The Companies (Amendment) Act, 2017 – Key Changes for Corporate Governance in India
India’s upper house of parliament passed the Companies Act (Amendment) Bill, 2016 in December 2017, after it was approved by the lower house last July. Upon securing the President’s assent, the Act came into effect on January 4, this year.
In India, the Companies Act regulates the incorporation of a company, responsibilities of a company and its directors, and the dissolution of a company. The 2017 Amendment Act consists of 93 amendments to the 2013 Companies Act, resulting in changes related to legal definitions, corporate governance, and management compliance. It impacts different aspects of business management in India, including key structuring, disclosure, and compliance requirements.
The new law is an important feature of the Modi government’s economic reforms agenda, and aims to improve the ease of doing business in India. The Amendment Act also irons out existing policy inconsistencies between financial regulatory mechanisms, such as the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India (RBI).
Below, we highlight key changes in the 2017 Companies (Amendment) Act.
Expansion of the term ‘related party’
The Amendment Act expands the definition of related party to include “an investing company or venture of the company”. This means that any company which receives investments from the body corporate, will become an associate of the body corporate. This is likely to cover investments in assets, joint ventures, human resource, and technology, among other things.
Definition of a subsidiary company
The subsidiary company will be determined on the basis of total voting power and not total share capital. The holding company must control the composition of the Board of Directors or control more than half of the total voting power in the subsidiary. The Amendment Act also allows firms to offer loans to subsidiary companies without approval from shareholders.
Definition of associate company
The term associate company will be used in place of the term “significant influence”. The 2013 Companies Act associates significant influence with control of 20 percent of total share capital while the 2017 Amendment Act provides for the associate company to hold 20 percent of the total voting power or participation in business decisions as per an agreement.
The same section also clarifies the definition of joint ventures as: a joint arrangement whereby the parties that have joint control of the arrangement, have rights to the net assets of the arrangement. This section is crucial for the financial accounting of the parent company, especially in cases of insolvency management.
Simplification of the private placement process
Private placement is redefined as any offer or initiation to subscribe or issue securities to a select group of persons by a company through private placement offer-cum-application. The private placement process no longer requires companies to keep separate offer letter details. The number of filings to be made to the Registrar of Companies have also been reduced. The reduced documentation is expected to enable faster access to funds.
Definition of independent directors
The 2013 law restricted a person with a ‘pecuniary interest’ in the firm from becoming an independent director. The term pecuniary interest was open to interpretation, and often resulted in confusion.
The Amendment Act provides clarity by stipulating that a person can become an independent director if the monetary benefit accruing to them, from the firm, is less than 10 percent of their total income.
Simplification of company incorporation
The Amendment Act relaxes several procedures involved in company incorporation. The period of reservation for a company name is now 20 days, which is counted from the date of approval for the new company. The reservation period is increased to 60 days in case an existing company wants to change its name. The proposed directors of the company can submit a self-attested declaration instead of an affidavit.
The time period for a company to establish its registered office is now 30 days, counted from the date of its incorporation.
Remuneration to management
The Amendment Act does away with the need to secure government approval for remuneration (exceeding 11 percent of profits) to top management. Instead, this matter will now need to be cleared by the company’s shareholders.
Financial statements and annual returns
Financial statements and annual returns of a firm must be attested by its chief executive officer (CEO), whether she/he is appointed as a director or not. The Form MGT-9, which served as a summary of the annual return in the board of director’s report has now been removed.
The Amendment Act also authorizes the government to issue a separate annual return form for one person companies (OPCs) and small companies. Further, companies with subsidiaries and associates (including joint ventures) must prepare a consolidated financial statement, apart from individual statements.
Ratification of auditors and audit committee
Auditors can be appointed for five years, and their appointment will not need to be ratified in every annual general meeting (AGM). Public listed companies must constitute an audit committee.
Loans to directors and employees
The 2013 law provided that a firm can extend credit to its directors and others that a director is interested in. The Amendment Act clarifies that a firm can offer loans and security to a director or a company in which they have stake. Such an offer can be made only after a special resolution is passed, that is, 75 percent of the company’s shareholders must approve it. Loans to family members of the company’s directors is still restricted.
Rohit Kapur, India Country Manager, Dezan Shira & Associates says: “The new Companies Act, 2017 has amended some of the confusing and contradictory provisions of the Companies Act 2013. These amendments will contribute towards improving “Ease of Doing Business” in India and inspiring confidence in investors.”
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