Talking Point. Rebooting the Companies Act

The Companies Law Committee (CLC) constituted by the Ministry of Corporate Affairs has come out with a report containing wide-ranging recommendations to overcome the implementation challenges of the Companies Act, 2013 (Act).

While the CLC has proposed some notable changes, there are areas where it has decided not to suggest any amendments and retain the legislative intent of the Act. The report is open for comments till February 15, 2016.

Among the major recommendations is the proposal to change the definition of associate company and subsidiary company.

The Companies Act defines a subsidiary company on the basis of control of the holding company over the composition of the board of directors or the holding company controlling more than one-half of the total share capital. This has been creating challenges in determining the ownership of companies.

For instance, companies having preference share capital greater than equity would be shown as subsidiaries but would not be consolidated under accounting standards.

To address this, the CLC has proposed to replace ‘total share capital’ with ‘total voting power’. Similarly, the definition of an associate company would be amended to focus on total voting power — significant influence means control of at least 20 per cent of the total voting power or control of or participation in taking business decisions under an agreement.

Currently, the approval of shareholders and the Centre is required if a public company intends to pay managerial remuneration exceeding the overall limits and also by companies having inadequate or no profits.

With the emphasis on self-regulation, the CLC has proposed the removal of the Centre’s approval for managerial remuneration with few additional disclosures.

It is interesting to note that despite strong representation, no changes have been proposed in the auditor rotation requirements. To ensure independence of the auditor, the CLC did not make change in non-audit services or provide exemption to any class of companies.

A relief for auditors is the recommendation that their reporting obligations on internal financial controls be with reference to financial statements only.

No change in responsibility of the board of directors for Internal Financial Controls has been proposed in view of their fiduciary role.

Despite various representations by the ICAI, the CLC proposes to retain wider powers of the National Financial Reporting Authority to act as an independent body to oversee the profession.

Another big relief for the corporate sector is the proposal to do away with restrictions on layering of subsidiaries. Companies will have sufficient flexibility to make investment through more than two layers of investment companies. To harmonise with SEBI regulations, the CLC proposes to introduce a threshold for pecuniary relationships in relation to qualification for an independent director.

To rationalise penal provisions to align them with international best practices, it has been proposed that frauds involving amounts below specified limits which do not involve public interest can be compoundable.

In view of the comprehensive SEBI regulations on forward dealing and insider trading, it is proposed to omit the relevant sections from the Act.

The CLC has endeavoured to address the interests of various stakeholders and for creating positive environment for start-ups through proposals such as reducing compliance burden on account of private placement procedure, raising deposits for its initial 5 years without any upper limits, increasing limits for sweat equity to 50 per cent of paid-up capital from 25 per cent, and permitting ESOPs to promoters working as employees.

These have paved the way for a much simplified law without diluting the intention of the Act to strengthen corporate governance. It is expected that the regulator will consider them.

The writer is Partner, Grant Thornton India LLP

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