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Panel suggests more freedom for India Inc-bs

Leeway to fix managerial salary, more sweat equity, stock options for start-ups

To make it easier for companies to do business, a panel constituted to suggest amendments in the Companies Act, 2013 has recommended, among other things, doing away with any kind of government intervention in managerial remuneration and allowing start-ups to issue more sweat equity and employee stock options (ESOPs).

The panel, headed by corporate affairs secretary Tapan Ray, has said that for managerial remuneration shareholders' approval should suffice and no government nod should be needed. Further, only ordinary resolution, nod from 50 per cent of shareholders, would be enough. At present, approval from 75 per cent shareholders is required. The committee also suggested relaxing norms for start-ups to issue sweat equity. Now, 50 per cent of the paid up capital could be issued as sweat equity, against the existing norm of 25 per cent.

The panel said employee stock ownership plan (ESOP) norms be relaxed for start-ups. Currently, ESOPs cannot be issued to promoters or promoter directors even if they are employees of the company. The committee felt this rule should be relaxed to enable issuance of ESOPs to promoters who are working as employees or employee directors or whole-time directors. This would help the promoters gain from increase in future valuation of the company without in impacting finances of the company during its initial years. On norms for associate companies, the panel suggested a company would only be considered an 'associate company' if the parent company controls at least twenty per cent of total voting power, instead of the current norm based on the share capital.

The ten-member panel recommended the removal of provision under Section 2(87), which prohibited the companies to not have more than two levels of subsidiaries. "The panel has tried to address various transitional challenges for companies as well as lots of inconsistencies because of different provisions in the Companies Act, accounting standards and Sebi regulations," said Yogesh Sharma, Partner, Grant Thornton India.

The panel found that Section 447 - which lays down the punishment for any person found guilty of fraud to minimum six months imprisonment - has a potential of being misused and may also have a negative impact on attracting professionals in the post of directors etc. It has recommended that only those frauds which involve Rs 10 lakh or above, or one per cent of the company's turnover, whichever is lower, may be punishable under Section 447.

In order to bring the Companies Act in harmony with the Sebi regulations, the panel said that independent director should not have any kind of pecuniary relationship with the company. It has recommended there should be a test of materiality so that a 'pecuniary relationship' can be established and, subsequently, prohibited if it is affecting the director's independence.

Sections 194 and 195 of the Companies Act - which restrict forward dealing and insider trading by directors and key managerial professionals (KMPs) of any company - have also been recommended to be removed. These issues are already covered under Sebi regulations. "The Committee deliberated on the issues involved and noted that Sebi regulations are comprehensive in the matter (and also apply to companies intending to get listed), and in view of the practical difficulties expressed by stakeholders, sections 194 and 195 may be omitted from the Act," said the panel report. This means the norms governing insider trading and forward dealing would not apply to unlisted entities.

In a major jolt to the Institute of Chartered Accountants of India (ICAI), the panel has recommended formation of National Financial Reporting Authority (NFRA) under Section 132 of the Act. The Committee said, "in view of the critical nature of responsibilities wherein lapses have been seen to cause serious repercussions, the need for an independent body to oversee the profession is a requirement of the day."

Major Changes Suggested In Companies Act

  • A firm to be called associate company only when the parent firm owns 20 per cent of voting power in it
  • Insider trading and forward dealing provisions to be removed from the Act as Sebi regulations already exist
  • Institute of Chartered Accountants of India's regulatory powers to be taken away; National Financial Reporting Authority would be formed
  • Independent directors should not have any pecuniary relationship - where it is getting material benefits - with the company
  • Small frauds of less than Rs 10 lakh not to be considered under harsh provisions
  • Private placement process to be simplified, doing away with separate offer letter, making valuation details public
  • Incorporation process to be made easier, allowing greater flexibility to companies
  • Self-declarations to replace affidavits from subscribers to memorandum and first directors
  • Managerial remuneration to need only shareholders' approval. No need for government approval

This article appeared in Business Standard on 02nd February, 2016.