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Anshul Jain
Partner
General Corporate & Regulatory
Background
Setting-up
Capital Raising
Independent Directors
Corporate Governance
Out of 470 sections, a total of 284 sections of the 2013 Act have been notified till date.
The stakeholders were facing lots of difficulties in implementing the provisions of the new law and based on various
representations, MCA had already issued more than 180 clarifications, circulars and notifications in the 2013 Act and one
comprehensive round of amendment was also done in 2015. But despite of this, the concerns were subsisting.
To address them, MCA constituted a Companies Law Committee consisting of representatives from the industry,
professional institutes and legal luminaries to examine the need for further amendments.
The Committee had prepared a report, based on a broad based consultation process, and proposed more than 100
amendments in the 2013 Act. then submitted the same to the Government. Based on the report, The Companies
(Amendment) Bill, 2016 has been prepared and it has recently been introduced in Lok Sabha for their consideration and
approval.
While most of the proposed changes are introduced in order to remove procedural inconsistencies across the law, there are
certain changes that are material in nature and cater to the intention of the Government to provide an environment for ‘ease
of doing business’ in India. Few of those changes are discussed in detail in the following slides.
Contents of ‘prospectus’ A detailed list of items is SEBI is in the process of simplifying Proposed to delete the
provided that should be the contents of prospectus by amending disclosure requirements from
mentioned in the prospectus the ICDR Regulations as the the Act and empower SEBI in
issued by a company. This is prescription under 2013 Act is quite this regard. This would make
over and above SEBI ICDR. detailed and repetitive. For this the prospectus more crisp and
purpose, an amendment of the 2013 cost efficient.
Act would be required.
Civil liability for mis- The 2013 Act prescribes civil The directors can be made liable for It is proposed to exclude
statements in prospectus liability for directors for misleading statements made by an directors from liability in cases
issuing misleading statements expert. where the misleading
in a prospectus. information in the prospectus is
made by an expert. This would
absolve the directors from
liability if they rely on the
statement of an expert.
Minimum The 2013 Act allows private This restriction takes away the Proposed to delink the investment
investment size placement offer / investment flexibility to raise funds as higher from ‘face value’ and the minimum
provided the minimum valuations in angel or VC rounds may investment size increased to Rs.
investment size is INR 20,000 not be able to accomplish the minimum 20,000 (for equity and compulsorily
(face value). face value investment of INR 20,000. convertible securities) and Rs.
100,000 (in other cases)
Allotment of Not permitted The FDI policy permits issuance of Proposed to allow preferential
partly paid-up partly paid-up shares and warrants. allotment of partly paid-up shares.
securities Need for alignment between both the
laws.
www.luthra.com
Capital Raising
Miscellaneous
Subject under Existing Provision Issue / ConcernProposed / recent amendments &
2013 Act impact
Deposit A company accepting deposits No insurance company offering It is proposed to omit the
insurance should provide for deposit such insurance products thereby requirement to provide for deposit
insurance. making it difficult to comply. insurance. This would be a big relief
for companies issuing deposits.
Private Requirements such as having Made the process cumbersome, It is proposed to make amendment to
placement prescribed offer letter and filing time consuming, requiring the 2013 Act to remove a number of
procedure, etc. thereof, valuation report and elaborate, sensitive and significant these unwanted procedural
details of person to whom offer is public disclosures requirements.
made with RoC.
www.luthra.com
Corporate Social Responsibility
Disclosure: CSR Policy shall be placed on the website, if any, of the company and disclosed in the directors’ report. If the
company fails to spend the CSR amount in a financial year, then adequate reasons should also be provided by the Board of
directors in their report. A format of the said statement is provided in the CSR Rules.
Penalty: Non disclosure of CSR may attract a penalty of INR 50,000 – INR 2,500,000 on the company; and every officer of the
company who is in default can be punishable with imprisonment for a term which may extend to three years or with fine of
INR 50,000 – INR 500,000, or with both.
Activities which are solely for the benefit of employees or their family members are excluded from the scope of CSR
activity.
Activities, even if they fall within activities listed in Schedule VII, but are done by a company in normal course of its
business shall not be considered as CSR activities.
Any excess expenditure of CSR in a particular financial year cannot be carried forward and adjusted against the subsequent
year’s obligation.
If a company’s employees are engaged in the effective implementation of its CSR program then the company cannot
monetize the pro bono services of employees towards its CSR expenditure.
Expenditure incurred by foreign holding company for CSR activities in India will qualify as CSR spend of the Indian
subsidiary if, the CSR expenditures are routed through Indian subsidary.
In terms of section 2(h) of Foreign Contribution (Regulation) Act, 2010 (“FCRA”), the donation, delivery or transfer
made by any ‘foreign source’ of, inter alia, any currency, whether Indian or foreign, would be considered as ‘foreign
contribution’.
Under section 2(j)(vi), a ‘foreign source’ includes, inter alia, a company within the meaning of the Companies Act, if more
than one half of the nominal value of its share capital is held, either singly or in the aggregate, by one or more of the
following, namely:
As per the FCRA regulations, any CSR contribution to an Indian organization from a foreign owned company would be
treated as FCRA money. The same applies to donations from Indian companies in which foreign investors hold more than
half of the nominal value of its share capital.
49% 51%
NGO NGO
The Finance Bill 2016 has proposed the following amendment to the FCRA:
“In the Foreign Contribution (Regulation) Act, 2010, in section 2, in sub-section (1), in clause (j), in sub-clause (vi), the
following proviso shall be inserted and shall be deemed to have been inserted with effect from the 26th September, 2010,
namely:— “Provided that where the nominal value of share capital is within the limits specified for foreign investment
under the Foreign Exchange Management Act, 1999, or the rules or regulations made thereunder, then, notwithstanding
the nominal value of share capital of a company being more than one-half of such value at the time of making the
contribution, such company shall not be a foreign source”
The Finance Bill 2016 therefore proposes for the FCRA regulations to be amended, to essentially exclude foreign owned
Indian companies from the ambit of ‘foreign source’, as defined under the FCRA regulations. If passed, the amendment
would be a huge relief for foreign owned Indian companies which are currently required to comply with the FCRA
regulations while undertaking CSR activities. The contributions made by such companies would be regarded as a domestic
contribution (not being from a foreign source) and not require compliance with the FCRA regulations.
However, the 2013 Act has codified the concept of Independent Directors and prescribed detailed eligibility requirements
for a director to be categorized as an Independent Director.
One of such criteria is that the said person or his relative should not have any ‘pecuniary relationship’ with the company, its
holding, subsidiary or associate company, or their promoters or directors, during the two immediately preceding financial
years or during the current financial year. Due to its generic and ambiguous nature, it has the potential to disqualify large
number of persons who have insignificant pecuniary relationship with the company.
The 2016 Bill has proposed amendments to Section 149 and defined the term ‘pecuniary relationship’ to exclude the
director’s remuneration or having transaction not exceeding 10% of his total income. In case of ‘relatives’ certain specific
thresholds are prescribed to determine if such relationship between the company and the relative would hamper the
independence of the director.
Additional roles and responsibilities for independent directors prescribed u/s 149 read with Schedule IV. The SEBI
LODR Regulations, 2015 also lay down certain duties on the directors of companies who have listed their equity or
convertible securities. An indicative list is provided in Annexure I and II to this presentation.
But the issue which is still not answered is whether section 166 of the Companies Act, 2013 is exhaustive regarding
duties or company directors, or whether directors are also bound by additional common law duties?
The widely accepted view (including the view of the JJ Irani Committee) is that section 166 is a partial codification of
directors’ duties and the statutory provisions lay down only broad and basic principles. The principles of common law are
preserved through implication and operate in addition to the statutory provisions or to at least aid in their interpretation.
Therefore, it seems that the intent of the legislature was not to provide an exhaustive list, thereby leaving doors open for
common law remedies.
Personal Liability- Under 2013 Act, directors could be held personally liable without any limitation on liability, to third
parties for fraudulent activities. These include:
Issue of prospectus with an intent to defraud
Failure to repay deposit or interest and it is proved that deposits were accepted with an intent to defraud
Report by inspector that fraud has taken place in a company, and director has taken undue advantage or benefit
If during winding up, it appears that business of the company has been carried on with intent to defraud
Class Action Suit: Direct claim can be made against directors for unlawful or wrongful acts.
Companies which in the ordinary Such companies have two Align the interest rate with the interest
course of its business provides different benchmark rates rate prescribed u/s 186(7) so as to bring
loans or gives guarantees or and the higher of the two uniformity across the law.
securities for due repayment of rates have to be applied
loan at an interest rate of not less making the other
than bank rate declared by RBI redundant
Venue of AGM • Either at registered • This does not provide enough • The 2016 Bill has proposed to allow unlisted
office of company or flexibility to companies to companies to hold their AGMs at any place in
some other place hold their AGMs outside the India provided approval of 100% shareholders is
within the city, town local jurisdiction even though obtained in advance. This would provide much
or village where the members of the company greater flexibility to closely held unlisted
registered office is were not within the said local companies (including joint ventures and wholly-
situated. jurisdiction. owned subsidiaries) to hold their AGMs
anywhere in India.
• This does not provide enough • The 2016 Bill has proposed to allow wholly-
Venue of EGM • Anywhere in India flexibility to companies to owned subsidiaries of a company incorporated
hold their EGMs outside outside India to hold their EGMs anywhere
India even in cases where all within or outside India. This would provide much
the members of the company greater flexibility to such companies to hold their
are non-residents. EGMs outside India as well.
Constitution of • Private limited • Inclusion of private companies is • Proposed to exempt these private
Audit and companies whose draconian to the functioning of the companies and the same would bring in the
Nomination & securities (other than company as such a company much needed relief for such companies.
Remuneration equity shares) are listed would also be required to appoint
Committee on stock exchanges are ‘independent directors’ and adhere
required to constitute to higher level of corporate
such committees. governance.