CS Rahul Harsh

CS Rahul HarshComparative Analysis of The Companies (Amendment) Bill, 2016, & Companies Act, 2013 (Part – 3)

The Central government on 16th of March, 2016 introduced in the Lok Sabha a bill to further amend the Companies Act, 2013 as part of efforts to address difficulties faced by stakeholders and improve the ease of doing business in the country.

The Part 1 of this article was published on this website and can be viewed at this link: –

http://taxguru.in/company-law/comparative-analysis-of-companies-amendment-bill-2016-companies-act-2013-part-1.html

The Part 2 of this article was published on this website and can be viewed at this link: –

http://taxguru.in/company-law/comparison-of-companies-amendment-bill-2016-ca-2013-part-2.html

In this series, I am analyzing the proposed amendments under The Companies (Amendment) Bill, 2016, with the existing provisions in the Companies Act, 2013. This is the Final part of the Three-part series and deals with amendment proposed W.r.t: Related Party Transactions, Punishment under section 447, Loan to directors, Intercorporate Loans, Disclosure of Interest by Directors, Powers of the Board, Audit and Nomination & Remuneration Committee, Vacation of Office by Director, Resignation of Director & Cost Audit.

Sl. No.SectionExisting ProvisionsProposed AmendmentsRemarks
1147

Punishment for contravention:

(1) If any of the provisions of sections 139 to 146 (both inclusive) is contravened, the company shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than ten thousand rupees but which may extend to one lakh rupees, or with both.

(2) If an auditor of a company contravenes any of the provisions of section 139, section 143, section 144 or section 145, the auditor shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees:

Provided that if an auditor has contravened such provisions knowingly or willfully with the intention to deceive the company or its shareholders or creditors or tax authorities, he shall be punishable with imprisonment for a term which may extend to one year and with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees.

(3) Where an auditor has been convicted under sub-section (2), he shall be liable to—

(i) refund the remuneration received by him to the company; and

(ii) pay for damages to the company, statutory bodies or authorities or to any other persons for loss arising out of incorrect or misleading statements of particulars made in his audit report.

(4) The Central Government shall, by notification, specify any statutory body or authority or an officer for ensuring prompt payment of damages to the company or the persons under clause (ii) of sub-section (3) and such body, authority or officer shall after payment of damages to such company or persons file a report with the Central Government in respect of making such damages in such manner as may be specified in the said notification.

(5) Where, in case of audit of a company being conducted by an audit firm, it is proved that the partner or partners of the audit firm has or have acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to or by, the company or its directors or officers, the liability, whether civil or criminal as provided in this Act or in any other law for the time being in force, for such act shall be of the partner or partners concerned of the audit firm and of the firm jointly and severally.

In section 147 of the principal Act,—

(i) in sub-section (2),—

(a) after the words “five lakh rupees”, the words “or four times the remuneration of the auditor, whichever is less” shall be inserted;

(b) in the proviso, for the words “and with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees”, the words “and with fine which shall not be less than fifty thousand rupees but which may extend to twenty-five lakh rupees or eight times the remuneration of the auditor, whichever is less” shall be substituted.

(ii) in sub-section (3), in clause (ii), for the words “or to any other persons”, the words “or to members or creditors of the company” shall be substituted;

(iii) in sub-section (5), the following proviso shall be inserted, namely:—

“Provided that in case of criminal liability of an audit firm, in respect of liability other than fine, THE CONCERNED PARTNER OR PARTNERS, who acted in a fraudulent manner or abetted or, as the case may be, colluded in any fraud shall only be liable.”

The proposed Amendment deals with the provision W.r.t Punishment to Auditors of a company in case of Contravention.

The amendment proposes to alter the amount of fine to be paid by the auditors in case of contravention to the provisions of sections 139, section 143, section 144 or section 145, the auditor shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to four times the remuneration of the auditor, whichever is less.

The other change proposed here is under subsection 5 of section 147, A new proviso is proposed to be inserted which provides that: In case of criminal liability of an audit firm (i.e. liability other than fine) the PARTNER WHO ARE CONCERNED with the Fraudulent Acts shall only be liable for their acts AND NOT the FIRM.

2148(3)COST AUDIT:

The audit under sub-section (2) shall be conducted by a Cost Accountant in practice who shall be appointed by the Board on such remuneration as may be determined by the members in such manner as may be prescribed:

Provided that no person appointed under section 139 as an auditor of the company shall be appointed for conducting the audit of cost records:

Provided further that the auditor conducting the cost audit shall comply with the cost auditing standards.

Explanation.—For the purposes of this sub-section, the expression “cost auditing standards” mean such standards as are issued by the Institute of Cost and Works Accountants of India, constituted under the Cost and Works Accountants Act, 1959, with the approval of the Central Government.

In section 148 of the principal Act,—

(i) in sub-section (3),—

(a) for the words “Cost Accountant in practice”, the words “cost accountant” shall be substituted;

(b) in the Explanation, for the words “Institute of Cost and Works Accountants of India”, the words “Institute of Cost Accountants of India” shall be substituted;

3149Company to have Board of Directors
149(3) – Every company shall have at least one director who has stayed in India for a total period of not less than one hundred and eighty-two days in the previous calendar year.(6) An independent director in relation to a company, means a director other than a managing director or a whole-time director or a nominee director,—(a) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;(b) (i) who is or was not a promoter of the company or its holding, subsidiary or associate company;(ii) who is not related to promoters or directors in the company, its holding, subsidiary or associate company;(c) who has or had no pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year;(d) none of whose relatives has or had pecuniary relationship or transaction with the company, its holding, subsidiary or associate company, or their promoters, or directors, amounting to two per cent. or more of its gross turnover or total income or fifty lakh rupees or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year;(e) who, neither himself nor any of his relatives—(i) holds or has held the position of a key managerial personnel or is or has been employee of the company or its holding, subsidiary or associate company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed;

(ii) is or has been an employee or proprietor or a partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed, of—(A) a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or (B) any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to ten per cent. or more of the gross turnover of such firm;

(iii) holds together with his relatives two per cent. or more of the total voting power of the company; or

(iv) is a Chief Executive or director, by whatever name called, of any nonprofit organisation that receives twenty-five per cent. or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds two per cent. or more of the total voting power of the company; or

(f) who possesses such other qualifications as may be prescribed.

 

In section 149 of the principal Act,—

(i) for sub-section (3), the following sub-section shall be substituted, namely:—

“(3) Every company shall have at least one director who stays in India for a total period of not less than one hundred and eighty-two days during the financial year:

Provided that in case of a newly incorporated company the requirement under this sub-section shall apply proportionately at the end of the financial year in which it is incorporated.”

in sub-section (6),—

(a) in clause (c), for the words “pecuniary relationship”, the words “pecuniary relationship, other than remuneration as such director or having transaction not exceeding ten per cent. of his total income or such amount as may be prescribed,” shall be substituted;

for clause (d), the following clause shall be substituted, namely:—

“(d) none of whose relatives—

(i) is holding any security of or interest in the company, its holding, subsidiary or associate company during the two immediately preceding financial years or during the current financial year:

Provided that the relative may hold security or interest in the company of face value NOT EXCEEDING FIFTY LAKH RUPEES OR TWO PERCENT. OF THE PAID-UP CAPITAL OF THE COMPANY, ITS HOLDING, SUBSIDIARY OR ASSOCIATE COMPANY OR SUCH HIGHER SUM AS MAY BE PRESCRIBED;

(ii) is indebted to the company, its holding, subsidiary or associate company or their promoters, or directors, in excess of such amount as may be prescribed during the two immediately preceding financial years or during the current financial year;

(iii) has given a guarantee or provided any security in connection with the indebtedness of any third person to the company, its holding, subsidiary or associate company or their promoters, or directors of such holding company, for such amount as may be prescribed during the two immediately preceding financial years or during the current financial year; or

(iv) has any other pecuniary transaction or relationship with the company, or its subsidiary, or its holding or associate company amounting to two per cent. or more of its gross turnover or total income singly or in combination with the transactions referred to in sub-clause (i), (ii) or (iii);

Ø in clause (e), in sub-clause (i), the following proviso shall be inserted, namely:—

“Provided that in case of a relative who is an employee, the restriction under this clause shall not apply for his employment during preceding three financial years.

Ø The Proposed Amendment gives clarification regarding a newly incorporated company for the requirement of at least one Director to Stay in India for a total period of not less than one hundred and eight – two days during the financial year. This requirement shall apply in a proportionate basis for the newly incorporated company.

Ø An independent director receiving Remuneration as such director or having transaction with the company not exceeding ten per cent of his total income shall not be counted for the purpose of determining pecuniary relationship of such director with the company.

 

 

 

 

4153Application for allotment of Director Identification Number:
Every individual intending to be appointed as director of a company shall make an application for allotment of Director Identification Number to the Central Government in such form and manner and along with such fees as may be prescribed.
In section 153 of the principal Act, the following proviso shall be inserted, namely:—

“Provided that the Central Government may prescribe ANY IDENTIFICATION NUMBER which shall be treated as Director Identification Number for the purposes of this Act and in case any individual holds or acquires such identification number, the requirement of this section shall not apply or apply in such manner as may be prescribed.”

The Proposed amendment provides that the CG may provide an Identification No. to an Individual for being appointed as the Director of a company which shall be treated equally as DIN and the requirement shall be deemed to be complied with.
5160 (1) & (4)Right of persons other than retiring directors to stand for directorship:
(1) A person who is not a retiring director in terms of section 152 shall, subject to the provisions of this Act, be eligible for appointment to the office of a director at any general meeting, if he, or some member intending to propose him as a director, has, not less than fourteen days before the meeting, left at the registered office of the company, a notice in writing under his hand signifying his candidature as a director or, as the case may be, the intention of such member to propose him as a candidate for that office, along with the deposit of one lakh rupees or such higher amount as may be prescribed which shall be refunded to such person or, as the case may be, to the member, if the person proposed gets elected as a director or gets more than twenty-five per cent. of total valid votes cast either on show of hands or on poll on such resolution.
(4) In the case of a public company, if the office of any director appointed by the company in general meeting is vacated before his term of office expires in the normal course, the resulting casual vacancy may, in default of and subject to any regulations in the articles of the company, be filled by the Board of Directors at a meeting of the Board:Provided that any person so appointed shall hold office only up to the date up to which the director in whose place he is appointed would have held office if it had not been vacated.
 

In section 160 of the principal Act, in sub-section (1), the following proviso shall be inserted, namely:—

“Provided that requirements of deposit of amount SHALL NOT APPLY IN CASE OF APPOINTMENT OF AN INDEPENDENT DIRECTOR OR A DIRECTOR RECOMMENDED BY THE NOMINATION AND REMUNERATION COMMITTEE, if any, constituted under sub-section (1) of section 178.”

In Sub-Section (4),—

(a) the words “In the case of a public company,” shall be omitted;

(b) after the words “meeting of the Board”, the words “which shall be subsequently approved by members in the immediate next general meeting” SHALL BE INSERTED.

The amendment proposes that:

Ø The requirement of deposit of Rs. One Lakh for re-appointment of the retiring director shall NOT apply in case the proposed director is AN INDEPENDENT DIRECTOR OR A DIRECTOR RECOMMENDED BY THE NOMINATION & REMUNERATION COMMITTEE OF THE COMPANY.

Ø The Appointment of Director in Casual vacancy by the Board of Directors in its meeting shall now be subject to the APPROVAL by the MEMBERS in the Subsequent General Meeting.

6164 (1) , (2) & (3)

Disqualifications for appointment of director

(1) A person shall not be eligible for appointment as a director of a company, if —

(d) he has been convicted by a court of any offence, whether involving moral turpitude or otherwise, and sentenced in respect thereof to imprisonment for not less than six months and a period of five years has not elapsed from the date of expiry of the sentence:

Provided that if a person has been convicted of any offence and sentenced in respect thereof to imprisonment for a period of seven years or more, he shall not be eligible to be appointed as a director in any company;

(e) an order disqualifying him for appointment as a director has been passed by a court or Tribunal and the order is in force;

(g) he has been convicted of the offence dealing with related party transactions under section 188 at any time during the last preceding five years;

(2) No person who is or has been a director of a company which—

(a) has not filed financial statements or annual returns for any continuous period of three financial years; or

(b) has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date or pay interest due thereon or pay any dividend declared and such failure to pay or redeem continues for one year or more, shall be eligible to be re-appointed as a director of that company or appointed in other company for a period of five years from the date on which the said company fails to do so.

(3) A private company may by its articles provide for any disqualifications for appointment as a director in addition to those specified in sub-sections (1) and (2):

Provided that the disqualifications referred to in clauses (d), (e) and (g) of sub-section (1) shall not take effect—

(i) for thirty days from the date of conviction or order of disqualification;

(ii) where an appeal or petition is preferred within thirty days as aforesaid against the conviction resulting in sentence or order, until expiry of seven days from the date on which such appeal or petition is disposed off; or

(iii) where any further appeal or petition is preferred against order or sentence within seven days, until such further appeal or petition is disposed off.

In section 164 of the principal Act,—

In sub-section (2), the following proviso shall be inserted, namely:—

“Provided that where a person is appointed as a director of a company which is in default of clause (a) or clause (b), he shall not incur the disqualification for a period of six months from the date of his appointment.”

(ii) in sub-section (3), for the proviso, the following proviso shall be substituted, namely:—

“Provided that the disqualifications referred to in clauses (d), (e) and (g) of sub-section (1) shall continue to apply even if the appeal or petition has been filed against the order of conviction or disqualification.”

A director being appointed shall not be held disqualified incase the he was a director of the company which has not filed financial statements & annual returns for a continuous period of 3 years or has not repaid deposits or its interest or redeem any debentures on the due date or pay interest due thereon or pay any dividend declared and such failure to pay or redeem continues for one year if SUCH DEFAULT TOOK PLACE WITH IN SIX MONTHS FROM THE DATE OF HIS APPOINTMENT.

 

 

7165(1)

Number of directorships

(1) No person, after the commencement of this Act, shall hold office as a director, including any alternate directorship, in more than twenty companies at the same time:

Provided that the maximum number of public companies in which a person can be appointed as a director shall not exceed ten.

Explanation.— For reckoning the limit of public companies in which a person can be appointed as director, directorship in private companies that are either holding or subsidiary company of a public company shall be included.

In section 165 of the principal Act, in sub-section (1), the Explanation shall be renumbered as Explanation I and after Explanation I as so numbered, the following Explanation shall be inserted, namely:—

“Explanation IIFor reckoning the limit of directorships of twenty companies, THE DIRECTORSHIP IN A DORMANT COMPANY SHALL NOT BE INCLUDED.”

The Amendment Proposes that: The number of Directorships held by a Person shall NOT INCLUDE DIRECTORSHIPS HELD IN A DORMANT COMPANY.

FYI: the term “Dormant company” was introduced in Companies Act, 2013 and it means “a company which is formed and registered under this Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction, such a company or an inactive company may make an application to the Registrar in such manner as may be prescribed for obtaining the status of a dormant company.”

8167(1)Vacation of office of director

(1) The office of a director shall become vacant in case—

(a) he incurs any of the disqualifications specified in section 164;

(b) he absents himself from all the meetings of the Board of Directors held during a period of twelve months with or without seeking leave of absence of the Board;

(c) he acts in contravention of the provisions of section 184 relating to entering into contracts or arrangements in which he is directly or indirectly interested;

(d) he fails to disclose his interest in any contract or arrangement in which he is directly or indirectly interested, in contravention of the provisions of section 184;

(e) he becomes disqualified by an order of a court or the Tribunal;

(f) he is convicted by a court of any offence, whether involving moral turpitude or otherwise and sentenced in respect thereof to imprisonment for not less than six months:

Provided that the office shall be vacated by the director even if he has filed an appeal against the order of such court;

(g) he is removed in pursuance of the provisions of this Act;

(h) he, having been appointed a director by virtue of his holding any office or other employment in the holding, subsidiary or associate company, ceases to hold such office or other employment in that company.

In section 167 of the principal Act, in sub-section (1),—

(i) in clause (a), the following proviso shall be inserted, namely:—

“Provided that where he incurs disqualification under sub-section (2) of section 164, the office of the director shall become vacant in all the companies, other than the company which is in default under that sub-section.”

(ii) in clause (f), for the proviso the following proviso shall be substituted, namely,—

“Provided that the office shall not be vacated by the director in case of orders referred to in clauses (e) and (f)—

(i) for thirty days from the date of conviction or order of disqualification;

(ii) where an appeal or petition is preferred within thirty days as aforesaid against the conviction resulting in sentence or order, until expiry of seven days from the date on which such appeal or petition is disposed of; or

(iii) where any further appeal or petition is preferred against order or sentence within seven days, until such further appeal or petition is disposed of.”

9168(1)Resignation of director

(1) A director may resign from his office by giving a notice in writing to the company and the Board shall on receipt of such notice take note of the same and the company shall intimate the Registrar in such manner, within such time and in such form as may be prescribed and shall also place the fact of such resignation in the report of directors laid in the immediately following general meeting by the company:

Provided that a director SHALL also forward a copy of his resignation along with detailed reasons for the resignation to the Registrar within thirty days of resignation in such manner as may be prescribed.

 

 

In section 168 of the principal Act, in sub-section (1), in the proviso, for the words, “director shall also forward”, the words, “director MAY also forward” shall be substituted.

FYI: The Difference between ‘Shall’ & ‘May’:

 

“Shall” is used in the context of offers, suggestions, invitations, or requests. In terms of a possibility, it connotes a definitive nature often developing into a need or necessity. In addition, the term “shall” is considered as more intense or forceful in nature compared to “may.”

On the other hand, “may” is used for a grant or allowance of permission, an implied possibility, or the capability to perform an action or an obligation to function.

10173 (2)Meetings of Board

(2) The participation of directors in a meeting of the Board may be either in person or through video conferencing or other audio visual means, as may be prescribed, which are capable of recording and recognising the participation of the directors and of recording and storing the proceedings of such meetings along with date and time:

Provided that the Central Government may, by notification, specify such matters which shall not be dealt with in a meeting through video conferencing or other audio visual means.

In section 173 of the principal Act, in sub-section (2), after the first proviso, the following proviso shall be inserted, namely:—

“Provided further that WHERE THERE IS QUORUM IN A MEETING THROUGH PHYSICAL PRESENCE OF DIRECTORS, any other director may participate through video conferencing or other audio visual means in such meeting on ANY MATTER specified under the first proviso.”

As per the proposed amendment in case there is a required quorum present on a BM then any other director may participate in the meeting through Audio Video mode on ANY Matter even if it’s a restricted matter as per CG.
11177 (1) & (4)(iv)Audit Committee

(1) The Board of Directors of EVERY LISTED COMPANY and such other class or classes of companies, as may be prescribed, shall constitute an Audit Committee.

(4) Every Audit Committee shall act in accordance with the terms of reference specified in writing by the Board which shall, inter alia, include,—

(iv) approval or any subsequent modification of transactions of the company with related parties;

 

 

 

 

In section 177 of the principal Act,—

Ø in sub-section (1), for the words “every listed company”, the words “EVERY LISTED PUBLIC COMPANY” shall be substituted;

Ø in sub-section (4), in clause (iv), after the proviso, the following provisos shall be inserted, namely:—

“Provided further that in case of transaction, other than transactions referred to in section 188, and where Audit Committee does not approve the transaction, it shall make its recommendations to the Board:

Provided also that in case any transaction involving any amount not exceeding one crore rupees is entered into by a director or officer of the company without obtaining the approval of the Audit Committee and it is not ratified by the Audit Committee within three months from the date of the transaction, such transaction shall be voidable at the option of the Audit Committee and if the transaction is with the related party to any director or is authorised by any other director, the director concerned shall indemnify the company against any loss incurred by it:

Provided also that the provisions of this clause shall not apply to a transaction, other than a transaction referred to in section 188, between a holding company and its wholly owned subsidiary company.”

Till this amendment comes to force, Every Listed company, (This Includes a Private company whose debt securities are listed on a recognized stock exchange in India) is required to constitute an Audit Committee. The Proposed Amendment removes the requirement of Constitution of An Audit Committee for listed companies’ OTHER THAN Public Limited Companies.

Ø The Other Change proposed is with regards to a Related party transaction entered into by Director involving an amount NOT EXCEEDING ONE CRORE RUPEES Without taking an Approval by Audit Committee within three months then such transaction then such transaction shall be voidable and the director shall indemnify the company for the losses if any incurred.

 

12178Nomination and Remuneration Committee (1) The Board of Directors of EVERY LISTED COMPANY and such other class or classes of companies, as may be prescribed shall constitute the Nomination and Remuneration Committee consisting of three or more non-executive directors out of which not less than one-half shall be independent directors.

(2) The Nomination and Remuneration committee shall identify persons who are qualified to become directors and who may be appointed in senior management in accordance with the criteria laid down, recommend to the Board their appointment and removal and shall carry out evaluation of every director’s performance.

(4) The Nomination and Remuneration Committee shall, while formulating the policy under sub-section (3) ensure that—

(c) remuneration to directors, key managerial personnel and senior management involves a balance between fixed and incentive pay reflecting short and long-term performance objectives appropriate to the working of the company and its goals:

Provided that such policy shall be disclosed in the Board’s report.

Ø in sub-section (1), for the words “every listed company”, the words “EVERY LISTED PUBLIC COMPANY” shall be substituted.

> in sub-section (2), for the words “shall carry out evaluation of every director’s performance”, the words “shall specify the manner for effective evaluation of performance of Board, its committees and individual directors to be carried out either by the Board, by the Nomination and Remuneration Committee or by an independent external agency and review its implementation and compliance” shall be substituted;

Ø in sub-section (4), in clause (c), for the proviso, the following proviso shall be substituted, namely: —

“Provided that such policy shall be placed on the website of the company, if any, and the salient features of the policy and changes therein, if any, along with the web address of the policy, if any, shall be disclosed in the Board’s report.”

The Proposed amendment removes the criteria for Every listed company to have NRC , the requirement is proposed to be tweaked to be followed by only PUBLIC listed companies. The amendment also proposes that the NRC or an external independent agency can also conduct the evaluation of Board’s performance.
13180Restrictions on powers of Board
1) The Board of Directors of a company shall exercise the following powers ONLY WITH THE CONSENT OF THE COMPANY BY A SPECIAL RESOLUTION, NAMELY:—
(c) to borrow money, where the money to be borrowed, together with the money already borrowed by the company will exceed aggregate of its paid-up share capital and free reserves, apart from temporary loans obtained from the company’s bankers in the ordinary course of business.
In section 180 of the principal Act, in sub-section (1), in item (c), for the words “paid-up share capital and free reserves”, the words “paid-up share capital, free reserves and securities premium” shall be substituted.

For the purpose of determining the requirement for a company to take consent by members in SR for borrowing money after a certain limit which includes as per the current provision:” Aggregate of Paid up Share capital and Free reserves, is now proposed to include SECURITIES PREMIUM”

14184Disclosure of interest by director
(4) If a director of the company contravenes the provisions of sub-section (1) or subsection (2), such director shall be punishable with imprisonment for a term which may extend to one year or WITH FINE WHICH SHALL NOT BE LESS THAN FIFTY THOUSAND RUPEES BUT WHICH MAY EXTEND TO ONE LAKH RUPEES, OR WITH BOTH.
(5) Nothing in this section—(a) shall be taken to prejudice the operation of any rule of law restricting a director of a company from having any concern or interest in any contract or arrangement with the company;
(b) shall apply to any contract or arrangement entered into or to be entered into between two companies where any of the directors of the one company or two or more of them together holds or hold not more than two per cent. of the paid-up share capital in the other company.
In section 184 of the principal Act,—

Ø in sub-section (4), the words “shall not be less than fifty thousand rupees but which” shall be omitted;

Ø in sub-section (5), for clause (b), the following clause shall be substituted, namely:—

“(b) shall apply to any contract or arrangement entered into or to be entered into between two companies or between one or more companies and one or more bodies corporate where any of the directors of the one company or body corporate or two or more of them together holds or hold not more than two per cent. of the paid-up share capital in the other company or the body corporate.”

 

The fine for not disclosing interest by a director U/s 184 is proposed to be fixed at Rs. 1 lakh. The amendment also proposes that this section shall not apply in case of any contract or arrangement entered or to be entered between 2 Co. or Body Corporates where any of the director either by himself or together with other directors hold not more than 2% of Paid up Share Cap. In the other Co. or Body Corporate.

This will provide a relief to many RPT in India.

15185

(Complete Section is Proposed to be substituted)

Loan to directors, etc

(1) Save as otherwise provided in this Act, no company shall, directly or indirectly, advance any loan, including any loan represented by a book debt, to any of its directors or to any other person in whom the director is interested or give any guarantee or provide any security in connection with any loan taken by him or such other person:

Provided that nothing contained in this sub-section shall apply to—

(a) the giving of any loan to a managing or whole-time director—

(i) as a part of the coditions of service extended by the company to all its employees; or

(ii) pursuant to any scheme approved by the members by a special resolution; or

(b) a company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the bank rate declared by the Reserve Bank of India.

Explanation.—For the purposes of this section, the expression “to any other person in whom director is interested” means—

(a) any director of the lending company, or of a company which is its holding company or any partner or relative of any such director;

(b) any firm in which any such director or relative is a partner;

(c) any private company of which any such director is a director or member;

(d) any body corporate at a general meeting of which not less than twenty five per cent. of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or

(e) any body corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.

(2) If any loan is advanced or a guarantee or security is given or provided in contravention of the provisions of sub-section (1), the company shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, and the director or the other person to whom any loan is advanced or guarantee or security is given or provided in connection with any loan taken by him or the other person, shall be punishable with imprisonment which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, or with both.

 

 

 

 

For section 185 of the principal Act, the following section shall be substituted namely:—

‘185. (1) No company shall, directly or indirectly, advance any loan, including any loan represented by a book debt to, or give any guarantee or provide any security in connection with any loan taken by,—

(a) any director of company, or of a company which is its holding company or any partner or relative of any such director; or

(b) any firm in which any such director or relative is a partner.

(2) A company may advance any loan including any loan represented by a book debt, or give any guarantee or provide any security in connection with any loan taken by any person in whom any of the director of the company is interested, subject to the condition that—

(a) a special resolution is passed by the company in general meeting:

Provided that the explanatory statement to the notice for the relevant general meeting shall disclose the full particulars of the loans given, or guarantee given or security provided and the purpose for which the loan or guarantee or

security is proposed to be utilised by the recipient of the loan or guarantee or security and any other relevant fact; and

(b) the loans are utilised by the borrowing company for its principal business activities.

Explanation.—For the purposes of this sub-section, the expression “any person in whom any of the director of the company is interested” means—

a) any private company of which any such director is a director or member;

(b) any body corporate at a general meeting of which not less than twenty-five per cent. of the total voting power may be exercised or controlled by any such director, or by two or more such directors, together; or

(c) any body corporate, the Board of directors, managing director or manager, whereof is accustomed to act in accordance with the directions or instructions of the Board, or of any director or directors, of the lending company.

 

(3) Nothing contained in sub-sections (1) and (2) shall apply to—

 

(a) the giving of any loan to a managing or whole-time director—

 

(i) as a part of the conditions of service extended by the company to all its employees; or

 

(ii) pursuant to any scheme approved by the members by a special resolution; or

 

(b) a company which in the ordinary course of its business provides loans or gives guarantees or securities for the due repayment of any loan and in respect of such loans an interest is charged at a rate not less than the rate of prevailing yield of one year, three year, five year or ten year Government security closest to the tenor of the loan; or

 

(c) any loan made by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company; or

(d) any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company:

Provided that the loans made under clauses (c) and (d) are utilised by the subsidiary company for its principal business activities.

(4) If any loan is advanced or a guarantee or security is given or provided or utilised in contravention of the provisions of this section, the company shall be punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, and the director or the other person to whom any loan is advanced or guarantee or security is given or provided in connection with any loan taken by him or the other person, shall be punishable with imprisonment which may extend to six months or with fine which shall not be less than five lakh rupees but which may extend to twenty-five lakh rupees, or with both.’

Section 185 Remains a restrictive clause after the proposed amendments.

The Companies have been relieved a bit with the provisions of providing Loan, Investment or Guarantee to its directors.

The companies are now allowed (as proposed in the bill) to provide give any guarantee or provide any security in connection with any loan taken by ANY PERSON IN WHOM ANY OF THE DIRECTOR OF THE COMPANY IS INTERESTED, subject to the SR passed in a GM.

 

The Explanatory statement issued along with the Notice for such GM must provide the reasons why the loan is being given along with its full particulars and its end use.

 

The expression “any person in whom any of the director of the company is interested” has also been defined in the bill.

 

The penalty for contravention of the section remains same as before.

 

 

16186Loan and investment by company
(1) Without prejudice to the provisions contained in this Act, a company shall unless otherwise prescribed, make investment through not more than two layers of investment companies:
Provided that the provisions of this sub-section shall not affect, —(i) a company from acquiring any other company incorporated in a country outside India if such other company has investment subsidiaries beyond two layers as per the laws of such country;
(ii) a subsidiary company from having any investment subsidiary for the purposes of meeting the requirements under any law or under any rule or regulation framed under any law for the time being in force.
2. No company shall directly or indirectly —(a) give any loan to any person or other body corporate;(b) give any guarantee or provide security in connection with a loan to any other body corporate or PERSON; and(c) acquire by way of subscription, purchase or otherwise, the securities of any other body corporate, exceeding sixty per cent. of its paid-up share capital, free reserves and securities premium account or one hundred per cent. of its free reserves and securities premium account, whichever is more.
(3) Where the giving of any loan or guarantee or providing any security or the acquisition under sub-section (2) exceeds the limits specified in that sub-section, prior approval by means of a special resolution passed at a general meeting shall be necessary.

(11) Nothing contained in this section, except sub-section (1), shall apply—

(a) to a loan made, guarantee given or security provided by a banking company or an insurance company or a housing finance company in the ordinary course of its business or a company engaged in the business of financing of companies or of providing infrastructural facilities;

(b) to any acquisition—

(i) made by a non-banking financial company registered under Chapter IIIB of the Reserve Bank of India Act, 1934 and whose principal business is acquisition of securities:

Provided that exemption to non-banking financial company shall be in respect of its investment and lending activities;

(ii) made by a company whose principal business is the acquisition of securities;

(iii) of shares allotted in pursuance of clause (a) of sub-section (1) of section 62.

Explanation.For the purposes of this section,—

(a) the expression “investment company” means a company whose principal business is the acquisition of shares, debentures or OTHER SECURITIES;

(b) the expression “infrastructure facilities” means the facilities specified in Schedule VI.

 

Ø sub- section (1) shall be omitted;

Ø in sub-section (2), the following explanation shall be inserted, namely:—

‘Explanation.— For the purposes of this sub-section, the word “person” DOES NOT include any individual who is in the employment of the company.

Ø for sub-section (3), the following sub-section shall be substituted, namely:—

‘(3) Where the aggregate of the loans and investment so far made, the amount for which guarantee or security so far provided to or in all other bodies corporate along with the investment, loan, guarantee or security proposed to be made or given by the Board, exceed the limits specified under sub-section (2), no investment or loan shall be made or guarantee shall be given or security shall be provided unless previously authorised by a special resolution passed in a general meeting:

Provided that where a loan or guarantee is given or where a security has been provided by a company to its wholly owned subsidiary company or a joint venture company, or acquisition is made by a holding company, by way of subscription, purchase or otherwise of, the securities of its wholly owned subsidiary company, the requirement of this sub-section shall not apply:

Provided further that the company shall disclose the details of such loans or guarantee or security or acquisition in the financial statement as provided under sub-section.

Ø for sub-section (11), the following sub-section shall be substituted, namely

“(11) Nothing contained in this section shall apply—

(a) to any loan made, any guarantee given or any security provided or any investment made by a banking company, or an insurance company, or a housing finance company in the ordinary course of its business, or a company established with the object of and engaged in the business of financing industrial enterprises, or of providing infrastructural facilities;

(b) to any investment—

(i) made by an investment company;

(ii) made in shares allotted in pursuance of clause (a) of sub-section (1) of section 62 or in shares allotted in pursuance of rights issues made by a body corporate;

(iii) made, in respect of investment or lending activities, by a non-banking financial company registered under Chapter III-B of

the Reserve Bank of India Act, 1934 and whose principal business is acquisition of securities.”;

in the Explanation, in clause (a), after the words “other securities” the following shall be inserted, namely:—

“and a company will be deemed to be principally engaged in the business of acquisition of shares, debentures or other securities, if its assets in the form of investment in shares, debentures or other securities constitute not less than fifty per cent. of its total assets, or if its income derived from investment business constitutes not less than fifty per cent. as a proportion of its gross income.”.

 

 

 

 

 

 

> The Provision of making an investment through not more than two layers of investment company has been proposed to be removed.

 

> The Provision for Passing an SR in GM in cases where loan or guarantee is given or where a security has been provided by a company to its wholly owned subsidiary company or a joint venture company, or acquisition is made by a holding company, by way of subscription, purchase or otherwise of, the securities of its wholly owned subsidiary company, has been proposed to be REMOVED.

> the expression “investment company” means a company whose principal business is the acquisition of shares, debentures or OTHER SECURITIES;

> Investment Company shall mean: A company will be deemed to be investment company if it is principally engaged in the business of acquisition of shares, debentures or other securities, if its assets in the form of investment in shares, debentures or other securities constitute NOT LESS THAN FIFTY PER CENT. of its total assets, or if its income derived from investment business constitutes not less than fifty per cent. as a proportion of its gross income.”

17188Related party transactions

(3) Where any contract or arrangement is entered into by a director or any other employee, without obtaining the consent of the Board or approval by a special resolution in the general meeting under sub-section (1) and if it is not ratified by the Board or, as the case may be, by the shareholders at a meeting within three months from the date on which such contract or arrangement was entered into, such contract or arrangement shall be voidable at the option of the Board and if the contract or arrangement is with a related party to any director, or is authorised by any other director, the directors concerned shall indemnify the company against any loss incurred by it.

 

Ø in sub-section (1), after second proviso, the following proviso shall be inserted, namely:—

“Provided also that nothing contained in the second proviso shall apply to a company in which ninety per cent. or more members, in number, are relatives of promoters or are related parties:”;

Ø in sub-section (3), for the words “shall be voidable at the option of the Board”, the words “shall be voidable at the option of the Board or, as the case may be, of the shareholders” shall be substituted.

The New Proviso to Subsection 1 Provides that the Provisions of Second Proviso regarding restriction to vote at GM by member of the company on SR to approve any contract or arrangement in which such member is related SHALL NOT APPLY if 90% or more members are relatives of promoters or related parties.
18194Prohibition on forward dealings in securities of company by director or key managerial personnelSection 194 shall be omitted.
19195Prohibition on insider trading of securitiesSection 195 of the principal Act shall be omitted.
20366Companies capable of being registered
(2) With the exceptions and subject to the provisions contained in this section, any company formed, whether before or after the commencement of this Act, in pursuance of any Act of Parliament other than this Act or of any other law for the time being in force or being otherwise duly constituted according to law, and consisting of seven or more members, may at any time register under this Act as an unlimited company, or as a company limited by shares, or as a company limited by guarantee, in such manner as may be prescribed and the registration shall not be invalid by reason only that it has taken place with a view to the company’s being wound up:
In section 366 of the principal Act, in sub-section (2), —

for the words “seven or more members”, the words “two or more members” shall be substituted.

The Proposed amendment provides that a WITH 2 OR MORE MEMBERS may at any time register as an Unlimited Company or as a company limited by shares, or as a company limited by guarantee.
21447Punishment for fraud
Without prejudice to any liability including repayment of any debt under this Act or any other law for the time being in force, any person who is found to be GUILTY OF FRAUD, shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud:Provided that where the fraud in question involves public interest, the term of imprisonment shall not be less than three years.
In section 447 of the principal Act, —

after the words “guilty of fraud”, the words “INVOLVING AN AMOUNT OF AT LEAST

TEN LAKH RUPEES OR ONE PERCENT. OF THE TURNOVER OF THE COMPANY, WHICHEVER IS LOWER” shall be inserted;

after the proviso, the following proviso shall be inserted, namely:—

“Provided further that where the fraud involves an amount less than ten lakh rupees or one per cent. of the turnover of the company, whichever is lower, and does not involve public interest, any person guilty of such fraud shall be punishable with imprisonment for a term which may extend to five years or with fine which may extend to twenty lakh rupees or with both.”.

The Amendment proposes to Divide FRAUD into two parts. I.e Greater than Rs. 10 Lacs. And Less than Rs. 10 Lacs or 1 % of the Turnover of the Company whichever is lower.

 

> Penalty and punishment on Fraud has also been proposed to be tweaked and it now provides that in case Fraud involves as amount less than Rs. 10 lacs or 1 % of T.O of the Company which ever is lower and does not involve public interest the person involved shall be punishable with Imprisonment for 5 yrs or Fine upto Rs. 25 lakhs or both.

Author: CS Rahul Harsh is an Associate Member of The ICSI from Kolkata and can be contacted on: csrahulharsh@gmail.com

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