Back to Basics. Decoding the changes in the Companies Act

The Ministry of Company Affairs (MCA) issued a circular last month notifying certain sections of the Companies (Amendment) Act, 2017.

The emphasis has been on simplifying rules and procedures to facilitate ease-of-doing-business, thereby removing certain practical difficulties faced by Corporate India.

One of the key changes is the removal of the restriction on new companies to issue sweat equity shares. Sweat equity shares are generally issued to persons for providing know-how or making available intellectual property rights.

Earlier, companies couldn’t issue sweat equity shares till completion of one year from the date of their commencement.

With this amendment, a company can now issue the shares immediately after incorporation.

This could help new-age companies, including start-ups, attract talent, and procure know-how and other value additions immediately after incorporation.

Recruiting directors

Earlier, defaulting companies faced difficulties in bringing new directors on board as their directorship in other companies may/could get affected due to their appointment in such defaulting companies. Defaulting companies are such companies which have not filed financial statements or annual returns for a continuous period of three financial years, or have failed to repay the deposits or redeem debentures for more than a year.

The amendment now gives a six-month grace period, permitting the incoming directors to rectify the past non-compliances of the defaulting company.

This change will now enable individuals to become a director of a defaulting company without any additional repercussion on their existing directorships.

Directors are now also permitted to attend meetings through any audio-visual mode for certain matters such as approval of annual financial statements, board report, merger and restructuring, so long as the requisite quorum is physically present in the meeting.

Until now, these matters required all directors to be physically present at the meeting. This change would help multinational companies that have foreign directors on board of an Indian company or directors of Indian companies who are continuously travelling.

Indian companies will benefit as they will not be required to match the calendar of the directors for undertaking such matters for board approval.

Ease in granting loans

Under the erstwhile provision, there was restriction on companies to grant a loan to any other private company if there were common directors or id its director held stake in such a private company. The said restriction was also applicable to lending to any corporate body which is being controlled by such a director. By this amendment, these have been were relaxed, and thus, the difficulties faced by the companies (especially private group companies) while entering into genuine loan, guarantee and security transactions are taken care of, subject to fulfilment of certain conditions.

Another significant amendment deals with the determination of a subsidiary on the basis of voting power, instead of share capital. Under earlier provisions, a company was considered a subsidiary company, if more than 50 per cent of its total share capital was held by another company. For example: Company X has two class of equity shares — Class A equity capital of 1,00,000 and Class B equity capital of 2,00,000. Class A equity shares which carries voting rights was held entirely by Company Y, and Class B equity shares with no voting rights was held entirely by Company Z. Going by the erstwhile definition of a subsidiary, Company X was treated as a subsidiary of Company Z. Now, with this amendment, as Company Z does not carry any voting rights, Company X will not be a subsidiary of Company Z. The amendment would now require companies to re-determine their subsidiary classification for matters such as consolidation, ROC filings, etc.

Earlier, approvals were required to be sought with requisite authorities for non-filing of certain forms beyond 270 days. Now, companies can file forms even beyond 270 days without any approvals. This step would enable minimum government intervention by paying additional fees.

While there are other amendments which have also been notified, the above amendments certainly give a fillip to the ease-of-doing-business in India .

The writers are with BDO India.

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