CS Manohar Mishra

CS Manohar MishraThe Companies Law Committee (CLC) was set up on the 4th June, 2015 to make recommendations to the Government on the issues arising from the implementation of the Companies Act, 2013 as well as  on the recommendations received from the Bankruptcy Law Reforms Committee, the High Level Committee on Corporate Social Responsibility (CSR), the Law Commission and other agencies.

The CLC on the basis of  the recommendation received from various sources,  submitted its report to the Government to make amendments under the Companies Act, 2013. On March 16, 2016 the Bill to further amend the Companies Act, 2013 has been introduced in Lok Sabha. The key highlights of the Bill peraining to the Definitions under the Companies Act, 2013 are as follows:

Section No.Provisions of the Companies Act, 2013Proposed by The Companies (Amendment) Bill, 2016
Remarks

 

2(6)-Associate Company“associate company”, in relation to another  company, to mean a company in which the other company has a significant influence, but is not a subsidiary company of the company having such influence, and also includes a joint venture company.

Explanation.—For the purposes of this clause, “significant influence” means control of at least twenty per cent of total share capital, or of business decisions under an agreement.

Note: The term “total share capital” means aggregate of the a) paid up equity share capital; and b) convertible preference share capital-as per Rule 2(1)(r) of the Companies (Specification of definitions details) Rules, 2014.

 

 

“associate company”, in relation to another  company, to mean a company in which the other company has a Significant influence, but is not a subsidiary company of the company having such influence, and also includes a joint venture company.

Explanation .—For the purposes of this clause, “significant influence” means control of at least twenty per cent of the total voting Power, or control of or participation in taking business decisions under an agreement.

The term “ joint venture” means a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement;

 

Now total voting power shall be the criteria to determine  significant influence.
2(30)-Debenture“debenture” includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not

 

 

“debenture” includes debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not.

Provided that:

a) the instruments referred to in Chapter III-D of the Reserve Bank of India Act, 1934; and

b) such other instrument, as may be prescribed by the Central Government in consultation with Reserve Bank of India, issued by a company, shall not be treated as debenture;

 

 

“any other instrument of a company evidencing a debt” includes instruments like commercial papers and other money market instrument which are short term fund raising source by eligible companies. Debenture on the other hand is a medium to long –term debt instrument. Therefore, treating the short term instrument as Debenture was illogical.

 

 

 

2(41)-Financial year“financial year”, in relation to any company or body corporate, means the period ending on the 31st day of March every year, and where it has been incorporated on or after the 1st day of January of a year, the period ending on the 31st day of March of the following year, in respect whereof financial statement of the company or body corporate is made up:

Provided that on an application made by a company or body corporate, which is a holding company or a subsidiary of a company incorporated outside India and is required to follow a different financial year for consolidation of its accounts outside India, the Tribunal may, if it is satisfied, allow any period as its financial year, whether or not that period is a year:

Provided further that a company or body corporate, existing on the commencement of this Act, shall, within a period of two years from such commencement, align its financial year as per the provisions of this clause;

 

 

“financial year”, in relation to any company or body corporate, means the period ending on the 31st day of March every year, and where it has been incorporated on or after the 1st day of January of a year, the period ending on the 31st day of March of the following year, in respect whereof financial statement of the company or body corporate is made up:

Provided that on an application made by a company or body corporate, which is a holding company or a subsidiary or associate of a company incorporated outside India and is required to follow a different financial year for consolidation of its accounts outside India, the Tribunal may, if it is satisfied, allow any period as its financial year, whether or not that period is a year:

Provided further that a company or body corporate, existing on the commencement of this Act, shall, within a period of two years from such commencement, align its financial year as per the provisions of this clause;-

 

Now Associate companies incorporated outside India may also apply to the National Company Law Tribunal (NCLT) for different financial year for consolidation of its accounts. Initially, it was only for holding or subsidiary of a company incorporated outside India.
2(46)-Holding Company“holding company”, in relation to one or more other companies, means a company of which such companies are subsidiary companies.“holding company”, in relation to one or more other companies, means a

company of which such companies are subsidiary companies.

Explanation.—For the purposes of this clause, the expression “company” includes any body corporate

 

1. Section 2 (87) defines subsidiary company and  Explanation (c) to Section 2(87) clarifies that the expression  “company” includes a ‘body corporate’. A similar explanation be included in Section 2(46), so that a company incorporated outside India could be considered to be the holding company of another company.

 

2(49)-Interested Director“interested director” means a director who is in any way, whether by himself or through any of his relatives or firm, body corporate or other association of individuals in which he or any of his relatives is a partner, director or a member, interested in a contract or arrangement, or proposed contract or arrangement, entered into or to be entered into by or on behalf of a company

 

To omit Section 2(49)Section 184(2) of the Act provides that nature of interest to be disclosed by Directors, but has not used the word Interested Director.

The definition provided in Section 2(49), though much wider, has not been used in the Act and is redundant.

 

Section 2(51)-KMP“key managerial personnel”, in relation to a company, means—

(i) the Chief Executive Officer or the managing director or the manager;

(ii) the company secretary;

(iii) the whole-time director;

(iv) the Chief Financial Officer; and

(v) such other officer as may be prescribed;

 

 

“key managerial personnel”, in relation to a company, means—

(i) the Chief Executive Officer or the managing director or the manager;

(ii) the company secretary;

(iii) the whole-time director;

(iv) the Chief Financial Officer;

(v) such other officer, not more than one level below the directors who is in whole-time employment, designated as key managerial personnel by the Board; and

(vi) such other officer as may be prescribed;

 

 

 

Officers, not  not more than one level below the directors     may be act as KMP, if designated by the BOD.
2(57)-Net Worth

“net worth” means the aggregate value of the paid-up share capital and all reserves created out of the profits and securities premium account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets, write-back of depreciation and amalgamation.

 

 

 

“net worth” means the aggregate value of the paid-up share capital and all reserves created out of the profits and securities premium account and debit or credit balance of profit and loss account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets, write-back of depreciation and amalgamation.

 

 

 

2(71)-Public Company“public company” means a company which—

(a) is not a private company;

(b) has a minimum paid-up share capital *of five lakh rupees or such higher paid-up capital, as may be prescribed:

Provided that a company which is a subsidiary of a company, not being a private company, shall be deemed to be public company for the purposes of this Act even where such subsidiary company continues to be a private company in its articles ;

*Note: The Companies (Amendment) Act, 2015 has amended the definition of Public Company.

 

 

 

“public company” means a company which—

(a) is not a private company;and

(b) has a minimum paid-up share capital *of five lakh rupees or such higher paid-up capital, as may be prescribed:

Provided that a company which is a subsidiary of a company, not being a private company, shall be deemed to be public company for the purposes of this Act even where such subsidiary company continues to be a private company in its articles ;

Now both the criteria to be satisfied for forming/determining a public company
2(76)(viii)-Related Party“related party”, with reference to a company, means any company which is—

(A) a holding, subsidiary or an associate company of such company; or

(B) a subsidiary of a holding company to which it is also a subsidiary

 

 

 

 

 

 

 

“related party”, with reference to a company, means any body corporate  which is—

(A) a holding, subsidiary or an associate company of such company; or

(B) a subsidiary of a holding company to which it is also a subsidiary; or

(C) an investing company or the venturer of a company,;

The existing definition used the word “any company” that means only those entities which are incorporated in India would come under the purview of definition of Related Party.

This resulted in the impression that companies incorporated outside India (such as holding/ subsidiary/ associate / fellow subsidiary of an Indian company) were excluded from the purview of related party of an Indian company but now the definition is clear.

 

2(85)-Small Company‘‘small company’’ means a company, other than a public company,—

(i) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than five crore rupees; or* and

(ii) turnover of which as per its last profit and loss account does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than twenty crore rupees-

Provided that nothing in this clause shall apply to—

(A) a holding company or a subsidiary company;

(B) a company registered under section 8; or

(C) a company or body corporate governed by any special Act

*Note: MCA vide  notification dated 13.02.2015 has amended the definition of Small Company by insertion of “and” instead of “or” between Section 2(85)(i) and (ii).

‘‘small company’’ means a company, other than a public company,—

(i) paid-up share capital of which does not exceed fifty lakh rupees or such

higher amount as may be prescribed which shall not be more than ten crore rupees;  and

(ii) turnover of which as per profit and loss account for the immediately preceding financial year does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than hundred crore rupees:

Provided that nothing in this clause shall apply to—

(A) a holding company or a subsidiary company;

(B) a company registered under section 8; or

(C) a company or body corporate governed by any special Act

 

 

Currently, the existing law does not confer much statutory liberty to a small company. The bill proposed an abridged form of annual return for Small and One Person Company.

 

 

2(87)-Subsidiary Company“subsidiary company” or “subsidiary”, in relation to any other company

(that is to say the holding company), means a company in which the holding company—

(i) controls the composition of the Board of Directors; or

(ii) exercises or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary companies:

Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed

Explanation.— For the purposes of this clause,—

(a) a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding company;

(b) the composition of a company’s Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors;

(c) the expression “company” includes any body corporate;

(d) “layer” in relation to a holding company means its subsidiary or subsidiaries;

Note: The term “total share capital” means aggregate of the a) paid up equity share capital; and b) convertible preference share capital-as per Rule 2(1)(r) of the Companies (Specification of definitions details) Rules, 2014

“subsidiary company” or “subsidiary”, in relation to any other company

(that is to say the holding company), means a company in which the holding company—

(i) controls the composition of the Board of Directors; or

(ii) exercises or controls more than one-half of the total voting power either at its own or together with one or more of its subsidiary companies:

Explanation.— For the purposes of this clause,—

(a) a company shall be deemed to be a subsidiary company of the holding company even if the control referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding company;

(b) the composition of a company’s Board of Directors shall be deemed to be controlled by another company if that other company by exercise of some power exercisable by it at its discretion can appoint or remove all or a majority of the directors;

(c) the expression “company” includes any body corporate;

 

 

1. Earlier definition of Holding and Subsidiary company was not inconsistent with the Indian Accounting Standards.

2. Same amendment in case of explanation to section 2(6)

3. Now it will be easy to determine Holding and  Subsidiary relationship.

 

 

 

2(91)-Turnover“turnover” means the aggregate value of the realisation of amount made from the sale, supply or distribution of goods or on account of services rendered, or both, by the company during a financial year;

 

turnover” means the gross amount of revenue recognized in the profit and loss account from the sale, supply or distribution of goods or on account of services rendered, or both, by the company during a financial yearIt was suggested by the Institute of Chartered Accountants of India (ICAI) that the definition of turnover should mean the amount of revenue recognised as per the applicable Accounting Standards followed by the company.

 

Author: CS Manohar Mishra-Associate Member of the ICSI & a Commerce Graduate from Calcutta University, he can be contacted at csmanoharmishra@gmail.com

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