On September 12, 2013, the Ministry of Corporate Affairs (MCA) notified 98 Sections of the Companies Act, 2013, and issued circulars to clarify the notification. These circulars recognise that certain provisions of the 2013 Act have a far-reaching impact when compared to the provisions of the Companies Act, 1956.

Section 2(87) — Definition of subsidiary company (Section 4 of the 1956 Act): The 1956 Act states that a company is a subsidiary of another when more than half the nominal value of its equity share capital is held by the other company. The 2013 Act states that an entity in which the holding company inter alia exercises or controls more than half of the total share capital directly or indirectly is a subsidiary company. Therefore, when evaluating whether a company is a subsidiary under the 2013 Act, the total share capital (equity and preference) need to be taken into account.

Section 23: Public offer and private placement: While the provisions relating to public offer in the 2013 Act have been notified, the provisions relating to private placement by public and private companies have not yet been notified.

Section 38: Punishment for personation for acquisition of securities (Section 68A of the 1956 Act): Section 38 of the 2013 Act, inter alia , states that where a person has been convicted under this section, the Court may also order disgorgement of gain, if any, made by him/ her, and seizure and disposal of the securities in his/ her possession; and that the amount so received through such disgorgement or disposal of securities shall be credited to the Investor Education and Protection Fund.

Section 180: Restrictions on powers of Board (Section 293 of the 1956 Act): The restrictions on the Board’s powers are now applicable to private companies as well, and can be exercised with the consent of the company by a special resolution (an ordinary resolution was envisaged under the 1956 Act). These powers include selling or leasing of the company’s undertaking(s). “Undertaking”, according to the 2013 Act, is one in which the company’s investment exceeds 20 per cent of its net worth according to the audited balance sheet of the preceding financial year; or one that generates 20 per cent of the company’s total income during the previous financial year.

The powers that can be exercised by the Board include investing in trust securities the amount of compensation received as a result of any merger or amalgamation. However, the nature of compensation envisaged to be received not clear.

With regard to the power to remit, or to give time for the repayment of, a director’s debt, the following questions arise: The 2013 Act does not address situations regarding existing loans given to directors. Also, this appears contradictory to the provisions of Section 185 of the 2013 Act, which provides that no company shall, directly or indirectly, advance any loan, including any loan represented by a book debt, to any of its directors or to any other person in whom the director is interested or give any guarantee or provide any security in connection with any loan taken by him/ her or such other person, except as set out in that section.

Section 181: Company to contribute to bona fide and charitable funds (Section 293(1)(e) of the 1956 Act): The provisions of this section state, inter alia , that where the aggregate contribution in any financial year exceeds 5 per cent of its average net profits for the immediate three preceding years, prior permission of the company in a general meeting is required. However, the mode of computation of net profits has not been provided for by way of reference to Section 198 of the 2013 Act.

Section 182: Prohibitions and restrictions regarding political contributions (Section 293A of the 1956 Act): The aggregate that can be contributed by a company in any financial year has been increased to 7.5 per cent of net profits. However, the method of calculation of profit has not been stated in the section as was mentioned in the 1956 Act.

The notified sections also include certain sections that contain similar provisions as the 1956 Act. These sections do not have any additional impact at present. Companies need to be aware of which sections will usher in and which won’t, and of the dates on which the changes are applicable. Proactive action to ensure compliance will go a long way in building investor confidence and enhancing good corporate governance.

Madhumathi L, Senior Manager, contributed to this article.

The author is Partner, Price Waterhouse

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