CA Sandeep Kanoi
In this article we have analyzed the Speech of Minister of Finance Mr. Arun Jaitley given in Lok Sabha on 17.12.2014 during debate on Bill to amend the Companies Act, 2013. Lok Sabha has passed the Companies (Amendment) Bill 2014 on 17.12.2014 and the bill can be accessed at the following link:-
Types of Changes in Amendment Bill and Rationale for the same
There are clearly two kinds of opinion which have been expressed by Shri Kirit Somaiya, Shri Pinaki Misra, and several others, who were in support of this Bill. They have contented that – in fact there are many more changes which are required to be made – because with a Bill of this kind, doing business in India may become difficult. There is another view which has been expressed. Why should we have a Bill which makes it easy for companies? What does the Government gain out of it? I have no hesitation in admitting that I agree with the former opinion. It is companies which create jobs. The West Bengal Government does not. Therefore, if the economy of this country is to revive, we cannot make it impossible to do business in this country. After this law has been enacted, I would just place some of the provisions which I am seeking to change, on which comment has not been made.
People represented to the Government even when the UPA was in power that it is perhaps better to create a proprietorship or a limited liability partnership and do businesses rather than having such a restrictive regime. But then raising public finance, getting loans, getting institutional finance becomes difficult. So people have to corporatise their structure and do it. I will just give an illustration.
There are four kinds of changes which we are making. One is with an intention of `ease of doing business’; the other is, drafting errors; the third is oversight; and the fourth is some provisions which are ex-facie oppressive to an environment to do business. Let me start with the fourth category.
Removal of Provision of No Bail for offences Under Companies Act, 2013
I would request any hon. Member, if he has a copy, to pick up section 212(6) of this Act. I am referring to an extraneous fact when in 2004 the UPA came to power, there was a law which the NDA had enacted called the Prevention of Terrorism Act (POTA).
The UPA’s main criticism of POTA was that some of the provisions are very repressive and so they repealed POTA. When they repealed the anti-terrorism law, they incorporated most of the provisions under the Unlawful Activities Prevention Act. But one provision the UPA said that they would not agree to put in the Unlawful Activities Prevention Act was regarding a harsh bail provision. The POTA said that any person arrested for terrorism will not get bail till either the Public Prosecutor consents to the bail or the court gives a finding that the person is innocent on the face of it. Now finding of innocence is not possible till the trial is held. So, the UPA’s own case was that this is not a provision we can agree with and, therefore, they removed that provision from the anti-terrorism law. Having removed it from there, they brought in the POTA bail provision under Section 212 (6) of the Companies Act, which says:
“Notwithstanding anything contained in the Code of Criminal Procedure… .the following offences which attract the punishment for fraud as provided in….to a person accused of those offences…no person shall be released on bail unless the prosecutor has been given notice where the prosecutor opposes it, the court is satisfied that reasonable grounds for believing that the person is not guilty of the offences.”
Verbatim, full stop for full stop, comma for comma, they incorporated the POTA provision into the bail provision of this Act. Now this language exists in the narcotics law. When we invite the rest of the world to come to India, form a company, do business and invest in India, are we trying to say that in case you commit any of these offences you will never get bail or you will indefinitely never get bail? Therefore, most companies said that it is safer for them to switch over to a limited liability partnership than continue to do business.
Extremely harsh offences will be before a Special Court and the rest will be before the normal courts
Now, if you look at the other provisions of the Act, all offences under grievous laws relating to terrorism, narcotics, sedition, prevention of corruption etc., they say that ordinary courts will not try these cases and there will be special courts. So, all offences against a company will go to a Special Court. The ordinary Magistrate’s jurisdiction is taken away. Are we trying to induce investors to come and invest in India or are we trying to scare them away from the country? We have, therefore, brought in an amendment that extremely harsh offences will be before a Special Court and the rest will be before the normal courts of the land. If a man wants to wind up a company, there has to be a provision in law. The case relating to winding up these days normally goes to a single judge of the High Court as one judge in every High Court is a company law judge. If somebody says that there is a commercial insolvency or any other reasoning or the company itself wants to be wound up, it goes to a single judge, there is a procedure to be followed and it gets wound up.
This Bill says that simple company matters and other matters go to a single judge, appeals go to a Division Bench and some extraordinary matters also go to a Division Bench. A company to be wound up has to go to a full Bench of three judges. What is the rationale? That is why I said either some of the provisions are oppressive or some of the provisions like having one judge or two judges or three judges could have even come by an oversight.
No More Minimum Capital and Common Seal Requirement
So it is the case of an oversight. If I run through each of these 14, the first two, requirement of capital and seal, the international standard practice now in corporate laws across the world is that you have done away with these requirements. So, here it has been brought at parity with international laws.
Deposit Violation been made an offence
Now, let me give you another oversight provision. There are offences companies commit. If there is a company which does not follow the procedure and starts collecting deposits, it is a punishable offence. In the Act, we forgot to make it an offence.
The next provision, section 76 says, we forgot to provide for an offence where somebody collects deposits in violation of law. We did not make it an offence under the Companies Act; so it has been made an offence.
BOARD RESOLUTION WILL NOT BE SUBJECT OF PUBLIC SCRUTINY
World-over the practice is, in the old Companies Act from the very beginning, all resolutions of the Annual General Meeting are subject to public scrutiny, but Board resolutions are not. I will tell you the reason why Board resolutions are not subject to public scrutiny. A company decides in its Board, let us say it is an automobile company, that this is going to be my next model. The very next day, are they going to allow their business rivals to come to know of this? The company decides in its Board that this is going to be my next trade mark, this is the product on which I am going to now acquire an intellectual property. I am a pharmaceutical company; this is my formulation; this is the next drug I am manufacturing and what is my funding mechanism? In a Board resolution, you take all kinds of strategic, commercially confidential decisions.
Nowhere in the word are Board resolutions subject to public scrutiny. It is only the AGM resolutions which are subject to public scrutiny. Just because transparency and accountability are words which we in public life and politics are fond of using, we say make it transparent, make it accountable. So why not put cameras in every Board meeting of a company so that its secret intellectual property, its financial strategies are known to its business rivals? It will be the most accountable procedure and most transparent procedure. But then nobody is going to come and set up a company in India if we create such an environment for doing business. So, before we say, make it accountable, there is some conspiracy why you are taking it away, please see the consequences of what we are doing.
Declaration of Dividend from current year profit only after set off of accumulated losses
Then there is a provision that you set off past losses against future profits and only then declare a dividend. The meaning is, a company has accumulated losses. This year it has some profit. So it allows the losses to continue in the name of the banks and others. But, out of this profit, the majority decides to usurp the dividend in its pocket. In the old Companies Act the rule was very clear that you must first write off those losses and then start declaring dividends when your health is good. Probably in this Companies Act, the intention was the same. So, what we did was, we provided for a rule which says this. The declaration and payment of dividend rule 3, sub-rule 5 says this but the provisions is, the Act does not permit this. So it is obviously a drafting error and this has to be corrected.
Rectification in requirement of transferring equity shares for an unclaimed dividend
Rectifying the requirement of transferring equity shares for an unclaimed dividend, now the rule is that if there is a dividend not claimed for a period of seven years, that dividend goes into the Investor Protection Fund. If for seven years, somebody does not claim dividend, the dividend will go into the Investor Protection Fund; so will the shares also go into the Investor Protection Fund. But the language in which the Act has been written and drafted is, the dividend will go after seven years but the shares may get transferred to the Investor Protection Fund in the first year itself. So, in one year you do not take dividend, your shares are lost. Obviously, there is an ambiguity there and that ambiguity had to be corrected.
Fixing of threshold limit for reporting of Fraud
There is this enabling provision about fraud. When you are auditing the affairs of a company –this is a view put up by the Institute of Chartered Accountants – there may be dozens of irregularities that you will find out. Is everyone of them to be reported to the Central Government or are the major ones to be reported?
There is a principle of de minimis that triviality is ignored. So, what is very small can be ignored and what are major ones are to be reported. All that it says is that a threshold will be fixed by the Government beyond which all such requirements will have to be reported; otherwise the Department of Company Affairs will become the largest Department in the Government of India. It will have only complaints arising out of some voucher for Rs. 100 which is not available. So, all these complaints will reach the Department of Company Affairs. That is not the intention. Therefore, a threshold will be fixed by the Department of Company Affairs and beyond that it will go to the Government of India.
With regard to related party transactions, a very large part of the corporate world, all chambers and many people have objected to this because procedurally we had made it difficult. What had we done in the Bill? Let us take a company in which some individuals control most of the shares. They have substantially owned subsidiaries. In related party transactions, only the procedures have been simplified. The procedure is that at the AGM, the persons, in relations to whom the resolution is being passed, will not vote and the rest of the minority shareholders will vote.
So, to have a related party transaction, you need the confidence of the minority shareholders. It said: “You need confidence of 75 per cent of them.” That 75 per cent has been made easier instead of a special resolution. Special resolutions are required only when fundamental changes are being made in the business of a company; otherwise, normal resolutions are required so that special resolution becomes normal. That is all that is being done. You may have a majority of the shareholding in a company but you need the approval of the majority of the minority. The original provision was that you need the approval of three quarters of that minority, which may be extremely difficult. Therefore, people said: “It will become impossible to have related party transaction. This law requires to be simplified.” There is an exemption of related party transactions and wholly owned subsidiaries, the principal controlled 100 per cent subsidiaries where there is no minority shareholding. So, there is nobody whose 50 per cent or 70 per cent consent you require.
Terrorist can get bail but not the businessman
Then, in bail provisions we have said: “Except in heinous offences under the Companies Act, which is related to fraud under Section 447, for all others the normal bail provisions will apply. Only for this extreme offence, an extreme bail provision which was put in into this Act, will apply. There is a Special Court and a two-Judge Bench instead of a three-Judge Bench to hear the winding up of these cases.
Sir, none of the amendments has any ulterior motive. Therefore, nobody needs to claim that there is a high moral ground in opposing such an objection. With some of these provisions, doing business in India would become extremely difficult. There are some provisions which we are easing. There are some which were oversight. There are some which were left out. And there are some which came in but came in as a part of this thinking that we must make doing business extremely difficult. So if somebody is arrested and he belongs to a company, a terrorist can get bail but he should never get bail. Now, this kind of thinking, I am afraid, we do not subscribe to. I, therefore, commend to this hon. House that these amendments be accepted.
Source- Extract of Speech of Shri. Arun Jaitley given in Lok Sabha on 17.12.2014