Companies Act: Wrinkles remain to be ironed out

Companies Act: Wrinkles remain to be ironed out

Within nine months of operationalising most provisions of the Companies Act 2013, the Lok Sabha last week approved the first amendment to this Act primarily with the intent of improving the ease of doing business in India. This amendment was moved taking into account the pressing issues and key challenges raised by corporates as well as professionals from their experience in implementing the Act.

While these amendments were necessary, there wasn’t a realistic expectation that the Ministry of Corporate Affairs would actually 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.  

However, there are still some areas where corporates continue to have concerns, and hope that a more comprehensive post-implementation review of the Act will be undertaken to address these other issues.
Conflict with Clause 49

Areas such as related party transactions, inter-corporate loans, and fraud reporting have had corporates struggling for a while now, trying to balance compliance with the new requirements without hampering business requirements. Some of these amendments will provide the necessary relief to corporates, and also bring certainty to certain other relaxations that were earlier provided through the rules accompanying the Act.

In particular, requiring only a simple majority to pass resolutions on related party transactions would come as a great relief to corporates, apart from other relief through exemption of transactions with wholly-owned subsidiaries from shareholder approval process and also permitting the Audit Committee to provide omnibus approvals for year on recurring transactions with related parties.  

However, there still is divergence between some of the provisions of the Act and that of Clause 49 of the Listing Agreement; corporates continue to hope that these matters will get aligned at some point to ease implementation challenges.

Similarly, the amendment which will require reporting of only material frauds to the central government would provide great relief to both corporates as well as auditors.

On the whole, it is a step in the right direction, and the pace at which the government has moved to amend the Act, should make up for the implementation challenges that corporates have faced over the past few months.
 
Corporate concerns

The changes being proposed on related party transactions are largely to address concerns from corporates on implementation of the new requirements.

In doing so, it seeks to partly align the requirements of the Act with the SEBI requirements whereas in some other aspects, it has sought to provide greater relaxation as compared to the SEBI requirements.

The amendment exempting transactions with wholly-owned subsidiaries and allowing companies to obtain omnibus approvals from the Audit Committee for related party transactions seeks to align the Act with similar changes that have been introduced by SEBI.  

However, on transactions that require shareholder approval, the SEBI requirements and those under the Act seem to be diverging further.

SEBI requires a special resolution for material transactions and only non-related party shareholders are permitted to vote on such transactions, whereas as per the proposed amendments in the Act, only an ordinary resolution would be required, and all related parties who are not interested in the specific transaction would also be permitted to vote.  

However, this move seems to be emanating from the hardship being faced by corporates who may not have been able to get minority shareholder approval on proposed transactions. However, in the case of listed companies, the stricter of the two norms would apply.

On reporting of fraud by the Auditor to the Central Government, both the Act as well as the related Rules did not include any reference to materiality of the fraud involved. While this concept was considered in the draft rules, the final rules chose to remain silent, making it onerous for the auditor by requiring him to report all frauds to the Central Government.  

The amendment now seeks to restrict this reporting requirement to only material frauds, for which the thresholds would be prescribed. This would bring great relief to both corporates as well as auditors.

(The writer is Partner and Head — Accounting Advisory Services, KPMG India)

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