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Over the last seven months, the bulk of the changes that have taken place pertain to provisions and rules in related-party transactions, corporate social responsibility (CSR) spend, easing rules for private companies, issue of consolidated financial statements, and the role of directors and key managerial personnel. Most of these changes were driven by calls from stakeholders -industry, auditors, consultants – to ease the environment to do business, while striking a balance for meeting a higher corporate governance threshold in the way business is conducted. Some of these changes were necessitated by avoidable drafting errors in the Act.
Business Standard spoke to various stakeholders from industry, audit community and corporate legal experts to get a drift of the impact of these changes on the way the Act will affect businesses.
Related-party transactions
While going about making these clarifications and changes, the ministry of corporate affairs has devoted most of its time and effort to issues surrounding related-party transactions. Ever since the new company law came into effect, stricter provisions around related-party transactions were something that was hurting the industry the most, with most complaining that they were difficult to implement, affecting day-to-day business operations. The government has, over the months, brought about changes to make these provisions more industry-friendly. According to an analysis by KPMG Accounting Advisory Services, eight major changes were made in the provisions pertaining to related-party transactions over the past seven months. These do not include the amendments suggested by the Cabinet last week.
One of its clarifications was that if any company and a public company have common director, and if that director – either by himself or along with his relatives – holds more than two per cent in the paid-up share capital of the company, then the companies will be termed ‘related party’. This provision was clarified so that a common director does not create a conflict of interest and minority shareholders are not harmed because of that director’s actions.
One major clarification came in relation to merger and amalgamations, where the government said mergers and amalgamations would be done according to the provisions of the Companies Act of 1956, and the provisions regarding the related party transactions would not be applied to such cases. Mergers and amalgamations, according to the new law, have to be sanctioned by National Company Law Tribunal (NCLT), instead of high courts. The Madras Bar Association has already filed a case against NCLT formation and the case is sub-judice.
In July, the government clarified that the related parties of the company themselves can’t vote when any related-party transaction comes up to a stage where there is need to pass a special resolution. In effect, this meant that only minority shareholders can vote in such a resolution. The government has now proposed that instead of special resolution, which requires 75 per cent approval, only an ordinary resolution needs to be passed, which requires just 50 per cent approval.
A special resolution is required in case a transaction value crosses a certain threshold. Industry associations felt that the prescribed threshold was very low. Subsequently, in a major relief, the government raised the threshold, bringing more clarity to the issue of passing the related-party transaction.
Sai Venkateshwaran, partner and head – accounting advisory services at KPMG in India, says the government seeks to partly align the requirements of the Act with the Securities and Exchange Board of India (Sebi) requirements, whereas in some other aspects, it has sought to provide greater relaxation, compared to the Sebi requirements.
Related party transactions
Thresholds for approvals
Exemptions from approval requirements
Amendments to related party definition
Internal financial controls
Consolidated financial statements
Financial statements prior to April 1, 2014
Subsidiaries of overseas companies
Independent Directors
Corporate Social Responsibility
The ministry has clarified certain issues relating to the provisions of Section 135 and the provisions of CSR rules. Some key clarifications are:
Depreciation
Useful life and residual value of the assets
Corporate social responsibility
The government has brought several clarifications on CSR spending. It prescribed certain areas in Schedule 7, in which a company can carry out its CSR activities. A subsequent notification, however, clarified that such a list of activities prescribed in the Act should be “interpreted liberally”. The government also clarified that while the companies can count the salaries paid to regular CSR staff as part of CSR budget, they cannot consider expenses incurred for the fulfilment of any law as CSR.
Following the clarifications, salaries paid by companies to regular CSR staff as well as to volunteers can be factored in to the CSR project cost as part of the CSR expenditure, notes Yogesh Sharma, partner, Grant Thornton India LLP.
Independent directors and financial statements
The Act has defined the role of independent directors, making them a crucial cog in uplifting corporate governance practices in the board. However, in a major relaxation to industry, the government has stated that any transaction with the independent directors, which is covered under the related-party transactions, and is under ‘ordinary course of business’ and ‘arm’s length basis’, will not be considered a pecuniary relationship.
According to V Balaji, partner, Deloitte Haskins & Sells, a clarification has also been issued to state that any remuneration that the independent director receives as prescribed in the Act will not be treated as part of a pecuniary relationship. “He/she can be considered for appointment in the holding company, subsidiary or associate company of such company,” he adds.
The company, if it has many step-down wholly-owned subsidiaries, then only the top holding company needs to bring a consolidated statement. The government also clarified that the consolidated financial statement need not be prepared by a company, which has no subsidiaries, but has only associate companies or joint venture companies.
Recent Cabinet amendments
The government has decided to remove the requirement of paid-up share capital to start a company. In the Act, any private company had to show certain amount in bank account in order to get a commencement certificate.
The government proposes to further loosen related party provisions. The Cabinet has also cleared provisions prescribing punishment under the new Act for the illegal deposits obtained from any company, prohibiting public inspection of board resolutions filed with the Registrar of Companies, introducing a threshold so that auditors shall only report frauds above that limit, among others. The plan is also to bring out the guidelines of the terms “ordinary course of business” and “arm’s length basis”, which will be a guide to businesses on nature of transactions.
A host of concessions to private companies – mostly small and mid-sized ones – from some stringent provisions of the Act is also in the offing.
More changes in the offing
The Companies Act, 2013, was notified on August 29 last year. Out of 470 sections in the Act, 283 sections and 22 sets of rules corresponding to such sections have so far come into force. The Companies (Amendment) Bill, 2014, set to be tabled in the current session of Parliament, will amend certain provisions in the Act. The proposed changes, cleared by Union Cabinet last week, include:
The article appeared in the Business Standard.