The Companies Act, 2013, which came into effect from April 2014, has seen scores of changes. Last week, a government-appointed committee proposed another set of 100-odd amendments. Tax and legal experts share with Business Standard their insights on the implications of the committee's key recommendations
Removal of government approval for managerial remuneration
'Enlightened non-promoter shareholders better than passive regulator'
The proposal to remove government approval for managerial remuneration is in line with international best practices. Seeking government approval for managerial remuneration is a legacy issue and has been a big impediment in ease of doing business. Such approvals took months of paper work and follow ups, leading to uncertainty in the minds of businesses. In effect, the regulator by default was taking business decisions, which should be best left to the judgment of shareholders. Any fears that this move will lead to a spike in remuneration of key managerial personnel should get addressed with the proposal on the need for a special resolution to approve the remuneration along with necessary safeguards in the form of additional disclosures, audits and higher penalties. Having enlightened non-promoter shareholders is better than a passive regulator taking business decisions.
The proposal is also in favour of start-ups, which need to attract talented individuals to drive their business. Companies that do not have adequate profit - which is the case in most start-ups - need talent to drive their business.
Partner, Grant Thornton India
Compliance for private companies
'Inability to make compliance easy is a missed opportunity'
The proposals to allow multi-layering of investment companies and remove prohibition on loans to subsidiaries will bring more ease of doing business. Many conglomerates need multi-layer investment structures for genuine reasons such as fund-raising, creating sector specific sub-groups, and private equity investment. Companies will have greater flexibility in raising finance where a PE investor wants to invest in specific businesses or group of entities, instead of making investment at ultimate parent level. There is a marked increase in compliance requirements mandated for private companies under the new Companies Act. There are concerns whether there is a need for increasing so much complexity in firms where the public has no direct financial interest. The Ministry of Corporate Affairs had issued a notification providing marginal relaxations for private companies. Still, there are many requirements in the Act, namely, preparation of consolidated financial statements, internal financial control reporting, rotation of auditors, approval of related party transactions, internal audit, restrictions on giving loans to directors and vigil mechanism, which apply to private companies.
These requirements did not exist for private companies under the 1956 Act. Also, globally in many countries such requirements are not made applicable to private companies. The committee has not made any recommendations to make compliance easy for private companies. This is a missed opportunity to increase the ease of doing business for small private companies.
Partner in a member firm of EY Global
Raising of funds
'No clarity on "relevant date" to calculate share price'
The Company Law Committee (CLC) has suggested many recommendations to simplify the process of fundraising without diluting the provisions of law applicable to it. It has recommended reducing paperwork required for raising funds by suggesting filing of e-forms with the registrar of companies (RoC) be dispensed with. Another recommendation is linking the minimum issue size of private placement to the issue price of shares instead of the face value. It has suggested many provisions of the Companies Act be harmonised with Fema regulations. These include permitting partly paid-up shares as against fully paid-up shares as required under the Companies Act and allowing the use of pricing formula for convertible securities as permitted in Fema regulations, provided the conversion price is not lower than the price prevailing at the time of issue. To curb the practice of using simpler route of rights issue offer to circumvent 'preferential offer', the CLC has recommended that the principles in the English Companies Act should be emulated to decide if the renunciation right has been genuinely exercised or only to bypass the provisions preferential offer. But,it would have been good if the CLC had recommended 180 days to allot shares, as under Fema regulations, instead of within 60 days of receiving the fund.
It has also not clarified the meaning of the term 'relevant date' to calculate the price of securities. If these recommendations are accepted, the process for funding-raising would certainly become clearer and easier without diluting the substantive provisions of law.
Partner, J Sagar Associates
Impact on minority shareholders
'Minority shareholders need to be vigilant'
Several of the changes suggested by the CLC come with appropriate safeguards, including in some cases further empowering shareholders. But, a few areas will require special attention from minority shareholders:
Loans to directors, other interested parties: Section 185 currently prohibits such loans, whereas the report recommends that such loans be permitted so long as those are approved by shareholders vide a special resolution and the funds are used for the recipient's principal business activities and not further given as loan or investment. Shareholders will, therefore, need to carefully evaluate whether the granting of such loans is in the interest of the company, when exercising their vote.
Related party transactions: The report recommends that no related party be allowed to vote on approval of any related party transactions, even if they are not a party to that transactions, thereby taking away a relaxation that was provided by an MCA circular last year. As a result, more transactions will come their way for approval, where the minority shareholder vote truly counts.
Managerial remuneration: It recommends the approval of managerial remuneration be left to the shareholders, with a special resolution being mandated for promoter or related person, and an ordinary resolution for professionals in managerial positions.
Minority shareholders, therefore, need to be vigilant and exercise the powers vested in them in a judicious manner.
Partner and India Head - accounting advisory services, KPMG in India
This article was published in the Business Standard, to read please click here.