Cabinet clears changes to Companies Act for ease of doing biz

Within months of the new Companies Act coming into force, the government today cleared a slew of changes to this law to make it easier for corporates to do business and to ensure severe punishment for those raising illegal deposits from the public.

This would be among the first major initiatives by the government to make changes in the country's regulatory framework to improve its global ranking for ease of doing business, where India has been ranked very low at 142nd position in the latest World Bank report.

The 14 proposed amendments, which were approved by the Union Cabinet this evening, also include provision to ensure that frauds beyond a certain threshold would need to be mandatorily reported by the auditors to the government.

To address concerns raised by the corporates, the government has also agreed to relax a number of norms including those pertaining to related party transactions, while resolutions passed by the companies' boards would not be subjected to public inspection.

The new Companies Act, which came into force with effect from April 1 with some provisions yet to become operational, has faced stiff criticism for many provisions.

The new law, put in place by the previous government, has replaced a nearly six-decade old Companies Act, 1956, but the new government has been indicating for quite some time that it would bring in necessary changes to address concerns raised by various stakeholders including corporates.

The Companies (Amendment) Bill, 2014, cleared by Union Cabinet chaired by Prime Minister Narendra Modi, would now go to the Parliament to bring into effect necessary amendments to the existing Act.

The Companies Act, 2013 was notified on August 29, 2013. Out of 470 sections in the Act, 283 sections and 22 sets of Rules corresponding to such sections have so far been brought into force.

The government said in a statement that these amendments have been proposed to address issues raised by stakeholders such as chartered accountants and professionals.

To improve ease of doing business, the proposed amendments include omitting requirement for minimum paid up share capital, and consequential changes and making common seal optional, and consequential changes for authorization for execution of documents.

Besides, specific punishment will be prescribed for non-compliance to norms governing deposits taking activities. Such a provision was "left out in the (existing) Act inadvertently".

Enabling provisions are being put in to prescribe thresholds beyond which fraud shall be reported to the central government, while cases below this threshold will be reported to the audit committee of the company's board.

Disclosures for both the categories would need to be made in the board's report, the government said, while adding that this provision has been made at the demand of auditors.

Besides loans given by a company to wholly owned subsidiaries and guarantees/securities on loans taken from banks by subsidiaries, would be exempted from the purview of related party transactions.

"This was provided under the Rules but being included in the Act as a matter of abundant caution," the government said.

In another major step, it has been proposed to replace "special resolution with ordinary resolution for approval of related party transactions by non-related shareholders.

This would address "problems faced by large stakeholders who are related parties," the government said.

Besides, related party transactions between holding companies and wholly owned subsidiaries have been exempted from the requirement of approval of non-related shareholders.

Further, the government has decided to prohibit public inspection of a company's board resolutions filed in the Registry and would include provision for writing off past losses/ depreciation before declaring dividend for the year.

Besides, the audit committee of a company would be empowered to "give omnibus approvals for related party transactions on annual basis".

This would also align provisions of the Act with that of capital market regulator Sebi's policy.

Taking into consideration the demand of corporates, the government would rectify the requirement of transferring equity shares for which unclaimed/unpaid dividend has been transferred to the IEPF (Investor Education and Protection Fund) even though subsequent dividend has been claimed.

In addition, the winding up of companies would be heard by a two-member instead of three-member bench.

Among others,"bail restrictions to apply only for offence relating to fraud under section 447 of the Act.

Enabling provisions to prescribe thresholds beyond which fraud shall be reported to the Central Government (below the threshold, it will be reported to the Audit Committee).

Another amendment is to ensure that special courts would try only offences carrying imprisonment of two years or more so that minor violations can be taken care by magistrates.