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Proposed Amendments to Companies Act, 2013

Finsec Law Advisors

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On November 02, 2018, an ordinance was issued amending Companies Act, 2013 (Act) by recategorizing certain compoundable offences to acts carrying civil liabilities. Another notice has now been issued by the Ministry of Corporate Affairs (MCA), proposing further amendments of ‘urgent’ nature to the Act. Some of the key proposals include:

Dematerialization of shares of unlisted companies

It is proposed that public issue of securities by unlisted public companies should be compulsorily made in dematerialized form. Currently, this mandate is only applicable for listed public companies. The proposed move will bring about more transparency in the ownership structure and will reduce the misuse of shell companies for fund flow. It will also prevent duplicate pledging of shares and curb benami transactions, furthering Government’s efforts towards reducing black money.

Significant Beneficial Ownership

A person is considered to be a significant beneficial owner if it holds 25% of beneficial interest in a company. It is now proposed that companies should be required to ‘identify individuals’ who may hold such significant beneficial ownership. The proposal is silent on the extent of efforts expected to undertake this obligation. In absence of the same, the recommendation will only create additional onerous obligations on the company and its management.

Corporate Social Responsibility (CSR)

Section 135 of the Act provides that a company should declare the unspent CSR amount in its Annual Report. It is now proposed that such unspent amount must be transferred to a special account. Further, this amount has to be compulsorily spent within 3 years from the date of transfer of the amount to the special account. The amendment, if brought into effect, shall change the status of CSR to ‘mandatory’ from the existing ‘comply or explain’. It appears that the Government intends to tighten the legal framework governing CSR. The High-Level Committee on Corporate Social Responsibility was recently reconstituted to suggest changes to the existing framework. In view of the same, it would be better if the proposed amendment is implemented only after proper deliberation of the framework by the special CSR committee.

Independent Directors

In light of the increasing boardroom battles, a number of questions were raised on the resignation, removal and relationship of the independent directors with the company and the norms governing them.

It is proposed that the pecuniary relationship of the independent director with a company shall not exceed beyond 25% of his total income, excluding sitting fees. Further, income derived from rendering professional services cannot be more than 10% of his total income. The proposed amendment may not undermine the ‘independence’ of directors, as a person receiving 25% of his total income from the company can hardly be termed as ‘independent’. Further, pegging the threshold to the total income of a person would create difference between the remuneration paid to each of the directors within the same company, which may not be an ideal situation.

It is further proposed that the independent directors have to compulsorily submit their resignation along with the reasons of resignation to the Registrar. Moreover, the removal of an independent director is proposed to be done only by passing a special resolution. These changes will empower the position of an independent director in the company and avoid instances of their arbitrary removal on mere disagreement with the promoter director / controlling shareholder.

Although some of the proposals are improvements to the Indian corporate regime, it is recommended that they should not be rushed without taking appropriate representations from the stakeholders into consideration.