered into by the company, if such member is a related party’.
Prohibition on forward dealing and insider trading of securities (S.194, S.195): Provisions relating to forward dealing and insider trading to be omitted from Companies Act. Listed companies are covered under SEBI Act/Regulations.
Managerial remuneration (S.197): To be approved by shareholders
Appointment of KMP (Schedule V): Requirement for a managerial person to be resident in India for twelve months prior to appointment to be done away with.
Companies incorporated outside India (S.379): Foreign companies having insignificant/incidental transactions through electronic mode to be exempted from registering and compliance regime under the Act.
Penalties:  

 

Various Sections :

Punishment for fraud (S.447): Frauds less than INR 10 Lakh to be compoundable offences. Other frauds to be continued to be non-compoundable.Rationalize penal provisions with reduced liability for procedural and technical defaults. Penal provisions for small companies to be reduced.
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