The Companies (Amendment) Act, 2017: key changes and highlights

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Objectives

The primary objectives of the Amendment are to (i) address difficulties in implementation and to rectify the omissions and inconsistencies of the CA13;(ii) facilitate ease of doing business in India; and (iii) harmonise Company Law with Accounting Standards, the Regulations made under the Securities and Exchange Board of India (“SEBI”) Act, 1992 and the Regulations made under the Reserve Bank of India (“RBI”) Act, 1934.

Important Changes made by the Amendment

 Provisions relating to Independent Directors

(i) Pecuniary relationship will not include remuneration received by an Independent Director and any amount from a transaction which does not exceed 10 percent of his/her total income (or such amount as may be prescribed).

(ii) Section 149(6)(d) has been amended with respect to the scope of restriction on a ‘pecuniary relationship or transaction’ entered by a relative and has been made more specific by clearly categorising the types of transactions.

(iii) Currently, an individual is restricted from being appointed as an Independent Director in case he/she or his/her relative is a Key Managerial Personnel (“KMP”) or employee of the company or its holding, subsidiary or associate company during any of the preceding three financial years. In terms of the Amendment, this restriction would not apply if a relative of an Independent Director is employed during the preceding three financial years.

 Rationalisation of Penalties

This is one of the most appreciated amendments in the amendment. Section 446A has been inserted which relates to “Factors for determining level of punishment”, which mandates that the quantum of punishment/ penalty will be levied taking into consideration the size of the company, nature of business carried on by the company, injury to public interest, nature, and gravity of default and repetition of default.

Section 446B is another provision which relates to “Lesser penalties for One Person Companies or Small Companies”. This provision greatly reduces penal provisions for small companies and one-person companies provided under Sections 92(5), 117(2) and 137(3) of the CA13.

 Process of Private Placement

The provisions on issuance of shares through private placement have been simplified. CA13 provided that funds raised through private placement could not be utilised until the shares were allotted. The Amendment provides an additional restriction by requiring that no funds be utilised until the requisite filings have been made with the Registrar. The Amendment further provides that an offer cannot be renounced in favour of a third party.

 Loans to Directors

A new section 185 which relates to “Loans to directors, etc.” has been inserted by the amendment in complete substitution of the present Section 185 of the CA13. Per the Amendment, a company may now advance any loan including any loan represented by a book debt, or give any guarantee or provide any security in connection with any loan taken by any person in whom any of the director of the company is interested, subject to the condition that (a) a special resolution is passed by the company in a general meeting; and (b) the loans are utilised by the borrowing company for its principal business activities.

 Matters to be stated in prospectus

The prospectus issued by a company will now be required to set out information as specified by SEBI, in consultation with the Central Government. The previous requirements, as set out in Section 26(1) (a), (b) and (d), have been omitted by the Amendment. However, a company will still be required to make a declaration in the prospectus relating to compliance with CA13, the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992. The reason for this amendment is to harmonize the provisions of CA13 with the existing provisions.

 Annual Return

The Amendment has made certain changes in respect of annual returns to be filed by companies. There is no longer a requirement to disclose the indebtedness of a company in the annual return. Further, there is no longer a requirement to include an extract of the annual return in the report of the Board of Directors; the annual return is now required to be uploaded in its entirety on the website of the company, and a link to the annual return is required to be included in the report of the Board of Directors.

 Acceptance of deposits

The Amendment has amended one of the conditions required in case a company accepts deposits from the public. A company is now required to deposit a sum equivalent to 20% of the deposits maturing the following financial year in a separate bank account (called the deposit repayment reserve account) maintained with a scheduled bank, by the 30th of April each year. Further, the requirement to provide deposit insurance has been done away with. In addition, a defaulting company with respect to the repayment of deposits may again begin accepting deposits once it has rectified the default and a time period of five years has elapsed since the default was rectified.

 Other notable modifications made under the Amendment

(a) Effect if number of Members fall below 2 (in case of Private Company) and below 7 (in case of Public Company) for period exceeding six months: Section 3A is inserted in the CA13 which provides that if number of members falls below the specified number and the company carries on business for more than six months while the number of members is so reduced, every person who is a member of the company who was cognisant of such fact will be severally liable for the payment of the whole debts of the company contracted during that time and may be severally sued therefore.

(b) Corporate Social Responsibility (CSR): The Amendment replaces the words “during any financial year” with the words “during the immediately preceding financial year”. Accordingly, the applicability of CSR requirement will be decided based on the net worth/turnover/net profit for the immediately preceding financial year. Also, the Amendment includes CSR rules in the CA13 itself in order to avoid any inconsistency between the CA13 and the CSR Rules. The Amendment further provides that where a company is not required to appoint independent directors under Section 149(4), it will constitute the CSR Committee with two or more directors.

(c) Ratification of Auditor’s Appointment: The Amendment omits the requirement of annual ratification of auditors’ appointment at the Annual General Meeting per Section 139 of the CA13.

(d) Residency requirement for Directors: The Amendment states that 182 days stay in India per Section 149(3) of the CA13 will be computed based on the Financial Year instead of the calendar year. It further provides that the requirement for 182 days stay in India will be for the current Financial Year and not the previous Financial Year. Also, in case of newly incorporated companies this requirement will apply proportionately at the end of the Financial Year.

(e) Reservation of name: Section 4(5)(i) is amended to provide that the name will be reserved by the Registrar only for 20 days from the date of approval or such other period as may be prescribed (previously, the reservation period was 60 days). However, if any application is made concerning the change of name of a company, the name will be reserved for 60 days from the date of approval.

(f) Registered Office of Company: Per the amended Section 12 of the CA13, intimation of registered office or change of registered office should be filed within 30 days (the limit was 15 days previously).

(g) Place of AGM and EGM: The Amendment prescribes that the Annual General Meeting (AGM) of an unlisted company may now be held at any place in India (as opposed to the city of the registered office of the company) if consent is received from all its members. Further, the Amendment has prescribed that the extraordinary general meeting (EGM) of a wholly owned subsidiary of a company incorporated outside India can be held outside India.

The changes introduced by the Amendment are extensive and accordingly, this article focuses on the key changes made to the CA13 and highlights of the Amendment. The Amendment makes significant changes to the CA13 which seeks to realign many provisions aimed at ease of doing business in India, better corporate governance and strengthening compliance and investor protection. Therefore, the Amendment is a welcome change and will help in promoting a healthy corporate environment in India.

Diljeet Titus & Baljit Singh Kalha, Titus & Co., Advocates

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