Changes required in Companies Act, 2013

CA Mayank Parekh

Ease of doing business in India – Changes required in the Companies Act, 2013

As the saying goes…… ‘Change is the only constant in life’. We can aptly say that ‘Change is the only constant in Laws’.

We have already entered in new era of Change called the Companies Act, 2013 (‘the Act’). However, this time change has brought enough reasons to worry and industry is already feeling heat of changes and struggling to cope with the changes due to complexities and additional burden of compliances brought by the Act.

As usual the Institute of Chartered Accountants of India (‘ICAI’) has come to rescue. Recently, CA Manoj Fadnis, President of ICAI and CA S. Santhanakrishnan, Chairman, Corporate Laws and Corporate Governance Committee (‘CLCGC’), ICAI met Shri Arun Jaitley, Hon’ble Minister of Finance, Corporate Affairs and Information & Broadcasting in presence of CA Kirit Somaiya, Hon’ble Member of Parliament, on 7th April, 2015. Key objective of the meeting was to present pathway to reduce cost of compliance and promote growth.

In the meeting discussions took place on the subject of Ease of doing business in India – Changes required in Companies Act, 2013.

Key areas that were touched upon are:

1. Exemption to private companies (Section 73 to 76):

Recent controversy on repayment of deposits and dilemma ‘to repay or not to repay’, which was then put to an end by clarification issued on last date had created chaos in the industry.

Following proposals have been made by the ICAI:

a) To exempt private companies from all requirements except public deposits, filing annual reports and regulatory filings to facilitate growth of business and allow capital formation;

b) Unlisted public companies and public companies with less than 10% shareholding to be treated akin to private companies exempting from excessive regulations;

c) Borrowings to be managed by lenders and not by regulators (Section 117)

2. Regulatory filing (Section 117):

With numerous filings under Section 117 along with board decisions with the agenda, it has become one of the draconian Sections which leads breach of corporate confidentiality, corporate espionage and affects growth of business.

It has been proposed by the ICAI that appropriate changes are required to be made in respect of upfront disclosures, Securities and Exchange Board of India (‘SEBI’) guidelines for listed companies and abandonment of filings.

3. Inter company loans (Section 185/ 186):

Section 185 and Section 186 restricts dealings between Holding and Subsidiaries and prevents investments even in tax free bonds which adversely impacting on capital formation and investment in newer ventures.

The ICAI proposes to remove minimum interest rate prescription and empowering board to decide on investments.

4. Directors responsibilities/ report:

One of the responsibilities of the Director is to devise proper systems to ensure compliance with the provisions of all applicable laws. It is practically difficult to ensure compliance with all laws. Accordingly, it has been advised that the words ‘all applicable laws’ to be substituted with ‘substantive laws’.

Further, exhaustive disclosure in respect of remuneration to employees under Section 178 breaches confidentiality. It is proposed that such disclosures restricted only to Directors and Key Managerial Personnel (‘KMP’).

5. Prohibition of insider trading (Section 194 and 195):

Under the new Act prohibition of insider trading has been extended to include private companies in respect of rights issue and private placement. Such prohibition adversely affects on fund raising and capital formation for corporates. Further, these are not even covered under SEBI.

Actions have been requested by the ICAI to exempt all companies except listed companies, which shall follow SEBI regulations, from restrictions provided in Section 194 and 195.

6. Harsh penalties prescribed in the Act both for corporates and professionals:

Corporates and professionals are punished severely without reference to the nature of offence. This has lead to poor confidence levels, restrictions on ease of business, High incidences of compliance cost. Such criminal laws and penalties must be diluted.

7. Fines and penal provisions on corporates:

Penalties levied on non-compliance under sections listed below are so precarious that it may impact working capital of the companies. Further, no mitigation is possible even in genuine cases.

a) Section 8 – Formation of company with charitable objects: Rs 1 crore;

b) Section 40 – Listing securities in stock exchange: Rs 50 lacs;

c) Section 74 – Repayment of deposit accepted before commencement of the Act: Rs 1 crore to Rs 10 crore

d) Section 195 – Insider trading: Rs 25 crore

It is requested by the ICAI that floor and cap to be prescribed and rest must be left for courts to decide.

8. Fines and penal provisions on Chartered Accountants (‘CA’):

Penalties are out of sync with the transaction and judgment of the punishing authority

 9. Multiple layers of Control:

Multiple layers of control by various authorities such as National Financial Reporting Authority (‘NFRA’), National Advisory Committee on Accounting Standards (‘NACAS’), The Institute of Chartered Accountant of India (‘ICAI’), Quality Review Board (‘QRB’) are not desirable for the growth of the profession and industry. This will result in unwieldy administration and it would require minimum Rs 200 crore or more over a period of 3 years.

It has been requested that dual control by the ICAI and NFRA in respect of Accounting Standards, Auditing Standards and Discipline should be avoided. It has been also requested to include more government nominees in Disciplinary mechanism.

Constitution of NFRA: NFRA should be under the control of Chartered Accountants. If NFRA has to be constituted, NFRA Rules will have to be widely debated. Further, ICAI must be consulted before any Rules are brought out. Wider consultation with members at large and stakeholders should take place.

It is requested that applicability of NFRA should be deferred and consultation should be completed at least within 180 days.

10. Matters to be left to the ICAI:

Request has been made to empower the ICAI in respect of number of audits, type of management services to be rendered by a CA, disqualification of auditor on grounds of relative being employed – to be restricted to KMP.

11. Other matters:

a) Amendment in the definition of Relatives (Section 2(77)):

Only one level up and down to be covered (ie Father, Mother, Son and Daughter). In respect of other categories only dependents should be covered and in respect of non-dependents only disclosure requirement without any restriction.

b) Related Party Transaction (Section 188):

Difficulties in voting are being faced by many private limited companies where there are only 2 shareholders and both or one of them is interested party. It is requested that applicability should postponed or threshold limit should be provided.

c) Exit to be made easier.

d) Protection to minorities.