ISSUE I : New gateway to corporate India via companies bill 2012!

New gateway to corporate India via Companies Bill 2012!

Introduction

A work in progress for years, the Companies Bill, 2012 (“Bill”), is steadily inching towards becoming the new legislation for corporate India. The Lok Sabha, the Lower House of Indian Parliament, passed the Bill on December 18, 2012. The Bill, once it is approved by the Rajya Sabha, the Upper House of the Parliament, and, pursuant to the President of India’s assent, will become the new gateway to corporate India replacing the existing law, the Companies Act, 1956 (“Act”) This bulletin provides a brief synopsis of the key features proposed to be introduced in the Bill and also highlights the departure made from the existing legislation. The article will touch upon the following important aspects: (i) types, incorporation and share capital of companies; (ii) management of companies (including Board, shareholders meetings, directors); (iii) auditors; (iv) mergers and amalgamations; (v) liquidation of companies; (vi) notable features viz. investment protection, corporate social responsibility, class action suits; and (vii) selective miscellaneous provisions.

1.1 Types of Companies

• Private company – The definition of “private company” is broadly the same as the Act¹ except for the increase in the limit on total number of members from the existing fifty

(50) to two hundred (200). However, One Person Company is exempted from the aforesaid.

• Public company -“Public company” continues to be defined as under the Act.² However, the Bill expressly provides that a private company which is a subsidiary of a public company will be regarded as a public company irrespective of its status as private company in its Articles of Association (“AOA”). This means that they will have to comply with all the governance requirements applicable to public companies.

• One Person Company – This new concept has been introduced under the Bill. It is defined as a company which has only one person as a member.

Foreign company – It means any company or body corporate incorporated outside India which (i) has a place of business in India whether by itself or through an agent

physically or through electronic mode; and (ii) conducts any business activity in India in any other manner.

• Small company – This new concept has been included in the Bill, which has been defined to mean a company (not a public company) which (i) has a minimum paid-up share capital INR 5 million (USD 91,979) and a maximum of INR 50 million (USD 919,794) or (ii) minimum turnover (as per its last profit and loss account) of INR 20 million (USD 367,918) and maximum of INR 200 million (USD 3,679,176). Such companies have less stringent provisions, inter alia, for reporting, Board meetings, and merger procedures. By linking with capital, it appears that the intent is to alleviate compliance burden of some companies.

• Dormant company – The Bill specifically includes a dormant company. Accordingly, where a company is formed and registered for a future project or to hold an asset or intellectual property and has no significant accounting transaction, such a company or an inactive company can obtain the status of a dormant company by applying to the authority.
  
  1.2 Company incorporation – By and large, the incorporation process is the same as under the existing Act.
  The changes include:For public companies, the requirement of certificate of commencement upon incorporation has been removed

• The Bill requires the subscribers to the Memorandum of Association (“MOA”) and first directors to provide an affidavit stating they are not convicted of any offence in connection with the promotion, formation or management of, or guilty of any fraud, misfeasance or breach of duty in relation to any company incorporated under the new enactment or any previous company law during the preceding five years. Further, particulars of interest (if any) of the first directors have to be filed with the Registrar of Companies (“ROC”). If false or incorrect particulars are furnished or any material information is suppressed, the person is liable for imprisonment.

• The MOA has to indicate the object for which the company is incorporated along with any other matters considered necessary for its furtherance. Unlike in the Act, the objects need not be divided under main, ancillary and other objects heads.

• The Articles of Association (“AOA”) can contain entrenchment provisions. Specific AOA clauses can be altered only if restrictive conditions, as specified, are met or complied with. The provisions for entrenchment can be made only on formation of a company or by AOA amendment upon approval from all the members of the company in case of a private company and by a special resolution in case of a public company. The company has to notify the ROC of such entrenchment provisions.
  
  1.3. Share capital

• In contrast to the existing law on restriction on transfer of shares, the Bill allows free transferability of shares of a public company and renders any contract/arrangement between two or more persons enforceable.

• A company will be considered as holding company of another, if the former, inter- alia, holds more than 50% of the total share capital of the latter i.e. both equity as well as preference share capital as against only equity share capital presently covered under the Act. Further, companies can have only two layers of subsidiaries for investment.

• Except for sweat equity shares, companies cannot issue shares at a discount. Any share issued by a company at a discounted price will be void.

• In respect of preference shares, the period of twenty (20) years before redemption becomes mandatory, still holds good. However, for infrastructure projects, preference shares can be issued for a period beyond 20 years, subject to redemption of such percentage annually at the option of the preferential shareholders. The Bill is silent on the upper ceiling.

• The provisions relating to further issuance of share capital including preferential and bonus issue have been made applicable for private companies also.

• The Bill specifically includes provisions for issue of bonus shares, which requires companies to fulfill certain conditions including: (a) AOA authorization; (b) shareholders approval in a general meeting; (c) no default in payment of interest or principal in respect of fixed deposit or debt securities issued by it; (d) no default in payment of statutory dues of the employees.

• Consolidation/division of shares resulting in changes in voting percentages requires approval of the National Company Law Tribunal (“NCLT”). In case of share capital reduction, the NCLT has to notify the application to the Central Government, ROC, Securities and Exchange Board of India (“SEBI”) (in case of listed companies) and the creditors for making any representations on the proposed reduction within three (3) months of receipt of notice, failing which no objection will be presumed.
  
  1.4 Management of Companies

• General meetings quorum – In case of a public company, (i) five (5) members personally present if the maximum number of members on the date of meeting is one thousand (1000); (ii) fifteen (15) members personally present if the number of members on the date of meeting is between one thousand (1000) and five thousand (5000); (iii) thirty

(30) members personally present if the number of members as on the date of the meeting exceeds five thousand (5000). For a private company, quorum is two (2) members personally present, as under the Act. The first Annual General Meeting (“AGM”) has to be held within nine (9) months from the close of first financial year instead of eighteen (18) months from incorporation date, as presently applicable. Members can vote by electronic means. Every listed company has to prepare a report and submit with the ROC within thirty (30) days of each AGM a confirmation to the effect that meeting was convened, held per the stipulated provisions. Non-filing of the report is a punishable offence.

• Board meetings – Akin to the Act, the Bill mandates four Board meetings in a year. However, it categorically states that a maximum of one hundred and twenty (120) days gap

can exist between two such meetings. Minimum advance notice of seven (7) days is necessary. The existing Act is silent on the notice period. The notice can be hand delivered, sent electronically or by post. Meeting at a shorter notice is allowed subject to the mandatory presence of one independent director³. However, in the absence of independent director, decisions taken at such meetings have to be circulated to all directors and ratified by at least one independent director. Bill has specific provisions regarding participation of directors through video-conferencing or other electronic means provided such participation is capable of being recorded and recognized. For One Person Company, small company, and dormant company, one meeting in each half of calendar year, with a gap of ninety (90) days between two such meetings, is mandatory.

• Directors – A maximum of fifteen (15) directors as opposed to the existing twelve

(12) has been allowed under the Bill. Shareholders can increase the number beyond fifteen

(15) with a special resolution. Central Government approval, as required under the Act, is not needed to affect the aforesaid increase. Appointment of at least one director who has stayed in India for minimum 182 days in the previous calendar year is mandatory under the Bill. There is no such requirement currently stipulated in the Act. Further, appointment of at least one woman director on the Board of prescribed classes of companies is compulsory. A person can hold directorship of maximum twenty (20) companies of which only ten (10) (as against 15 under the Act) can be public companies. The Bill specifically provides procedure and manner of resignation by directors.

• Independent directors – This new concept has been introduced in the Bill. Some important features are as follows: All listed companies have to appoint independent directors constituting at least one-third of the Board. Such director (s) can be appointed for a maximum of two consecutive five (5) year terms. Thereafter, re-appointment is allowed pursuant to a gap of three (3) years. The pre-requisites for appointment of independent directors are stipulated in the Bill and are extremely stringent. An independent director is liable only in respect of acts of omission/ commission by the company which had occurred with their knowledge, attributable through Board processes, and with their consent or connivance. He is not entitled to any remuneration besides sitting fees, reimbursement of expenses for participation in the Board. A distinction has been drawn between nominee director and independent director in the Bill. The former is appointed by a financial institution, government or pursuant to an agreement or by a person to represent his interests.

• Key Managerial positions – The Bill has introduced the concept of key managerial personnel and it includes: Chief Executive Officer or the Managing Director or Manager, Company Secretary, whole-time director, Chief Financial Officer, such other officer as prescribed.

• Committee of Directors – In addition to Audit Committee (as under the Act), constitution of Nomination and Remuneration Committee and Stakeholders’ Relationship Committee has been made mandatory for listed companies.

1.5 Auditors

• The Bill mandates appointment of auditors at the first AGM of the company who is allowed to hold office until the conclusion of sixth AGM of the company and thereafter. It provides for mandatory rotation of an individual auditor once in every five (5) years and once in every ten (10) years for an audit firm. Shareholders of a company have the liberty to decide rotation of auditors every year. The maximum number of companies in which an auditor can be appointed is fixed at twenty (20).

• Auditors are prohibited from rendering services viz. internal audit, investment banking advice, management services, actuarial services, directly or indirectly to the company, its holding company or subsidiary. Companies formed under the existing Act on or before the Bill becomes law have to comply with the provision of rotation of auditors within a period of three (3) years from the commencement of the new law.

• Companies having subsidiaries have to prepare consolidated financial statements of parent and subsidiaries and present it at the AGM. “Subsidiary” includes associate company and joint venture.

• The Central Government has been empowered to constitute a National Financial Reporting Authority to provide for matters relating to accounting and auditing.

1.6 Mergers and Amalgamations

• The process has been simplified by removing the requirement of the existing court sanction under the Act. The Bill allows mergers and amalgamations between companies in India and in other jurisdictions, subject to rules stipulated by the Central Government and the Reserve Bank of India (“RBI”). Currently, the Act does not allow merger of Indian company into a foreign company.

• Any objection to a scheme of compromise or arrangement can be made only by persons holding at least 10% of the shareholding or having outstanding debt amounting to at least 5% of the total outstanding debt.

• The Bill allows an acquirer/persons acting in concert or person (s) holding 90% or more paid-up capital to purchase the minority shareholding at a price determined by a registered valuer. As such, the Bill allows squeezing out minority shareholders, which has, for long, been a grey area under the Act. Further, the minority can offer their shares for purchase to the majority at a price determined by a registered valuer.

• The merger scheme has to be notified to various regulatory authorities including central government, income tax authorities, RBI, stock exchanges, Competition Commission of India. The authorities have thirty (30) days from the date of its receipt to make their representations, if any, failing which the presumption is the authorities do not have any representations.

1.7 Liquidation

The following new grounds have been inserted i.e. where (a) the affairs of the company have been conducted in a fraudulent manner; (b) the company was formed for fraudulent and unlawful purpose; and (c) the persons concerned in its formation or management have been guilty of fraud, misfeasance or misconduct in connection therewith

1.8 Notable features

• Corporate Social Responsibility (“CSR”) – The Bill has introduced CSR concept, which entails every company having a net worth of INR 5 billion (USD 91,979,398) or more, or turnover of INR 10 billion (USD 183,958,796) or more or net profit of INR 50 million (USD 919,794) or more in any financial year, has to constitute a CSR Committee of the Board comprising three (3) or more directors, one of whom ought to be an independent director. The committee is responsible for recommending policies to the Board. It is mandatory for every such company to spend 2% of its average net profits made during the three (3) immediately preceding financial years, in every financial year. Preference for CSR activities has to be given to the local areas of the company’s business operation. The Board has to provide reasons in its report in the event the company fails to spend the amount earmarked for CSR activities.

• Investment Protection – The Bill provides for establishment of Serious Fraud Investigation Office (“SFIO”) to investigate frauds relating to companies, which has been given statutory status. SFIO is entitled to make arrests and frame charges in court of law. For swift trial of offences, the Central Government has the power to establish special courts in consultation with the Chief Justice of High Courts. These courts are allowed to do summary proceedings for offences that are punishable with maximum three (3) years imprisonment.

• Class action suits – The Bill includes the concept of class action suits. According to the provisions, in case of oppression and/or mismanagement, requisite number of members or depositors can file a suit with the NCLT on behalf of members and creditors, to seek appropriate  relief,  claim  damages/compensation  for  unlawful  or  wrongful  acts  from  or against the company, directors, auditors, experts, advisors.

1. Miscellaneous – In addition to the aforesaid, the Bill covers several other provisions, some of which are listed below:

• Dividends – The Bill has eliminated the requirement of transfer of fixed percentage of profits to reserves prior to declaration of dividends every year and has given discretionary powers to the company. Shareholders are entitled to claim dividends transferred to Investor Education and Protection Fund. The Bill provides that the Board of Directors can declare interim dividends during any financial year from the surplus. It further contains stringent punishment in case of failure to distribute dividends within thirty (30) days of its declaration.

• Constitution of NCLT and stringent punishment- The Bill stipulates constitution of NCLT and an appellate body comprising judicial and technical persons. The timeline for

disposing of cases is three (3) months. The Bill covers strict penal provisions, with mention of minimum and maximum quantum of penalty.

• Broader definition of “Officer-in-default”- The scope has been widened to include registrar, transfer agent, merchant banker, and key managerial personnel.

• Appointment of registered valuer – The Bill mandates the appointment of registered valuer for performing valuation of company’s property viz. shares, stocks, debentures, securities, goodwill, net worth and its liabilities.

• Private placement – Provisions for offer or invitation for subscription of securities on a private placement basis is specifically covered under the Bill. The offer can be made to fifty

(50) persons or more, as prescribed (excluding qualified institutional buyers and employees under employee stock options) in a financial year.

• Secretarial standards – For the first time, this concept has been introduced in India. Every company has to follow the prescribed secretarial standards with respect to general and Board meetings specified by the Institute of Company Secretaries of India constituted under the Company Secretaries Act. Under the Bill, it is the duty of company secretaries to adhere to the established standards. Secretarial audit has also been provided for in case of listed companies.

• Striking off companies – ROC can strike off companies on various grounds viz. non commencement of business within one year from incorporation date, failure to pay subscription money with 180 days from incorporation date.

Conclusion

The Bill certainly seeks to bring in a positive change in the manner of working of companies in India, especially in the wake of the prevailing global trends. There is a significant focus and transparency on corporate governance. Additionally, independent directors will become more accountable and, we hope, in times to come will be “independent” in the true sense of the word. The Government has been conscious in covering hitherto silent provisions and endeavored to introduce an effective and comprehensive law. However, it is important to bear in mind the Bill is yet to become a law. By the time the legislation comes into force, there may be changes to the present Bill.

Authored by:
Priyatha Rao

1 The minimum paid-up capital should be INR 100,000 (USD 1,841 approximately @ 1 USD = INR 54.30). The Articles of Association restrict the right to transfer its shares and prohibit invitation to the public to subscribe for any securities of the company.
2 It is not a private company and should have a minimum paid-up capital of INR 500,000 (USD 9,209 approximately).
3 This is applicable in case of listed public companies. For every listed company, at least one-third of the directors should be independent.