It seems the recent set of proposed amendments to the Companies Act will give some respite to Corporate India. The lower house of Parliament passed the Companies (Amendment) Bill, 2014 on December 17.
Finance Minister Arun Jaitley said that "some of the original provisions were only posing hurdles to doing business." A closer look at the proposed amendments shows that several provisions have been toned down. "In the last one year, from the last December onwards, it became clear that certain provisions (of the law) were troublesome. The government has responded to some of those," says Vivek Gupta, Partner, BMR Advisors.
To begin with, the earlier version of the Act required approval from non-related shareholders for transactions between holding companies and wholly-owned subsidiaries. The new norms have done away with this requirement. Experts say that it is a clear case of relaxation of previous norms.
"Increasingly, people use subsidiaries to do transactions with group companies. We fear that a lot of related party lending transactions will be routed through 100 per cent subsidiaries," says Amit Tandon, Founder & MD of proxy advisory firm Institutional Investor Advisory Services (IiAS).
In addition, the amendment also proposes to replace "special resolution approval" with "ordinary resolution approval" from non-related shareholders on related party transactions below Rs 100 crore or 10 per cent of net worth. Special resolution requires approval of 75 per cent of the non-related shareholders (broadly speaking, non-promoter shareholders) whereas ordinary resolution requires only half of non-related shareholders to vote. It means a promoter will now require lesser number of minority shareholders to approve the transaction.
Interestingly, the government is showing lesser concern when it comes to
frauds. As per the old norms, the Act provides that if an auditor (of a company) believes that an offence involving fraud is being committed by the officers or employees of the company, he shall report it to the central government immediately.
According to the amendment now, the auditor shall report only such events of frauds when a certain threshold limit is crossed. In short, fraud involving a lesser amount will no longer be reported to government because the auditor will report them to the audit committee or to the board of the company. "It certainly reduces the work load of central government employees but it is also likely that some of these frauds may never get reported. Corruption, big or small, needs to be reported to the public authorities," says a company law consultant.
Certain other provisions have also been watered down. For example, the requirement to have independent directors on boards of private companies or certain types of public limited companies. Typically, private companies and some types of public limited companies are not supposed to have an independent director.
At the moment, any company with a turnover of over Rs 1,000 crore or a net worth of over Rs 500 crore or net profit of over Rs 5 crore during a financial year is mandated to form a CSR committee with at least one independent director. Under the proposed amendments, some public limited companies and private companies (which do not otherwise the requirement of having an independent director) may constitute such committee without the independent director also.
The softening of provisions is coming within nine months after the law came into (nearly) full force. The upper house of Parliament still has to clear the amendments.
