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Companies (Amendment) Act, 2017

BACKGROUND

The Companies Act, 2013 was one of the most significant legal reform in India, enacted aiming to bring accountability, disclosure, investor protection and corporate governance and to harmonize with global practices. Authority has received several representations from various stakeholders consequently Ministry of Corporate Affairs(MCA) established Companies Law Committee (referred as “Committee”) for detail analysis subsequent to which the committee received numerous comments. Giving rise to the complexity and to resolve them the Committee come up with Companies (Amendment) Bill, 2016 which was later referred to the standing Committee on Finance for examination. After considering the suggestion made by the Standing Committee the Bill renamed as Companies (Amendment) bill, 2017 which has been passed by Lok Sabha on 27th July,2017 and by Rajya Sabha on December 19th, 2017 and finally received the president’s assent on 3rd January, 2018 revamping into Companies (Amendment) Act, 2017.

OBJECTIVE

The objective of the companies (Amendment) Act, 2017 is to address the inconsistency & to rectify the omissions in the companies Act, 2013(for brevity referred as “The Act”) and to facilitate ease of doing business by bringing some radical changes, and to address the various concerns of corporate sector pertaining to compliance of the act and to give the effect to the intent of law maker along with bringing the harmonization with Accounting standard, Securities and Exchange Board of India Act, 1992, and Reserve bank of India Act, 1934 and the respective regulation made under the Act.

The brief Analysis and Key Features of Companies (Amendment) Act, 2017

For the purpose of better understanding and easy analysis the Companies (Amendment) Act, 2017 is presented in division on the basis of relativeness of the various amendments.

Definition

Sec 2(49) definition of Interested Director has been omitted, as the interested director referred in sec 174(3) point out at sec 184(2) hence due to redundancy of sec 2(49) it is omitted.

Incorporation of Company

Insertion of Sec 3A comes with the creation of liability of the members or member as the case may be in a specified situation when there is reduction in minimum number of members for more than 6 months and the company carry the business during such excess period than the member who was or were cognisant with such fact shall be liable to the debt of the company incurred in such excess period. This sec was earlier in the Companies Act, 1956 but was missing in the Act.

Sec 4(5)(i) the reservation of name shall be for 20 days from the date of approval instead of 60 days from the date of application; If an existing company make an application in this regard, the ROC may reserve the name for a period of 60 days from the date of approval.

Sec 7(1)(c) inter alia require the subscriber of MOA and the First Director named in AOA to file a self-declaration instead of “an affidavit” which was to be filed earlier to this amendment, this will ease the documentation burden at the time of incorporation.

Sec 12(1) inter alia envisages a company shall have a registered office “within 30 days of its incorporation” instead of “on and from 15 days of incorporation” and u/s 12(4) lays as

any change in the situation of registered office after date of incorporation shall be intimated to the ROC within “30 days” instead of “15 days”. This will surely ease the documentation as preparation of lease deeds or title deeds consume time earlier 15 days was not enough for the same.

Sec 21 inter alia provides now onwards an employee of the company may also be authorized besides the KMP or an officer of the company to sign the contracts or documents on behalf of company.

Prospectus & Allotment of Securities

Sec 26 An attempt has been made to align the disclosure requirement in the prospectus as required by the Act and SEBI by omitting the clause 26(1)(a), (b) and (d); and by empowering SEBI in this regard to specify such information to be included in the prospectus in consultation with CG. However, until such specification is made by SEBI, the regulation made by SEBI in respect of financial information and reports on financial information shall apply.

Sec 35(2) the amendment in this section comes up with a new clause 35(2)(c), relief to the person referred u/s 35(1) from the civil liability if such person(s) has relied on a misleading statement made by an expert and he had reasonable ground to believe and did up to the time of the issue of the prospectus believe, that the person making the statement was competent to make it and that the said person had given the consent as required u/s 26(5) and has not withdrawn it.

“that, as regards every misleading statement purported to be made by an expert or contained in what purports to be a copy of or an extract from a report or valuation of an expert, it was a correct and fair representation of the statement, or a correct copy of, or a correct and fair extract from, the report or valuation; and he had reasonable ground to believe and did up to the time of the issue of the prospectus believe, that the person making the statement was competent to make it and that the said person had given the consent required by sub-section (5) of section 26 to the issue of the prospectus and had not withdrawn that consent before delivery of a copy of the prospectus for registration or, to the defendant's knowledge, before allotment

thereunder”

Sec 42 has been totally substituted with a new set of provision: key points are summarized

•  Private placement offer letter shall not contain right of renunciation.

•  Return of allotment has to be filed within “15 days” from the date of allotment

  instead of “30 days”.

•  Money received under sec 42 shall not be utilized unless the allotment is made AND the return of allotment is filed with ROC.

•  Allowed to companies to make multiple offer of security simultaneously.

•  Penalty, for non-filing of return of allotment, imposed on the company, its

  promoters and directors to INR 1,000 for each day subject to maximum of INR 25

  lakh.

•  Penalty, for contravention of sec 42, imposed on the company, its promoters and

  directors, which may extend to the amount involved in private placement or INR 2 crore, whichever is lower.

  For exact transcript of new substituted Sec 42 refer the link provided at the end of this Article.

  Share Capital & Debentures

  Sec 47 as this section is the primary/basis for the voting rights of shareholders, and as related party have been restrained by sec 188(1) to vote on related party transaction, this have been aligned. As now Sec 47 starts with “subject to the provision of sec 188(1) besides sec 43 and 50(2)”

  Sec 53 deals with the prohibition of issue of shares at discount which is subject to sec 54 a new exception has been provided by insertion of sec 53(2A) which lays as A company may issue shares at discount to its creditors on conversion of its debt into shares due to any statutory resolution plan or debt restructuring scheme in accordance with any guidelines or directions or regulations specified by RBI.

  Also, in sec 53(2) “discounted price” shall be substituted with “discount”.

  Sec 54 contain provision pertaining to the sweat equity shares one of the condition to be satisfied by the company is: A company shall not issue sweat equity share unless period of 1 year has been elapsed from the date of commencement of its business, this condition has been done away with the omission of sec 54(1)(c).

  Sec 62 envisage the provision pertaining to the Further issue of share the amendment in this sec is not substantive in nature:

•  Compliance with section 42 in respect of the preferential offer has been incorporated in the section itself, which was earlier provided by the rules.

•  Right issue offer letter can be sent through courier also.

  Acceptance of Deposits by Companies

Sec 73(2) lays the condition to be satisfied prior to issue of DEPOSITS, certain condition has been modified as:

•  Requirement of Deposits insurance has been omitted as no insurance company was offering such insurance cover.

•  An amount not less than 20% of deposits, maturing in the next financial year shall be deposited before 30th April of each Financial year with a scheduled bank in separate a/c to be called as Deposits Repayment Reserve Account, earlier 15% of deposits maturing during the FY and in the next FY year, were to be deposited in such a/c; this now will reduce the cost of borrowing and will help to maintain liquidity at its best with minimum blockage of fund.

•  The defaulting companies now are allowed to issue Deposits after expiry of 5 years from the date of making good the default earlier there was permanent ban for such companies.

  Sec 74(1)(b) inter alia, time period for repayment of deposits accepted before the commencement of the Act has been revised to “3 year” from “1 year”. Provided renewal of such deposits shall be as per the provision of the Act.

 However Sec 74 envisages; in respect of any deposits accepted by the company before the commencement of this Act, the amount of deposits or any part thereof or any interest due there is unpaid at the time of commencement of this Act or becomes due thereafter the company shall repay the same within 1 year from the date of commencement or from the date on which such amount becomes due, whichever is earlier. this requirement was relaxed by RULE 19 of companies (Acceptance of Deposits) Rule, 2014 inter alia by providing the requirement of Sec 74(1)(b) is deemed to be complied, if the company was complying with the provisions of companies Act, 1956 and their Rules pertaining to the repayment of such deposits (deposits accepted before commencement of the Act). The Amendment aims to align these provision as the Rules was having overriding effect on the Act.

Sec 76A is penal provision for contravention of sec 73 or 76, the penalty has been revised to the amount of twice of deposits accepted or INR 1 crore, whichever is lower; instead of INR 1 crore which may extend to INR 10 crore. Punishment for the officer of the company u/s 76A(b) stands as “imprisonment AND fine” instead of “imprisonment or fine”

Registration of Charge

Sec 77 envisages the provision for creation of charge by the company, insertion of 3rd proviso to Sec 77(1) provides that certain charge as prescribed in consultation with RBI shall not fall under the ambit of this Section.

Sec 78 empower the charge holder to register the charge with ROC in case the company fails to register the same within 30 days of its creation as required in Sec 77(1), earlier it was 300 days meaning thereby chargeholder was able to register the same after expiry of 300 days of its creation.

Sec 82 the timeline for filing of satisfaction of charge is increased to 300 days by insertion of proviso to sec 82(1).

DECLARATION and PAYMENT of DIVIDEND

Sec 123 Inter alia now provides that BOD may declare interim dividend during any FY or at any time during the period from closure of FY till holding of the AGM out of the surplus in the P & L a/c or out of profits of the FY for which such interim dividend is sought to be declared or out of profits generated in the FY till the quarter preceding the date of declaration of the interim dividend.
Unrealized gains, notional gains or revaluation of assets and any change in carrying amount of an asset or of a liability on measurement of the asset or the liability at fair value shall be excluded in the calculation of Profits for this Section.

ACCOUNTS of COMPANIES

Sec 129(3) require CFS to be prepared by the company and shall lay the same in AGM, company shall consolidate the accounts of its subsidiaries and associate company, however earlier it was covered in the explanation to the sec 129(3) which now have been incorporated in the main body of the provision also the accounts of joint venture shall be consolidated while preparing the CFS, as Associate company includes Joint venture u/s 2(6).

Sec 130 in addition to authorities already specified, any other person concerned shall be given notice before passing an order for re-opening of accounts, as there were concern that, the company or it Auditors whose Books of accounts are to be reopened shall also be given a right to represent itself.

Earlier there was no time limit for reopening of Books of accounts u/s 130, now the order for reopening of accounts can be made up to 8 FY preceding the current financial year unless there is a specific direction under section 128(5) from the Central Government for longer period.

Sec 132 the fine for the firm has been reduced to INR 5 lakh from INR 10 lakh u/s 132(4)(c)(A)(II). In addition, sub section 6,7,8 and 9 has been omitted pertaining to the Appellate authority.

Sec 134 deals with financial statement & board report; the amendment Act has provided some relevant amendments to this section the brief is:

•  Chief Executive Officer shall sign the Financial Statement irrespective of fact of being director of the company or not; earlier he has to sign only when he is a director also.

•  Not every company has to appoint Managing Director, hence in sec 134(1) “if any” has been incorporated after the word Managing Director.

•  The disclosures which has been provided in the financial statement shall not be required to be reproduced in the BOD report again.

•  instead of exact text of the policies, key/salient feature of policies along with its web link shall be disclosed in Board report, if the policy is on the web site of the company.

•  The extract of annual return has been done away, now the web address where Annual return is placed, has to be given in the BOD report.

•  Insertion of sec 134(3A) provides that CG is empowered to prescribe an abridged Board’s Report for One Person Company and Small Company.

•  In respect to performance evaluation, it is proposed to omit the responsibility of the Board for carrying the performance evaluation of Board, Directors and committee. This will align the sec 178(2) & SCH IV.

  Sec 135 Envisage the provision pertaining to the Corporate social responsibility (CSR). The amendment to this Section seeks to address various practical issue and the brief is:

•  Earlier the basis for constituting CSR committee the basis of Net Worth, Turnover or Net profit was to be taken of “any FY” which was not clear, now the basis of these shall be of “immediately preceding FY”.

•  The term Net profit has been defined in the CSR Rules as which specifically excludes the profit from overseas branch and the dividend received from the company covered under S 135 also the EXP of Sec 135(5) provides that the Sec 198 shall be complied with in calculation of net profit in this section which is apparent contradiction as sec 198 doesn’t include those two deduction this has been now aligned by substituting the EXP as: “net profit" shall not include such sums as may be prescribed, and shall be calculated in accordance with the provisions of section 198.

 The Company not falling under the ambit of sec 149(4) was required to appoint ID mandatorily for the purpose of composition of CSR committee however the CSR rule do contain the relaxation for unlisted company not required to appoint ID may have CSR committee without ID. Since the requirement of having ID in CSR committee was arising from the Act there was concern as the Rules are overriding with the Act, the same now has been clarified by insertion of proviso to sec 135(1) which provides as the company shall have 2 or more directors in CSR committee where it doesn’t fall under the ambit of Sec 149(4).

Sec 136 deals with the right of member to copies of audited financial statement, the amendment Act now provides:

•  that the accounts may be sent in less than 21 clear days if 95% of the members entitled to vote at the meeting consent the same, this was earlier provided in the circular now the same has been incorporated in the Act itself.

•  only listed companies shall publish the accounts of its subsidiary or subsidiaries. earlier all companies required to comply this.

•  If the Foreign subsidiary is required to make CFS in pursuance to any law of such state the requirement of posting audited accounts of subsidiary shall be met if CFS of such foreign subsidiary is placed on the website of the listed company.

•  Where foreign subsidiary is not required to get its financial statement Audited, the holding listed company shall place such unaudited financial statement on the website and if the same is not in the English language then the financial statement shall be placed in English translation.

 If any member request for financial statement of a subsidiary, then if such subsidiary is not required to audited accounts, copy of unaudited financial statement can also be provided.

Sec 137 insertion of 5th proviso to sec 137(1) which enables the holding Indian company filing of unaudited financial statements of foreign subsidiary which is not required to get its accounts audited along with a declaration to that effect.

AUDIT and AUDITORS

Sec 139 the requirement of annual ratification of appointment of the auditor has been omitted. As non-ratification of auditor amounts to its removal in contrast the removal of auditor shall be in accordance with the sec 140(1) which shall be done only by the CG approval and by passing Special Resolution. Hence the amendment aims to align the same.

Sec 140(3) penalty for non-filing of ADT 3 by the Auditor on the resignation has been revised to “INR 50,000 or the remuneration of Auditor whichever is less” earlier the maximum penalty was INR 5 lakh.

Sec 141(3)(i) a person who, directly or indirectly, renders any service referred to in section 144 to the company or its holding company or its subsidiary company will not be eligible for appointment as Auditor. Earlier the restriction is only on the person, his subsidiary, associate company or any other form of entity.

Sec 143 deals with authority of Auditor, as to align the amendment in sec 129, now the auditor of the company shall be entitled to inspect the books of accounts of its subsidiaries and associate company.
Auditors responsibility for reporting on internal financial control should be limited to auditing of the system with respect to financial statement only; to address this the sec 143(3)(i) has been amended suitably.

Sec 147 envisage the provision related to the penalty of the auditors. The amendment to this section is briefed as under:

•  The maximum fine which can be imposed on an auditor has been revised from INR 5 lakh to INR 50,000 or 4 times the remuneration of the auditor, whichever is less.

•  The proviso of Sec 147(2) inter alia provides the fine which is now revised to INR 1 lakh or INR 25 lakh or 8 times of auditor remuneration whichever is less.

•  The criminal liability shall be of the partner or partners concerned of the audit firm and of the audit firm jointly and severally, however Rule 9 of Companies (Audit and Auditors) Rules, 2014 provides that the criminal liability shall be devolved only to the partner concerned, the Rule has effectively amended the requirement of the act pertaining to the jointly and severally liability this now has been addressed by incorporating the same in the Act itself.

 liability of auditor who is convicted of any default, to pay the damages to any person for loss arising out of incorrect or misleading statements made in the audit report, “to only members and creditors” of the company. Earlier the Auditor were liable to pay damages “to any person concerned”.

APPOINTMENT and QUALIFICATIONS of DIRECTORS

Sec 149 has been amended in a significant manner the whole section has been incorporated in the following chart:

•  Every company shall have one Resident Director, who shall stay in India during the FY ≥ 182 days. The days shall be counted in proportion for co incorporated during the FY at the end.

•  Who has or had no pecuniary relationship other than remuneration as director or transaction not exceeding 10% of his total income or such amount as may be prescribed with CASH or their promoters or directors during immediately 2 preceding FY or during current FY.

 Noneofwhoserelative; (i) (ii)

(iii) (iv)

Hold security or

interest in CASH during last 2 FY or during current FY.

Relative may hold security in THE COMPANY of Face value not exceeding INR 50 Lakh or 2% of paid up capital of CASH or such higher amount as may be prescribed

A relative may only hold security IN THE CO & NOT in its H, S or A co. moreover it’s a little ambiguous that the limit of 2% is of paid up share capital of CASH which can be debated.

Sec 152 a person may be appointed as director if he /she holds DIN or such other number as prescribed u/s 153.

Sec 153 CG may prescribe such identification number similar to DIN.

Sec 160 the requirement of deposit of INR 1 lakh with respect to nomination of directors shall not be applicable in case of appointment of independent directors or directors nominated by nomination and remuneration committee.

Sec 161 u/s 161(1) restriction has been created for a person from being appointed as an alternate director if he is holding directorship in the same company.
Also, casual vacancy of Director now can be filed by every company earlier only public company was able to fill such casual vacancy also such appointment shall be approved in immediate next GM.

Sec 164 deals with the disqualification of Directors:

•  Director appointed in the company which fall under the ambit of sec 164(2),

  then such director shall not incur the disqualification for a period of 6 months

  from the date of his appointment.

•  The disqualification u/s 164(1)(d), (e) and (g) shall continue even if the director

  has filed an appeal.

  Sec 165 directorship in the dormant company shall not be counted while calculating the limit of 20 directorship in this section.

  Sec 167 provides the grounds of vacation of directorship:

•  If in case the director is disqualified u/s 164(2) then he shall vacate the office in all

  companies other than the company who is in default of sec 164(2).

•  the director will not vacate office u/s 167(1)(e) and (f), where an appeal is preferred.

  Sec 168 it is now optional for Director to file DIR 11 to ROC at the time of resignation.

The article doesn’t cover whole amendment Act; however, an attempt has been made in order to cover the relevant aspects with detailed analysis and interpretation.

For reference:

For exact transcript of Companies (Amendment) Act, 2017 refer to https://www.icsi.edu/WebModules/CompaniesAmendmentBill2017_LokSabha.pdf

Disclaimer:

The content of this document has been prepared on the basis of the provisions of the Companies (Amendment) Act, 2017. The results & interpretation have been done on the basis of my understanding of the Act & Rules, where applicable and with reference to the general articles and analysis. I explicitly disclaim any financial or other liability of any kind arising on account of any action taken pursuant to the results or interpretation of this document. With respect to information available hereinbefore, the author doesn’t make any warranty, express/implied or assume any liability or responsibility for the accuracy, completeness, or usefulness of such information.