Companies amendment act 2017

Companies (amendment) act 2017

Companies (amendment) act, 2017

Salient Features of Companies (amendment) act 2017

The Companies (Amendment) Act, 2017 has introduced several amendments to the Companies Act, 2013, realigning provisions to improve corporate governance and ease of doing business in India while continuing to strengthen compliance and investor protection.

Though the 2013 Act was a step in the right direction as it introduced significant changes in areas of disclosures, investor protection, corporate governance, etc., there were multiple instances of conflicts and overreach within the legislation leading to difficulties in its implementation.

Accordingly, the Companies Law Committee (CLC) was constituted in June 2015 with the mandate of making recommendations to resolve issues arising from the implementation of the 2013 Act.

Based on the recommendations of the report of the CLC, the Government introduced the Companies (Amendment) Bill, 2016 (Bill) in the Lok Sabha on 16 March 2016 which was passed by the Lok Sabha on 27 July 2017 and by the Rajya Sabha on 19 December 2017.

The Companies (Amendment) Act, 2017 (Amendment Act) received the assent of the President on 3 January 2018, but different provisions of the Amendment Act will be brought into force on different dates by the Central Government.

Proposing a slew of changes, the Amendment Act seeks to realign many provisions to ease corporate governance and doing business in India while continuing to strengthen compliance and investor protection.

Following is the summary of the important changes made through the Companies (Amendment) Act, 2017:

1. Associate Company

An associate company, in relation to another company, was defined under the 2013 Act as a company in which that other company has a ‘significant influence’ and included a joint venture company.

‘Significant influence’ was defined as control of at least 20% of the total share capital or business decisions under an agreement.
The Amendment Act widens the definition of ‘significant influence’ by,

(a) referencing, control of 20% of the total voting power as opposed to the total share capital; and

(b) including participation in (and not only control of) business decisions.

The Amendment Act defines the term ‘joint venture’ as a joint arrangement whereby parties that have joint control of the arrangement have rights to the net assets of the arrangement.

2. Holding Company

The Amendment Act has introduced an explanation to the definition of holding company to clarify that a holding company includes any body corporate. Accordingly, a company incorporated outside India may well be termed as a holding company of its Indian subsidiaries.

3. Subsidiary

One of the tests of a subsidiary company under the 2013 Act was the control of more than one-half of its total share capital by the holding company.
The Amendment Act has changed the criteria to control of ‘voting power’ instead of control of ‘share capital’.

4. Reduction in Minimum Membership

Section 3A has been inserted by the Amendment Act, 2017 which provides for personal liability of members in certain cases. It provides that:
If at any time the number of members of a company is reduced, in the case of a public company, below seven, in the case of a private company, below two, and the company carries on business for more than six months while the number of members is so reduced,

every person who is a member of the company during the time that it so carries on business after those six months and is cognisant of the fact that it is carrying on business with less than seven members or two members, as the case may be, shall be severally liable for the payment of the whole debts of the company contracted during that time, and may be severally sued therefor.

5. Issue of shares at a Discount

Issue of shares at a discount to face value was prohibited under the 2013 Act. The Amendment Act permits companies to issue shares at a discount to its creditors under a statutory resolution plan or debt restructuring scheme in accordance with any guidelines, directions or regulations specified by the Reserve Bank of India.

6. Issue of Sweat Equity Shares

Under the 2013 Act, sweat equity shares could not be issued within 1 year of commencement of business of the company.

The Amendment Act seeks to remove this restriction

7. Private Placement Process

The Amendment Act has substantially revised the provisions on issuance of shares through a private placement process:

i. The Amendment Act expressly states that a private placement offer cannot be renounced in favour of a third party.

ii. The 2013 Act provided that funds raised through private placement could not be utilised until the shares were allotted.

The Amendment Act provides an additional restriction prescribing non- utilisation of funds until the requisite filing has been made with the RoC. The timeline for the filing has also been reduced to 15 days (from 30 days under the 2013 Act).

iii. The 2013 Act restricted a company from making a fresh private placement offer while a previous offer was pending.
The Amendment Act seeks to provide flexibility to raise funds by permitting companies to make more than one issue of securities to such class of identified persons as may be prescribed, subject to a maximum of 50 identified persons or as may be prescribed.

8. Contents of a prospectus

Section 26 of the 2013 Act listed matters that needed to be stated in the prospectus while making a public offer, resulting in an overlap between the 2013 Act and the requisite Securities and Exchange Board of India (SEBI) regulations.

The Amendment Act has omitted the provisions that require specific matters to be stated in the prospectus and provides that the company should provide such information as required by the SEBI in consultation with the Central Government.

9. Liability for Misstatement in the Prospectus

While section 34 of the 2013 Act prescribed civil liability for directors, promoters and experts for issuing misleading statements in a prospectus, it did not allow directors who relied on the statements made by experts in a prospectus to use such reliance as a defence.
The Amendment Act incorporates a defence against the liability of a director for misleading statements in the prospectus made by an expert, provided the director can prove that he had reasonable ground to believe that the expert making the statement was competent to make it, that such expert had given consent to issue the prospectus and had not withdrawn such consent before registration of the prospectus.

10. Key Managerial Personnel – Definition

The term ‘key managerial personnel’ (KMP) was defined under section 2(51) of the 2013 Act to mean the chief executive officer, managing director, manager, com- pany secretary, whole time director and chief financial officer.

The Amendment Act expands the definition of KMP by giving the Board of directors the power to designate such other officer, not more than one level below the directors who is in whole-time employment, designated as key managerial person- nel by the Board and such other officer as may be prescribed.

11. Resident Director

Section 149(3) of the 2013 Act required every company to have at least one resident director, i.e., a director who has stayed in India for a total period of not less than 182 days during the previous calendar year.
The Amendment Act has modified the residency requirement, by making it appli- cable to the current financial year instead of the previous calendar year.

12. Independent Director

Under the 2013 Act, a person appointed as an independent director and his relatives were not permitted to have any pecuniary relationship or transaction with the company in which such a person was appointed as an independent director.

The Amendment of section 149 of the Act permits an independent director to have limited pecuniary relationships with the company without compromising his independence, such as receiving remuneration as an independent director and having transactions with the company not exceeding 10% of his total income.

13. Number of Directorships

Under section 165 of the 2013 Act, a person was not allowed to hold office as a director, including alternate directorship, in more than 20 companies.

The Amendment Act excludes directorship in dormant companies in determining the limit of 20 companies, so that directorships in dormant companies is not discouraged.

14. Disqualifications for Appointment of a Director

Under section 164 of the 2013 Act, a director could not be reappointed as a director in a company which had failed to file financial statements and annual returns for a continuous period of three years or had not repaid deposits or interest or redeemed debentures on the due date, etc. for a year or more.

The Amendment Act provides that a newly appointed director of a company in default should not incur such disqualification for a period of six months from his appointment, which gives him an opportunity to rectify the defect and avoid this disqualification within such period.

Further, if the existing director of such a company in default incurs disqualification, the office of such director would become vacant in all other companies, except the company which is in default, to ensure that the defaulting company has the requisite number of directors to remedy the default.

15. Register of significant beneficial owners in a company

The substituted section 90 provides that every individual, who acting alone or together,

or through one or more persons or trust, including a trust and persons resident outside India, holds beneficial interests, of not less than twenty-five per cent or such other percentage as may be prescribed, in shares of a company or the right to exercise, or the actual

exercising of significant influence or control as defined in clause (27) of section 2, over the company (herein referred to as “significant beneficial owner”),

shall make a declaration to the company, specifying the nature of his interest and other particulars, in such manner and within such period of acquisition of the beneficial interest or rights and any change thereof, as may be prescribed.

16. Abridged form of annual return

Section 92 has been amended to provide that the Central Government may prescribe abridged form of annual return for “One Person Company”, small company and such other class or classes of companies as may be prescribed.

17. Annual general meeting of an unlisted company

Amended section 96 allows annual general meeting of an unlisted company to be held at any place in India if consent is given in writing or by electronic mode by all the members in advance.

18. Business required to be transacted by means of postal ballot
Section 110 has been amended to provide that any item of business required to be transacted by means of postal ballot may be transacted at a general meeting by a company which is required to provide the facility to members to vote by electronic means under section 108.

19. Consolidated Financial Statements

Section 129(3) ‘as amended’ provides that where a company has one or more subsidiaries or associate companies, it shall, in addition to financial statements provided under sub-section (2), prepare a consolidated financial statement of the company and of all the

subsidiaries and associate companies in the same form and manner as that of its own and in accordance with applicable accounting standards, which shall also be laid before the annual general meeting of the company along with the laying of its financial statement under sub-section (2).

20. Overall Maximum Managerial Remuneration

A company can now pay remuneration to its managerial personnel exceeding 11% of the net profits by passing a resolution in general meeting. Approval of the Central Government, as contemplated under the Act of 2013 shall not be required.

Also Read –

History of company law in India


Difference between Companies and Partnerships


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Winding up of company & legal provisions

Meaning & definition of company law


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