First introduced in the lower house of parliament as the Companies Act (Amendment) Bill, 2016 in March of last year, the Bill seeks to make important changes to the Companies Act of 2013 in relation to the structuring, disclosure, and compliance requirements for companies.
After incorporating feedback from the Standing Committee on Finance, the respective government chambers of commerce and industry, as well as professional bodies, the draft bill was finally approved by the lower house as the Companies Act (Amendment) Bill, 2017 on July 27, 2017.
It will now be examined by the upper house of parliament for approval before seeking the President’s assent.
The 2017 Bill – in its current form – continues to rein in the layering of both investment companies and subsidiaries. Presently, the 2013 Act states that investments in a company cannot be made through more than two layers of investment companies; this stands to remain unchanged.
Some of the major amendments proposed to the 2013 Act are outlined below:
- Definition of ‘related party’ expanded – The Bill expands the prevailing definition to include “an investing company or the venture of a company” in Section 2(76). Thus, a body corporate’s investment in a company will allow that company to become an associate company of the body corporate.
- Definition of a ‘small company’ – Under Section 2(85), to qualify as a ‘small company’ – it is proposed to raise the firm’s maximum paid-up share capital amount from US$780,000 (Rs 50 million) to US$1.56 million (Rs 100 million), and increase the prescribed turnover amount from US$3.12 million (Rs 200 million) to US$15.61 (Rs 1 billion).
- Definition of a ‘subsidiary company’ – It is proposed in Section 2(87), that a subsidiary company or subsidiary – in relation to any other company (the holding company) – means a company where the holding company controls the composition of the Board of Directors or exercises or controls more than one-half of the total voting power either on its own or together with one or more of its subsidiary companies. Currently, the 2013 Act provides for the exercise or control of more than half of the total share capital.
- Definition of ‘associate company’ – The Bill changes the explanation of the term ‘significant influence’ under the definition of an associate company in Section 2(6) to having control of at least 20 percent of the total voting power or control of or participation in business decision-making. Under the current Act, an associate company’s ‘significant influence’ is tied to control of share capital. According to legal experts, this proposed amendment could potentially impact the parent company’s financial accounting, and in the case of insolvency management.
- Simplification of the private placement process – The 2017 Bill proposes to amend the entire Section 42 of the Companies Act of 2013, which deals with the issue of shares on private placement basis. Among the proposed changes, the Bill takes away the right of investors to renunciate their investment rights in favor of another entity, so that only investors whose names are mentioned in the information memorandum, filed by the issuer, can subscribe to the shares.
- Definition of independent directors – The Companies Act of 2013 defined an independent director as a person who has or has had no ‘pecuniary’ relationship with the company, its holding, subsidiary, or associate company, or their promoters, or directors – during the two immediately preceding financial years or during the current financial year. The Companies Act (Amendment) Bill, 2017 seeks to exclude remuneration and transactions – not exceeding 10 percent of the independent director’s total income – from what is defined as a pecuniary or financial relationship.
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