Lok Sabha clears changes to Companies Act to improve business climate

The amendments propose to relax the rules for related party transactions, drop the minimum capitalisation norms and prescribe a threshold for reporting fraud by auditors. They also prescribe penalty for companies raising deposits illegally.Some of its provisions would have made doing business in India extremely difficult and the investment environment in the country would be disrupted by such a law. The object of these amendments is solely to ease the process of doing business in India,” Finance and Corporate Affairs Minister Arun Jaitley said in his reply to the debate on the amendments. “Industry is appreciative of the swift manner in which the government is seeking to address the issues,” industry lobby FICCI said in a statement. The amendments also provide that board resolutions would not be open to public scrutiny, a move aimed at preventing leak of confidential commercial information to rivals.

“A company deciding in its board on its next model, a new product trademark or the funding mechanism would not like such matters to be known to competitors. Amendments will bring parity with global laws and will help in ease of doing business,” Jaitley said.

While winding up the debate, the minister said the amendments will do away with draconian POTA-type provisions, which had made securing bail difficult for a person accused of violating the Companies Act. (POTA or the Prevention of Terrorism Act was repealed in 2004.) Stakeholders were also concerned that stringent regulations for related party transactions could hurt routine business activity.

“There wasn’t a realistic expectation that the ministry would get an amendment bill tabled and passed within such a short time of the Act being operationalised. It, therefore, comes as a great relief to corporates as they go about implementing the new law and gear up for the first year of reporting under the new law,” said Sai Venkateshwaran, partner and head of accounting at KPMG in India.

The amendments also include a provision to ensure that frauds beyond a certain threshold would need to be mandatorily reported by the auditors to the government.

“These amendments address some of the issues raised by stakeholders including CAs and respond to representations made by auditors and corporates, redress problems faced by large stakeholders, who are related parties, and also align the related party approval requirement with Sebi policy in one case,” said Yogesh Sharma, partner, assurance, Grant Thornton India LLP.

The amendments also rectify several inconsistencies between the Act and rules that existed in the new Companies Act of 2013. “There were anomalies in several provisions of the Companies Act and clarifications issued from time to time weren’t helping. The amendments were much needed,” said Anand Mehta, partner at Khaitan & Company.

The article appeared in the Economic Times. The article can be found here.