In line with the ongoing narrative of investor protection and ease of doing business in India, the government has introduced various amendments to the Companies Act, 2013 (“2013 Act”) through the Companies (Amendment) Act, 2017 (“Amendment”), subject to the provisions of the Amendment being brought into force. The Amendment is a result of the recommendations of the Companies Law Committee appointed in 2015 to address issues with the implementation of the Companies Act, 2013. The key amendments relate to a) definitional changes to the meaning of associate and subsidiary companies, b) issuance of shares, public offers, and misstatements in prospectus, c) rights and obligations of directors and KMPs, d) alignment of provisions of the 2013 Act with SEBI regulations, e) director compensation, f) related party transactions, g) concept of beneficial interest, h) materiality threshold for fraud.
In the 2013 Act, an associate company was understood as a company over which another company had “significant influence”, including a JV. Significant influence meant 20% of the total share capital or control over business decisions under an agreement. The Amendment has modified the definition by substituting the 20% shareholding threshold with a 20% voting rights threshold and has included participation rights along with control over business decisions. Similarly, for determining a subsidiary relationship, the Amendment has changed the criteria from a shareholding threshold to a voting rights threshold. The 2013 Act prohibited the issuance of shares at a discount to face value. The Amendment now permits distressed companies to issue shares at a discount under a statutory resolution plan or debt restructuring scheme in accordance with RBI norms. The Amendment further facilitates companies, especially start-ups, by removing the restrictions on the issuance of sweat equity within the first year of commencement of business.
In relation to disclosures in a prospectus, the Amendment seeks to remove unnecessary confusion that resulted from certain specific prescriptions in the 2013 Act, in light of elaborate SEBI regulations on the matter. The Amendment omits such prescriptions and thereby modifies the 2013 Act to state that companies should provide such information as required by SEBI in consultation with the Central Government. Similar changes have also been made in relation to other areas where SEBI has extensive jurisdiction and to that extent, partial requirements under the 2013 Act were redundant. For instance, a provision prohibiting insider trading.
Further, the Amendment provides an additional defence to directors against their liability for misleading statements made by an expert in the prospectus, subject to certain conditions regarding reasonable reliance. The meaning of KMPs has been expanded by allowing the board to designate any person who directly reports to a whole-time director of the company as a KMP, as opposed to the predefined class of persons under the 2013 Act.
The Amendment will permit independent directors to have limited pecuniary relationships with the company without compromising their independence, upto 10% of his total income. In relation to loans to directors or bodies with common directorship, the Amendment requires a special resolution and imposes end use restrictions on such loans. The definition of a related party under the 2013 Act was inadvertently limited to Indian entities only. The Amendment rectifies that to include a foreign holding, subsidiary or associate company of an Indian company for determining RPTs. The Amendment also provides a new definition of ‘beneficial interest’ in a share to better identify individuals to seek shelter behind complex corporate structures for illegal activities including, money-laundering and tax evasion. Lastly, the Amendment provides a materiality threshold for fraud at Rs. ten lakh (Rs. 1 million) or 1% of the turnover of the company. Other fraudulent activities would be met with the lowered sentence and would be compoundable.
The Amendment reflects that the changes have been driven by practical difficulties faced in the implementation of the 2013 Act and it seeks remove redundancies where possible. While further issues arising out of the 2013 Act continue to exist, the Amendment is a step in the right direction.