companies bill total summary

7/29/2019 Companies Bill Total Summary

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The Companies Bill, 2009 was introduced on August 3rd

2009. The Standing Committee presented itsreport on August 31st 2010. The central government withdrew this Bill in the winter session of 2011. It

re-introduced the Companies Bill 2011 on December 2nd2011.

We present four tables below to help the Standing Committee on Finance in examining this Bill.

Table 1 - Recommendations of the Standing Committee on the Companies Bill 2009 that were not

incorporated in the Companies Bill, 2011

Table 2 - Some recommendations of the Standing Committee on the Companies Bill, 2009 that were

partially incorporated in the Companies Bill, 2011

Table 3 Some provisions in the Companies bill 2011 that were not present in the Companies bill 2009

Table 4: Recommendations given by the Standing Committee on the Companies Bill, 2009 that were

incorporated in the Companies Bill, 2011

Table 1: Recommendations of the Standing Committee that were not incorporated in the

Companies Bill, 2011

Key Issues and Clause No. inthe Companies Bi ll, 2009

Standing Committee Recommendations

Clause 2(1)(k) - Body Corporate Definition should include Limited Liability Partnership

Fraud not defined Definition of fraud to be included

Clause 2(1)(zzi) Officer who isin default Promoter should be included as a new category and persons advising theBoard in a professional capacity should be excluded

Clause 2(1)(zzp) & (zzs) PrivateCompany

Capitalisation threshold of private company and public company should behigher as the Bill also proposes new forms like small companies and OnePerson companies with lower capitalisation

Clause 2(1)(zzs) PublicCompany

Definition should be amended to exclude private company, one personcompany or a small company

Clause 13(1) Alteration ofArticles

Amendments to smoothen the process of conversion of one form ofcompany to another

Clause 24(3) Offer of invitationfor subscription of securities

Time period for allotment of securities should be reduced from 70 days to 15days in tune with the SEBI norms and there should be a provision for

payment of interest on share application money remaining unpaid beyondthe stipulated period

Clause 34(4) Allotment ofsecurities

The clause should be made applicable to both public as well as privatecompanies

Clause 94 Proxies With both postal as well as electronic voting system in place, proxies maybe discontinued

Clause 110(1) Declaration ofDividend

Consent of directors present instead of consent of all directors


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Key Issues and Clause No. inthe Companies Bi ll, 2009

Standing Committee Recommendations

Clause 117(1) Financialstatement

Non-applicability of this clause to banking companies should be clearlymentioned

Clause 117(5) Exemption tounlisted companies

The ministry should re-consider exempting unlisted companies frompreparing detailed consolidated financial statements of all subsidiaries

Clause 123(8) Audit Committee The Audit Committee shall ensure and monitor that the independencecriteria has been fulfilled by the auditor of the company throughout histenure

Clause 125 Remuneration ofAuditors

Providing safeguards on the remuneration of auditors

Clause 149 Resignation of theDirector

To clarify the time period within which the Board is to forward the resignationto the Registrar

Clause 174(4) Thosedisqualified from being appointedas managerial personnel

Conviction under SEBI Act, Securities Contract (Regulation) Act,Depositories Act and for committing fraud, forgery etc may also beconsidered as a disqualification for persons to be appointed as Managing orwhole time Directors

Appointment of Key ManagerialPersonnel

An individual shall not be Chairman as well as the MD or CEO of thecompany at the same time

Clause 195 Action to be takenin pursuance of InspectorsReport: Disgorgement ofproperties of directors who haveindulged in fraud

A new clause to empower the government to initiate proceedings fordisgorgement of assets and properties of the directors who have takenundue advantage or benefit. The Standing Committee recommended thatthe words undue advantage or benefit should be deleted as they dilute theprovision.

Clause 230 - Application forrevival and rehabilitation

Other stakeholders particularly other creditors could be allowed to file anapplication for revival and rehabilitation of a company, not just any securedcreditor

Clause 281 Meeting of creditors Proposed adding an enabling proviso for holding a joint meeting of members

and creditors

Clause 342 (1) Documents etc.to be delivered to Registrar byforeign companies

Proposed changing the time period for delivering the documents to theRegistrar to 90 days from 30 days

Clause 409 Punishment whereno specific penalty is provided

Define the term continuing offence

Table 2: Some recommendations of the Standing Committee that were partially incorporated in the


Key Issues and ClauseNo. in the CompaniesBill, 2009

Standing CommitteeRecommendations

Remarks

Appointment and Qual if ication of Directo rs

Clause 146 Number ofDirectorships

Maximum number of companies in whichone may become director should bereduced to 10 from the proposed 15 inthe case of public companies, and 5 from7 in the case of listed companies

Partially implemented. Publiccompanies reduced to 10 butno mention of listedcompanies. Proviso removed Clause 165 in the new Bill


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Remarks

Winding up

Clause 250 CompanyLiquidators and their

appointments

A time frame of 15 days should beprescribed for the company liquidator to

file a declaration relating toindependence

A time frame of seven days hasbeen prescribed.

Clause 265 Power andDuties of CompanyLiquidator

Drafting changes in sub clause (1)(a),(e), (g), (j), (l), (m), and sub clause 3

All drafting changes madeexcept those to sub clause(1)(a) which states that thecompany shall have the powerto carry on the business so faras may be necessary for thebeneficial winding up of thecompany.

Clause 276 Arrest ofperson trying to quit India

or abscond

Replace the words to be arrested andkept in custody with the words may be

detained

Words were replaced by to bedetained

Table 3: Some provisions in the Companies Bill, 2011 that were not present in the Companies Bill,

2009 in the Companies Bill, 2011


New provis ions Remarks

Prospectus and Allotment of Securities

Clause 23 Public offer

and private placement

A public company may issue securities through

prospectus, private placement, and rights issueor bonus issue. A private company may issuesecurities only through private placement. Publicoffer is the offer of sale of securities to the publicby an existing shareholder.

Share capital and debentures

Clause 63 Issue ofbonus shares

A company may issue fully paid up bonus sharesto its members out of its free reserves, securitiespremium account and capital redemption reserveaccount.

This was recommended by theStanding Committee.

Acceptance o f Deposit s by Companies

Clause 76 Acceptanceof deposits from public bycertain companies

A public company may accept deposits frompersons other than its members subject tocertain conditions which include obtaining arating from a credit rating agency to inform thepublic at the time of invitation of deposits toensure adequate safety. In case of securedloans a charge should be created on the assetsof the company which is not less than theamount of the deposits accepted.



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Management and Administration

Clause 93 Return shouldbe filed with the Registrar

in case the promotersstake changes

Every listed company shall file a return with theRegistrar informing him of the change in the

number of shares held by the promoters and topten shareholders within 15 days of such change.

Accounts of Companies

Clause 130 Reopeningof accounts on courts orTribunals orders

A company shall not re-open its books ofaccount unless an order is made by a court orTribunal.

Clause 131 Voluntaryrevision of financialstatements or Boards

report

If the Directors of the company feel that thefinancial statement does not comply with certainprovisions, they may prepare revised financial

statement or report after obtaining approval ofthe Tribunal.

Clause 135 CorporateSocial Responsibility

Every company which has a net worth of Rs 500crore or more during any financial year shallconstitute a Corporate Social ResponsibilityCommittee of the Board consisting three or moredirectors of which at least one is an independentdirector. The Board shall ensure that thecompany spends at least two per cent of theaverage net profits of the company made duringthe three immediately preceding financial years.


Clause 138 InternalAudit

Some companies as may be prescribed shall berequired to have an internal auditor who shalleither be a chartered accountant or a costaccountant or any such professional decided bythe Board. The central government mayprescribe the manner and intervals for the auditto be conducted.


Aud it and Audito rs

Clause 140 Removal,resignation of auditor andgiving of special notice

An auditor appointed may be removed from hisoffice before the expiry of his term only by aspecial resolution of the company.

Some changes to provisions toSection 225 of the Companies Act1956.


Clause 150 Manner ofselection of independentdirectors and maintenanceof data bank ofindependent directors

An independent director may be selected from adata bank containing names, addresses, andqualifications of persons who are eligible andwilling to act as independent directors. Thecentral government may prescribe the mannerand procedure of selection of independentdirectors.


Clause 151 Appointmentof Director elected bysmall shareholder

A listed company may have one director electedby such small shareholders in such manner andwith terms and conditions as may be prescribed.

Similar to the provisions ofSection 252 (1) of the Companies

Act 1956.


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Appointment and Remunerat ion of Manager ial Personnel

Clause 197 Overallmaximum managerial

remuneration

The total managerial remuneration payable by apublic company to its directors, including

managing director and whole time director, shallnot exceed 11 per cent of the net profits for afinancial year.

This was recommended by theStanding Committee. Similar to

the provisions of Section 198 ofthe Companies Act 1956.

Clause 200 Centralgovernment or companyto fix limit with regard toremuneration

In cases where the company has inadequate orno profits, the central government or thecompany may fix the limit for remuneration.

Similar to the provisions ofSection 637 AA of the Companies

Act 1956.

Clause 204 Secretarialaudit for big companies

A class of companies as may be prescribed shallgive a secretarial audit report given by acompany secretary in a manner that may beprescribed.


Clause 205 Functions of

the Company Secretary

Some of the functions include reporting to the

Board about compliance to ensure the companycomplies with applicable secretarial standards.

This was recommended by the

Standing Committee.

Inspection, Inquiry, and Investigation

Clause 211 Establishment of SeriousFraud InvestigationsOffice (SFIO)

The central government may by notificationestablish an SFIO to investigate frauds relatingto a company. The body shall consist of adirector and experts from other fields asspecified.


Clause 212 Investigationinto affairs of company bySFIO

The Bill states the process of investigation intofrauds relating to company by the SFIO.

Clause 218 Protection ofemployees duringinvestigation

During the pendency of any proceeding againstan employee of a company the body corporateshall obtain approval of the Tribunal for theaction proposed against the employee.

Compromises, Arrangements, and Amalgamations

Clause 230 - Compliancewith Accounting Standards

While formulating compromise or arrangements,a new proviso included to ensure that anauditors certificate is required.


Winding up

Clause 277 Intimation tocompany liquidator,

provisional liquidator,provisional liquidator andRegistrar

When the Tribunal makes an order forappointment of provisional liquidator or for the

winding up of a company, it shall within a periodnot exceeding seven days from the date ofpassing of the order cause intimation to be sent.

This was two weeks in theCompanies Act 1956.

Clause 284 Promoters,directors, etc to cooperatewith Company Liquidator

Promoter is added to this Clause.

Clause 287 AdvisoryCommittee

Committee of Inspection is changed to AdvisoryCommittee.


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Companies authorized to register under thi s act

Clause 366 - 374 Permits registration of companies that havebeen formed by an Act of Parliament or a Law

passed.

This corresponds to sections 565,574, 575, 576, 577, 578, 586, 587

and adds some obligations to it.Winding up of unregistered companies

Clause 375 - 378 Provides for winding up of unregisteredcompanies

This corresponds to sections 583,584, 589 of the Companies Act1956.

Government Companies

Clause 395 Annualreports where one or morestate governments aremembers of companies

A new clause where the central government isnot a member of a government company, thestate government/s which is/are members of thatcompany shall prepare an annual report withinthe prescribed time frame.

This corresponds to section 620of the Companies Act 1956.

Special Courts

Clause 442 Mediationand Conciliation Panel

The central government shall maintain a panel ofexperts having qualifications for mediationbetween the parties during the pendency of anyproceedings before the Tribunal.

Miscellaneous

Clause 447 Punishmentfor fraud

Any person who is found guilty to be guilty offraud, shall be punishable with imprisonment fora term which shall not be less than six monthsbut which may extend to ten years and shall alsobe liable to fine which shall not be less than the

amount involved in the fraud, but which mayextend to three times the amount involved in thefraud.

Clause 463 Power ofcourt to grant relief incertain matters

If in the proceeding for negligence, default etc.against the officer of a company, it appears tothe court that he or she is liable in respect of thenegligence but that he has acted honestly andreasonably, the court may wholly or partly relievehim of his liability on such term as it may think fit.

This corresponds to section 633of the Companies Act 1956.

Clause 467 Power of thecentral government toamend Schedules

The central government may by notification alterany of the rules, regulations, Tables, forms andother provisions contained in the Schedules tothis Act.


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Table 4: Recommendations given by the Standing Committee that were incorporated in the


Key Issues and Clause No. in theCompanies Bill, 2009


Clause No. in the CompaniesBill 2011

App licabi li ty

Clause 1(4)(b) - Applicability of the Bill The Clause should be clarified. Theprovisions of the Bill should only beapplicable in respect of matters where anySpecial Act is silent. If both Acts aresilent, then it should be covered by theCompanies Bill. Any ambiguity betweenthe different provisions of the Bill andother Special Act should be completelyremoved.

Clause 1(4)(e)

Definitions

Clause 2(1)(a) - Abridged Prospectus Clause should be amended to specify thatsalient features should be as may bespecified by SEBI.

Clause 2(1)

Clause 2(1)(z) - Contributory Amendment to exclude a fully paid upshareholder from the liabilities ofcontributory.

Clause 2(26)

Clause 2(1)(za) - Control orControlling interest

Definition of controlling interest to bereplaced by control.

Clause 2(27)

Clause 2(1)(ze) - Deemed Director Remove the definition since it is coveredunder the definition of officer in default.

Implemented

Clause 2(1)(zo) - Financial Institution Financial Institution should be defined inan inclusive manner so as to include allfinancial institutions including scheduledbanks and NBFCs.

Clause2(39)

Clause 2(1)(zq) - Financial Year Provisions may be made for empoweringthe Tribunal to grant exemption to class ofcompanies.

Clause 2(41); exemptiongranted to companiesimplemented outside India

Clause 2(1)(zza) - KMP Whole-time Directors should also berecognised as KMPs.

Not expressly included, but theClause provides that KMPincludes definition of any otherofficer as may be prescribed

Clause 2(1)(Zzd) - Managing Director The need for having more than one MD ina company should be suitably reflected inthe definition.

Clause 2 (54); The provisionnow stipulates a directoroccupying the position of

managing director, bywhatever name called. -Clause 2(54)

Clause 2(1)(zzl) - Paid up ShareCapital

The definition should include the amountcapatalised on issue of bonus shares,shares issued against consideration otherthan cash and other arrangements.

Clause 2(64): The definitionincludes any amount ofmoney credited as paid-up inrespect of shares of thecompany. -


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Clause 2(1)(zzy) - Related Party Director and Key Managerial Personnelshould be included in the definition ofrelated party.

Clause 2(76)

Clause 2(1)(zzz) - Relative A broader definition should be formulated

instead of listing out all the relatives in thestatute

Clause 2(77)

2(1)(zzi) - Subsidiary Company The definition should be amended toinclude a company in which the holdingcompany holds voting power through twoor more subsidiary companies as well asa company which shall deem to controlthe Board of Directors of anothercompany.

Clause 2(87)

Incorporation of Companies

Clause 3(1) -Formation of a Company Necessary modifications should be madein the clause providing that in the event of

the death of a member of the one personcompany, a person who has given hiswritten consent shall become the memberof the one person company.

Clause 3(1)

Clause 6(5) - Articles Necessary modifications may be made byadding the words in such form as may beprescribed after the words of suchprovisions.

Clause 5(5)

Clause 7(1)(b) - Incorporation of acompany

Certificate of compliance should be givenby both the professional as well as theDirector/Manager/Secretary of theCompany.

Implemented - Clause 7(1)(b)

Clause 9 Effect of Memorandum andArticles

The clause should be modified to ensurethat the Bill has an overriding effect overthe memorandum or articles ofassociation of the company or provisionsof any agreement executed by theCompany or any resolution passed by theCompany.

Clause 6

Clause 19 (1) - Service of Documents The clause may be brought in conformitywith the corresponding provision in theCivil Procedure Code by including it in theClause.

Clause 20(1)

Prospectus and Allotment of Securities

The Committee recommended that anoffer of sale to the public should bedeemed to be a prospectus issued by theCompany.

Clause 28(2)Clause 22 - Power of SEBI to regulateissue and transfer of securities

There should be harmony between thedifferent regulators and therefore theexisting jurisdiction of SEBI as a sectoralregulator should be preserved.

Clause 24(2)


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Committee recommended that thestatement to be made in the prospectusregarding management perception of riskfactors should be specific and notoverstated. It should not be ambiguous.

Clause 23(1)(a)(xi) - Matters to bestated in prospectus

The clause should be modified to providethat the prospectus should containinformation on the source of promoterscontribution and the main objects of thepublic offer.

Clause 26(1)(ix)&(xiv)

Clause 23(1)(b) - Financial Informationin the Prospectus

Necessary modifications should be madeto allow companies which have been inexistence for less than five years to makea public issue.

Proviso to Clause 26(1)(b)(ii)

Clause 23(1)(b)(iii) - Auditors Report The disclosure in the prospectusregarding the auditor reports on the

financial position of the company shouldbe more relevant.

Implemented with certainmodifications - proviso Clause

26 (1)(b)(iii)

23(1)(c) - Statement on Compliance inthe Prospectus

A new Clause be inserted restricting acompany from varying the terms of thecontracts or objects mentioned in theProspectus without the prior approval ofthe shareholders.

Clause 27(1)

Share Capital and Debentures

Clause 37 - Kinds of share capital The Committee recommended that theMinistry may re-examine its position withrespect to shares with differential votingrights. The Bill removed shares with

differential voting rights as a category andprovided only preference shares andequity shares as share capital.

Clause 43(ii)

Clause 42(2) - Variation ofShareholders rights

Suitable modifications should be made onthe lines of the existing 1956 Act. Thatprovides for a time period of 21 dayswithin which an application may bedissenting shareholder.

Proviso to Clause 48(2)

Clause 49(2) - Issue and redemptionof preference shares

The Ministry had proposed to amend theclause to provide that the premium, if any,payable on redemption shall be providedout of the profits of the Company.

Implemented

Clause 50(7) - Transfer andtransmission of securities

The Bill should be amended to reflect thechanges suggested by SEBI. SEBI hadsuggested that as the clause relates torectification, it needs to be inserted in theprovisions relating to rectification.

Clause 59(4)

Clause 56 (1) - Further issue of sharecapital

The Committee recommended that asuggestion to include a specific enablingprovision allowing companies to issuebonus shares may be considered.

Clause 62 and Clause 63(1)


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Clause 59(3) - Reduction of sharecapital

Include a proviso suggested by it to theClause for ensuring adherence to theaccounting standards.

Proviso to Clause 66(3)

Clause 63 - Prohibition of buyback in

certain circumstances

Buy back should be permitted if the

default mentioned in clause 63(c) isremedied and certain period (three years)has lapsed after the such default hasceased to subsist.

Proviso to clause 70(1)(c)

A special resolution should be passed at ageneral meeting for converting thedebentures into shares.

Proviso to clause 71(1)Clause 64(1) - Debentures

All public companies should be permittedto issue secured debentures.

Clause 71(3)

Acceptance o f Deposit s by Companies

The Committee had recommended that

the new clause suggested by the Ministrywhich allowed companies having a networth of more than 500 crores and aturnover of not less than 1000 crores toaccept public deposits may beimplemented.

It also recommended that deposits shouldbe secured by creation of a charge on thecompanys assets and that penal interestshould be a deterrent for the defaultingcompanies.

Clause 68 - Damages for fraud with

respect to public deposits

The requirement should be to obtain a

high credit rating and not the highestcredit rating.

Implemented - Clause 76(1).

The net worth requirement willbe prescribed.

Registration of Charges

Clause 69 - Duty to register charges The Committee recommended that acreditor may be allowed to inspect thecompanys register of charges without anypayment of fees.

Clause 81(2)

Management and Administration

Clause 82 Annual return Disclosure of holdings by FII should bemandated.

Clause 92 and Clause 93

Declaration and Payment of Dividend

Clause 110(3) - Interim dividend Interim dividend should be permitted to bedeclared out of the surplus in the P&Laccount as well as profits of the financialyear in which such interim dividend issought.

Clause 123 (3)


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Clause 110(6) Non declaration ofdividend

A company shall not declare any dividendon its equity shares so long as the failureto declare the dividend continues (ongrounds of both prohibition on acceptanceof deposits from public and repayment of

those Implemented beforecommencement of the Act).

Clause 123 (6)

Clause 112 Investor EducationProtection Fund (IEPF)

Fund should be utilized for refund ofunclaimed mature dividends, unclaimedapplication money on any security etc.

Clause 125 (3)

Clause 113 Amount lying in previousfunds to become part of IEPF

To include unclaimed mature debenturesetc. and to delete this section as it ismentioned earlier.

Clause 125 (e) Proviso

Accounts of Companies

Clause 117(1) Financial statement Altering the language and adding aProviso that the items contained in the

financial statement be contained in thedefinition of such items contained in theaccounting standards.

Clause 129 (1)

Clause 118 National AdvisoryCommittee on Accounting and

Auditing Standards (NACAAS)

The NACAAS should not only be a bodyfor setting accounting standards but alsobe a quasi regulatory body and shouldhave a clear role and responsibilities.

Clause 132 (4)

Clause 120(1) Financial statement,Boards report

The CEO should be authorised to sign thefinancial statement only if he is a memberof the Board.

Clause 134 (1)

Clause 120- Financial statement,

Boards report

Matters affecting the financial state of the

company be included as is in the existingCompanies Act (1956).

Clause 134

Clause 120 -Financial statement,Boards report

Insertion of Corporate SocialResponsibility (CSR)

Clause 135

Clause 121 Right of a member tocopies of the audit balance sheet

Enable listed companies to send copies offinancial statements be included within theClause.

Clause 136 (1) Proviso

Clause 122 Copy of FinancialStatement to be filed with theRegistrar

Penalty should be looked into todifferentiate between procedural mistakesand fradulent acts.

Clause 137 (3) Upper limitremains the same 10 lakh.The lower limit altered.

Aud it and Audito rs

Clause 123 Rotation of the Auditor The rotation shall be brought under thestatute.

Clause 139 (3) (a), althoughthe central government mayprescribe rules for companiesto rotate the auditors

Clause 123(5) Casual vacancy Amendments with regard to time limitwithin which casual vacancy arising out ofresignation of an auditor should be filled.

Clause 139 (8) and (9)-It hasto be filed within 30 days


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Clause 126 Auditors reports andaccounting standards

To clearly state the information soughtand obtained (or not obtained) from thecompany and the effect of that to thefinancial statement of the company.

Clause 143 (3)

Clause 127 Auditor not to rendercertain services

Non-rendering of certain services toensure independency to includesubsidiaries as well.

Clause 144 (ii)

Clause 130 - Punishment forcontravention

Stringent proposals stipulating joint andindividual liability of the audit firm.

Clause 147 (2) and (3)


Clause 132 (3) Director - Ordinarilyresident in India

Replace these terms with resident inIndia.

Clause 149 (2)

Clause 133(6) Retirement ofDirectors

To be clarified the number of directorswho shall be liable to retire at the AGMand otherwise in general.

Clause 153 (6)

Clause 141 Right of persons otherthan retiring directors to stand forDirectorship

Alter the clause to add 25% of the totalvotes cast either by the show of hands oron poll.

Clause 160 (1)

Clause 150 Removal of a Director Minimum number of shareholders with aminimum level of share capital specifiedto move the motion to remove a director,no deposit should be collected.

Clause 169 (1) and (2)

Clause 151 Register of Directorsand key managerial personnel andtheir shareholding

Particulars of directors should includedetails of securities held by them.

Clause 170 (1)

Meeting of boards and its Powers

Clause 154 (2) Meetings of theBoard

Modifications to provisions to eliminatepossibilities of misuse of the option ofvideo conferencing.

Clause 173 (2)

Clause 161 Prohibitions andRestrictions regarding Politicalcontributions

Increase the limit from 5% to 7.5% of theaverage net profits.

Clause 182 (1) proviso

Clause 163 loan to Director Explanation of the term or to any otherperson in whom he is interest.

Clause 185 (1)

Clause 165 Investments ofCompany to be held in its own name

Inclusion of proposals related toinvestment of a company in its own name.

Clause 187 (2)

Clause 167(1) Register of contracts

or arrangements in which directors areinterested

Signature of the Register by all directors

to be retained from the existing Act.

Clause 189 (1)

Clause 173 Prohibition of InsiderTrading

Definition of insider trading to be included. Clause 195(1)


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Appointment and Remunerat ion of Manager ial Personnel

Clause 175 - Ceiling on ManagerialRemuneration

An overall outer ceiling on managerialremuneration should be prescribed. Aformula maybe evolved keeping in view

the growth in corporate profits and otherrelated factors.

Clause 197 and Clause 198

Clause 178(3) - KMP shall not holdoffice in more than one company atthe same time. A KMP can be aDirector in any company with thepermission of the company

The words permission of the companyshould be clarified.

Proviso Clause 203(3)

Inspection, Inquiry and Investigation

Clause 183 - Investigation into theaffairs of a company

SFIO should be strengthened and bemade a part of the statute rather thanprescribe it in rules.

Clauses 210, 211 & 212

188(4), 188(7), 189, 191(1) -Procedure, Power etc. of Inspectors,Strengthening inspection/investigationprocess, protection of employeesduring investigation, freezing of assetsof a company

Ministry made the required proposals tothe Committee which were agreed to bythe Standing Committee.

Implemented - Clause 217(4),(5), (9), (11), (12), 218 & 221

Clause 191(1) - Freezing of Assets ofa company

In order to discourage frivolous orvexatious complaints the Tribunal shouldonly entertain complaints from suchperson who is either a shareholder withprescribed shareholding or creditor.

Clause 221(1)

Clause 194 - No suit or proceeding till

submission of final report

Clause may be reconsidered on the

grounds on legal tenability.

Implemented - Clause deleted

Clause 200 - Penalty for furnishingfalse statements, mutilation,destruction of documents duringcourse of inspection, inquiry orinvestigation

The scope of offence and of penaltiesshould be increased.

Clause 229(a). It now includestampering or unauthorizedremoval of documents.

Compromises, Arrangements and Amalgamations

Clause 201(3) - Advertisement forcalling meeting of creditors

Notices should be sent individually tocreditors rather than by advertisements.

Clause 230(3)

Clause 201(4) - Voting for adoption ofthe compromise or arrangement

Postal ballot and proxies should bepermitted.

Clause 230(4)

Clause 201(5) - Authorities to whomnotice should be sent for compromiseor arrangement

The words "sectoral regulators" should beadded.

Clause 230(5)

Clause 203(2)(c) - Report on impact ofcompromise on each class ofshareholders

Addition of non promoter shareholders inthe impact report.

Implemented


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Clause 203(3) - Accounting Standardsfor compromise or arrangement

In addition to the accounting standards,the Committee recommended opt outmechanisms for investors at the time ofmerger in line of regulations made bySEBI.

Clause 232(h), proviso of (j)

Clause 205(2) - Amalgamation of aCompany with a foreign company

The term foreign company should beclarified. A foreign company may or maynot have a place of business in India.Prior approval of RBI needed for mergerand amalgation under this Clause.

Clause 234(1), (2)

Prevention of Oppression and Mismanagement

The orders of the Tribunal should alsocover "allotment of shares" and"restriction on the transfer of the shares ofthe Company".

Clause 242(2)(d)213(2)(d) - Power of Tribunal to issueorders

Consent should be required only in cases

of agreements which do not involve MD,Director or Manager of a Company.

Implemented - Clause

242(2)(f)

Registered Valuers

Clause 218 - Valuation of RegisteredVoters

Recommended that the words "any otherasset" and liabilities be incorporated inthe scope of valuation.

Clause 247(1)

Revival and Rehabilitation o f Sick Companies

Clause 229 Determination ofsickness

Reconsider provisions with regard to theconcerns expressed by law firms. Theseincluded making the right to seek a stayorder available only after determination of

the company as a sick company.

Clause 257: Two concernshave been addressed - (1)References by the governmentand public financial institutions

to the Tribunal have beenallowed. (2) The tribunal hasbeen empowered to permit acompany to function withoutinterference if it believes thatthe company can recover byitself and repay its debts.

Clause 238 scheme to be binding Proposed inclusion of binding effect ofscheme on employees of the company.

Clause 263

Clause 240 Winding up of companyon report of company administrator

Proposed inclusion of the words within 15days in order to stipulate the time frame.

Clause 265

Winding Up

Clause 247 Petition for winding up Substitute incorrectly drawn reference to246(1)(d) in Clause 247(1)(g) with246(1)(c). Restrict the power of theRegistrar to file winding up petition tocircumstances enumerated under Clause246(1) (a), (c) and (f) only.

Clause 247 (1)(c)- Incorrectreference has beensubstituted. Power of registrarhas been restricted tocircumstances under Clause271(1) (a) (c), (e) and (f)


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Clause 249 Directions for filingstatement of affairs

The Tribunal should be allowed to grantadditional 30 days to a company to file itsobjections on cases of winding up insituations of contingency or specialcircumstances.

Proviso Clause 274(1)

Clause 250 Company liquidatorsand their appointments

A time frame of 15 days should beprescribed for the company liquidator tofile a declaration relating toindependence.

Clause 275(6)- A time frame ofseven days has beenprescribed

Clause 262 Committee of inspection Proposed that the Committee ofInspection be renamed as AdvisoryCommittee.

Clause 287

Clause 265 Power and duties ofCompany Liquidator

Committee recommended draftingchanges in sub-clause (1)(a), (e), (g), (j),(l), (m) and sub-clause 3.

Clause 290: All draftingchanges except those to sub-clause (1)(a) have beenImplemented -

Clause 274 Power to summonpersons suspected of having propertyof company etc.

Suggested consideration of draftingchanges to 274(2) and 274(5)(b).

Clause 299

Clause 275 Power to orderexamination of promoters, directorsetc.

Suggested drafting changes to 275(1) and275(7).

Clause 300

Clause 284 Effect of voluntarywinding up

Proviso should be added for continuedcorporate state and corporate powers ofthe company till its dissolution.

Clause 309

Clause 285 Appointment ofcompany liquidator

The declaration should be filed within aweek.

Clause 310

Clause 337(1) Sale of assets andrecovery of debts due to company

The words whether movable orimmovable should be added.

Clause 362

Clause 338 Settlement of claims ofcreditors by official liquidator

The 30-day time period for the officialliquidator to call upon the creditors shouldcommence from the date of hisappointment.

Clause 363

Companies Incorporated Outside India

Clause 347 Fee for registration ofdocuments

and with additional fee should bedeleted.

Clause 385

Clause 349 Dating of prospectusand particulars to be contained therein

can be inspected should be added. Clause 387


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16




Nidhis

Clause 367 Power to modify act inits application to nidhis

The Committee expressed its desire thatclause 367 be reviewed to clearly lay outthe role of the central government in

regulating Nidhis. It also emphasized thatthe regulatory mechanism applicable toNidhis in terms of notifications issued bythe Ministry should be firmed up on thebasis of RBIs advice.

Clause 406 stipulates thatNidhis have to comply withrules as prescribed by the

central government for theirregulation.

National Company Law Tribunal and Appellate Tribunal

Clause 370, 373, 374 & 378 Committee expressed the need forchanges to these provisions as indicatedby the Ministry in order to constitute andoperationalize the NCLT and its appellatetribunal.

Clause 407-434

Miscellaneous

Clause 410 Punishment in case ofrepeated default

Committee recommended the redraftingof the clause keeping in mind thesuggestion of the ICSI. The ICSIsuggested that punishment for repeateddefault (twice the fine for such default andimprisonment if any) should be imposed ifthe offence is repeated within a period ofthree years. After three years, anotherdefault should be treated as a first timeoffence.

Clause 451- Repeating anoffence within a period of threeyears is punishable with twicethe fine for such an offenceand imprisonment if any.

Clause 411 Punishment for wrongfulwithholding of property

Committee recommended empowering aMember of a company to complain

against wrongful possession of propertyand/or cash. It also recommended that therefund of property or cash should not berestricted only to the property or cashamount but should also include thebenefits derived from such property orcash.

Clause 452

Clause 421 Power to modify certainprovisions of act in their application toprivate company, one personcompany and small company

The Committee recommended thatexemptions available to different forms ofcompanies specified in the bill should beprovided for and clearly stated in therespective provisions and not to benotified later.

Clause 462

Clause 422 Prohibition ofassociation or partnership of personsexceeding certain number

The Committee recommended theretention of Clause 422 with someclarification regarding the formation ofLLPs.

Clause 464, but there is noclarification regardingformation of LLPs.


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Countdown to

Companies Act,2013Impact on Transactions andCorporate restructuring

August 2013

www.pwc.in


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Preface

The wait is finally over The Companies Bill, 2012

is just a step away from becoming an Act. The Bill

which was approved by Lok Sabha on 18th

December 2012 is approved by Rajya Sabha on

08th August 2013 and will become an Act post

Presidents assent and notification in the Gazette

of India.

The new legislation promises to bring easy and

efficient way of doing business in India, better

governance, improves levels of transparency,

enhance accountability, inculcating selfcompliance and making Corporates socially

responsible.

The Companies Bill, 2012 (the Bill) will replace

more than half a centuary old Companies Act, 1956

with some sweeping changes including those in

relation to corporate restructurings, mergers and

acquisitions. Some of the key changes to look for

are in merger/demerger processes, cross border

mergers, fast track mergers between small

companies and holding subsidiaries, andprovisions relating to minority shareholders

protection and exit. We believe that the new Act

will help in reducing shareholders litigation and

making corporate restructuring process smooth

and efficient.


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Sneak preview of keyprovisions relatingto Transactions and

Corporaterestructurings National Company Law Tribunal: A

dedicated forum to deal with company lawmatters including mergers, demergers, capitalreduction, etc. It will facilitate speedy disposalof cases.

One person company:A private companywith only one member or director, enjoying

exemption from various filings, meetings,compliances etc. This is a welcome move inline with the concept followed globally. It is

beneficial for sole proprietors.

Restriction on number of investmentcompanies: Investment through more thantwo layers of investment companies is notpermitted.

Fast track merger:A provision proposingspeedy mergers between certain companies,

viz., small private companies and holding andwholly-owned subsidiaries.

Cross-border mergers: Merger betweenIndian companies and foreign companies withprior approval of the RBI is permissible.

Purchase of minority shareholding:Majorityshareholders who have, inter-alia,acquired majority stake (at least 90%) throughamalgamation, share exchange, conversionetc. to compulsorily notify their intention to

buy-out minority shareholders.

Shareholders democracy:Concept ofclass actions suits introduced. Threshold forraising objections to the scheme ofarrangement by minorityshareholders/creditors has been prescribed.


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Section I:Compromise,arrangement and

amalgamation(includingdemerger)

(Clause 230 to 240of the Bill)

The clauses contain provisions for compromise

or arrangement between company and its

shareholders and/or creditors including merger

or demerger of companies/undertakings. The

Bill deals with the following types of merger

(including demerger):

Merger of companies Merger of small private companies

and merger between holding and itswholly-owned subsidiary (Fast track

merger)

Merger of Indian company andForeign company (Cross Border

Merger)

Merger in public interestNote: Provisions discussed herein below

in relation to merger equally applies todemerger unless otherwise specified.


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Merger of companies

Amendments or new provisions Remarks

Introduction of National Company Law

Tribunal for approving mergers, demergersetc.

Single forum to decide on the matters relating

to Compromise, arrangement andamalgamation (including demerger)

No more approval of High Court required

Merger / demerger process - Robust and transparent

Decision of merger or demerger to be

considered in a board meeting only

Scheme cannot be approved by Board by

passing a resolution by circulation

Dispensation of creditors meeting possible

Discretion available with National Company

Law Tribunal to grant dispensation subject toreceiving confirmation of at least 90% creditors

in value

Brings uniformity in practice followed by

different high courts while granting approval

Consent required by way of affidavit from eachcreditors

No explicit provision for dispensation from

shareholders meeting

Filing of notice of shareholders or

creditors meeting with various statutory

authorities

Notice to be filed with the income tax

department, RBI, ROC, OL, CG, SEBI, stock

exchanges (wherever applicable), CCI or anyother regulators likely to be affected

Regulators to make representation within 30

days - else deemed no objection

Notice to accompany the following:

Copy of Valuation report

Statement explaining details of

compromise/arrangement

Statement explaining impact of such

compromise/arrangement on stakeholders

Auditors certificate on accounting

treatment

Ensures accounting treatment in the scheme is

in compliance with Accounting Standards

Provisions brought in line with those

applicable to listed companies as per the

listing agreement

Shareholders or creditors can now votethrough postal ballot for approval of the

scheme of arrangement

Gives equal opportunity of vote to all thestakeholders

Set-off of fees paid on authorised capital by

transferor company

Set-off of fees paid, if any, on authorised share

capital by dissolving transferor against any fee

payable by transferee company on its

authorised share capital post amalgamation

Practice followed by different courts codified

into law

Minimum threshold for raising objection tothe scheme of arrangement

Limits frivolous litigations by few smallshareholders or creditors


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Persons holding at least 10% of shareholding or

5% of the total outstanding debt as per the

latest audited financials eligible to raise

objections

Will result in efficiency in implementation of

the scheme

Protection of shareholders interest

National Company Law Tribunal

empowered to provide for exit offer to

dissenting shareholders

National Company Law Tribunal to provide

appropriate directions for exit mechanism for

dissenting shareholders

Purchase from minority shareholders

Majority shareholders (holding at least 90% of

equity share capital) who have acquired

majority stake through amalgamation, share

exchange, conversion of securities or for any

other reason to compulsorily notify their

intention of buying out minority shareholders

Purchase price to be ascertained on the basis of

the valuation done by a registered valuer

Provides an exit option to minority

shareholders in unlisted companies as well

SEBI delisting regulations1

Instructions may be required to bring

uniformity with SEBI delisting regulations

provide that

purchase price for minority shareholders

should be determined as per reverse book

building

Merger/demerger of listed company with

unlisted company

Permits mergers subject to exit offer by

unlisted transferee company to shareholders

deciding to opt out

Pricing to be in accordance with pre-

determined pricing formula or at a fair value

(shall not be less than price arrived as per the

relevant SEBI regulations)

Applicability of the SEBI delisting regulations

may need to be considered

Companies not to hold shares in their own

name or in the name of any trust, whether

on its behalf or on behalf of any of its

subsidiary or associate companies

(Treasury shares)

Creation of Treasury shares no longer

permissible (i.e., holding shares in trust)

Other relevant amendments

Buy back in a scheme of compromise or

arrangement

Any buy-back of shares in a scheme of

arrangement need to be compliant with the

buy-back conditions prescribed under clause

68 of the Bill

May not be possible to exceed limits specified

for buyback through scheme of arrangement

1SEBI (Delisting of Equity shares) Regulations, 2009


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Fast track merger


The Bill provides an option of simplified and fast track process of merger /demerger in cases of

specified small companies and between holding and its wholly-owned subsidiary. Under this processmerger/demerger will be approved by Central Government and there will be no requirement to

approach National Company Law Tribunal.

Applicability

Small private companies

Small company is defined to mean a private

company meeting either of the following

requirements:

Paid-up capitaldoes not exceed INR 5

million (or higher amount as may be

prescribed which shall not be more than INR

50 million or

Turnoveras per its last profit and loss

account does not exceed INR 20 million (or

higher amount as may be prescribed which

shall not be more than INR 200 million)

Benefit of fast track merger or demerger not

available to small public companies

Holding and its wholly-owned subsidiary All types of companies whether public or

private eligible

Key conditions

Notice to ROC and OL or persons affected

by the scheme, inviting objections to

scheme within 30 days

Approval of scheme

At a general meeting by members holding at

least 90% of the total number of shares

By majority representing 9/10th in value of

creditors or class of creditors in meeting or

approved in writing

Merging companies to file a declaration of

solvency with ROC

Registration of scheme by CG. On

registration transferor company is

deemed to be dissolved.


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Cross-border merger


The Companies Act, 1956 permits merger of foreign companies with companies registered in India but

not vice-versa. The Bill permits merger of Indian company with foreign companies as well.

Applicability

Between companies registered under this

Act and companies incorporated in

notified countries

List of countries yet to be notified

Approving authority

National Company Law Tribunal

Prior approval of the Reserve Bank of India

also required

Other approvals or process same as merger

or demerger discussed earlier

Other amendment(s)

Merger scheme may also provide for

consideration in form of cash or

Indian depository receipts (IDR) or

partly in cash or partly in IDR


25/40

Section II: Capital reduction, buy-back andredemption of shares

Key amendments Remarks

Capital reduction (clause 66 of the Bill)

As per the Companies Act, 1956 a company may reduce its share capital subject to confirmation of such

reduction by the court. The Bill has made few amendments in relation to this provision as under:

Approval of National Company Law

Tribunal required

Approval of High Court not required

Capital reduction not permitted in case of

default in repayment of existing/fresh

deposits or any interest thereon

Requirement for auditors certificate that

accounting treatment on capital reduction

is compliant with relevant AS

National Company Law Tribunal to send

notice of application of capital reduction

received from the company to CG, ROC and

SEBI (whenever applicable) and creditors

of the company and consider their

representation, if any

No objection presumed where none of the

above persons make any representation

within three months of receipt of notice

from National Company Law Tribunal

Penalties imposable for certain non-

compliance

Buy-back (clause 68 of the Bill)

As per the Companies Act, 1956, companies desiring to buy-back shares from its shareholders may do so

up to 25% of its total paid-up equity capital and free reserves in a financial year post obtaining

shareholders approval through a special resolution. However, buy-back of up to 10% of equity shares

can be done with the boards approval (in which case next buy-back can be affected after a period of 365

days).

The key amendments introduced by the Bill are as follows:

Decision of buy-back to be considered only

in board meeting

Decision cannot be considered by passing a

resolution by circulation

Minimum gap in two buy-back offers

No offer for buy-back shall be made within a

period ofone year from the date of preceding


26/40

Key amendments Remarks

buy-back

Buyback not permitted till expiry of 3 years

after such default is remedied

Buyback not permitted in case of default in

repayment of deposits / redemption of

debentures, preference shares/repayment of term

loans, any interest thereon, etc.

Redemption of preference shares(clause 55 of the Bill)

Period of redemption

Preference shares may be issued by companies

for more than 20 years for funding

infrastructure projects subject to annual

redemption of prescribed percentage of

shares, at the shareholders option

Some of Infrastructure projects prescribed are

Power generation, trading & distribution of

power, Transportation (roads, national

highways and other road related services, rails,

ports etc.), telecommunications services etc.

Inability to redeem preference shares (or

payment of dividend on such shares)

Companies which are not able to redeem any

preference shares (in accordance with terms of

issue) or pay dividend due on such shares may

redeem the same with further issue of

equivalent amount of preference shares

(including the dividend due thereon) with the

consent of:

- 3/4th in value of such preference shares

- Approval of National Company Law

Tribunal

Persons who do not consent to redemption as

above needs to be discharged

Redemption of preference shares by

companies with inadequate profits may be

possible


27/40

Section III: Sale or lease of undertaking bya company (clause 180 of the Bill)

Amendment or new provision Remarks

As per the Companies Act, 1956 a public company proposing to dispose of its business undertaking or

(substantially the whole of such undertaking) is required to seek prior approval of its shareholders by

passing an ordinary resolution. The Bill in this respect has brought the following key changes:

Applicability

All types of companies No more exemption to private companies

Definitions/clarifications

Specific definition of undertaking and

substantially the whole of the undertaking

provided in the bill

Undertaking defined to mean such

undertaking inwhich the company has

investment exceeding 20% of its net worth as

per audited balance sheet of the preceding

financial year or an undertaking which

generates 20% of the total income of the

company during the previous financial year

Substantially the whole of the

undertaking

in any financial year means 20% or more of

the value of the undertaking as per the audited

balance sheet of the preceding financial year

Transfer of undertakings not meeting the

threshold criteria may not require

shareholders approval

Approving authority

Approval of members by way of a

special resolution

Approval through special resolution instead

of ordinary resolution provided under the

Companies Act, 1956


28/40

Section IV: Shareholders rights

This section has been divided under the following heads:

Preferential issue of shares or convertible securities (clause 62 of the Bill) Bonus shares and dividend (clauses 63 and 123 of the Bill)Amendment or new provision Remarks

Preferential issue (clause 62 of the Bill)

As per the Companies Act, 1956 preferential allotment requires shareholders approval by way of a

special resolution. However, these provisions are presently not applicable to private companies.

The Bill has brought the following key changes :

Applicable to all companies No more exemption to private companies

Pricing of shares

In case of preferential allotment pricing

needs to be in accordance with valuation

report obtained from a registered valuer

subject to such conditions as may be

prescribed

Issue of shares at a price different than that

determined by the registered valuer may not

be questionable

Bonus shares and dividend (clause 63 and clause 123 of the Bill)

Specific provision inserted under the Bill

on bonus shares

Bonus shares cannot be issued out of

revaluation reserves

Provision in line with the SEBI (Issue of

Capital and Disclosure requirements)

Regulations

No mandatory transfer of profits to

reserves prior to declaration of dividend No locking of funds in general reserves


29/40

Section V: Loans and investment bycompanies (clause 186 of the Bill)

Key amendments/new provisions Remarks

As per the Companies Act, 1956, public companies intending to make investments by way of

subscription or acquisition of shares or extend loan or guarantee, etc. to other persons may do so with

requisite shareholders approval where the prescribed threshold of higher of either (a) 60% of paid up

share capital and free reserves or (b) 100% of free reserves is exceeded.

The Bill proposes to bring significant changes under the provision as follows:

Applicability

All companies All private companies enjoying exemption

under the Companies Act, 1956 from such

provisions will now need t0 comply with it

Restriction on making investment

Restriction on making investment through

more than two layers of investment

companies

Investment through more than two layers of

investment companies not permitted

(investment company means a companywhoseprincipal business is acquisition of

shares, debentures or other securities)

Exemptions

Acquisition of a company incorporated outside

India if such overseas company already has

investment subsidiaries beyond 2 layers

Subsidiary company from having any

investment subsidiary for the purpose of

meeting the requirement under the law, rules

or regulations

Impact on multi-layered holding

structures?

Loans and guarantees by companies

No more exemptions for transactions

(loans) between holding and wholly-owned

subsidiaries

Interest free loans between holding -

wholly owned subsidiary not possible

irrespective of it being public or private

company

(Rate of interest on loans cannot be lower

than the prevailing yield of one, three, five

or ten year Government Security closest to

the tenor of the loan)


30/40

Section VI: SICK companies (clause 253-269 of the Bill)

Amendment or new provision Remarks

As per the existing applicable provisions, a company can be declared sick if its net worth is eroded

completely/ potentially as prescribed under the Sick Industrial Companies Act, 1985 (SICA).

The Bill seeks to amend the existing provisions applicable to sick companies and amongst other, has

changed the applicability as well as the exiting criteria for determining sickness from net worth

erosion to inability to pay debt. Some of the key amendments are:

Applicable to all companies Applicable to all companies and not only to

industrial undertakings

The power of BIFR will now vest with the

NCLT

Criteria to determine sickness

A company may be declared sick if it fails to

pay the amount of debt on demand by the

secured creditors representing 50% or

more of the outstanding debt

Application for intimating sickness and

revival measures - process

Sickness application

Secured creditor can file an application to

NCLT on default (of payment of debt etc.)

for determination that the company be

declared sick

NCLT to pass order within 60 days from

receipt of application - declaring whether

the company is a sick company or not.

Revival measures Company or any of its secured creditors

can make application to the NCLT for

determination of revival measures ( if the

company is declared as sick)

Application to be made within 60 days of

sickness order received from NCLT


31/40

Glossary

NCLT National Company Law Tribunal

RBI Reserve Bank of India

ROC Registrar of Companies

OL Official liquidator

CG Central government

SEBI Securities Exchange Board of India

CCI Competition Commission of India

BIFR Board for Industrial & Financial Reconstruction


32/40

About PwC

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Contacts

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Bangalore

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Bangalore 560 008

Phone +91-80 4079 7000

Chennai

8th Floor, Prestige Palladium Bayan

129-140 Greams Road,

Chennai 600 006

Hyderabad

#8-2-293/82/A/113A Road no 36,

Jubilee Hills, Hyderabad 500 034,

Andhra Pradesh

Phone +91-40 6624 6600

Kolkata

56 and 57, Block DN.

Ground Floor, A- Wing

Sector - V, Salt Lake.

Kolkata - 700 091, West Bengal, India

Phone +(91) 033 - 2357 9101 / 4400 1111

MumbaiPwC House, Plot no 18A,

Guru Nanak Road-(Station Road),

Bandra (West), Mumbai - 400 050

Phone +91-22 6689 1000

Gurgaon

Building no 10, Tower - C

17th and 18th Floor,

DLF Cyber City, Gurgaon

Haryana -122002

Phone : +91-124 3306 6000

Pune

GF-02, Tower C,

Panchshil Tech Park,Don Bosco School Road,

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Phone +91-20 4100 4444


34/40

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PricewaterhouseCoopers Private Limited (PwCPL) to be reliable but PwCPL does not represent that this information is accurate or complete.

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35/40

PRS Legislative Research Centre for Policy Research Dharma Marg Chanakyapuri New Delhi 110021Tel: (011) 2611 5273-76, Fax: 2687 2746

www.prsindia.org

Legislative Brief

The Companies Bill, 2009

The Bill was introduced inthe Lok Sabha on 3rdAugust, 2009.

Recent Briefs:

The Motor Vehicles(Amendment) Bill, 2007

June 25, 2009

The Protection andUtilisation of PublicFunded IntellectualProperty Bill, 2009May 13, 2009

Chakshu [email protected]

Avinash [email protected]

August 18, 2009

Highlights of the Bill

The Bill shifts the onus of regulation and oversight over managementaway from the government and towards shareholders. It provides forstricter standards of approval by shareholders over some types ofmanagement decisions.

The Bill allows for certain types of companies to be subject to a lessstringent regulatory framework.

It seeks to strengthen corporate governance by including new provisionsrelated to independent directors and auditors.

It gives greater powers to creditors to supervise a rescue plan and restrictthe powers of management in the rehabilitation of a sick company.

The Bill establishes a National Company Law Tribunal to administerprovisions with respect to company law. It increases penalties andprovides for special courts to try offences under the Act.

Shareholders and creditors can file class action suits against the companyfor breaching provisions of any Act.

Key Issues and Analysis

The composition and powers of the National Company Law Tribunal aresimilar to those introduced by a 2002 amendment to the Companies Act.The constitutional validity of that amendment is being examined by theSupreme Court.

The Bill permits certain financial relationships between independentdirectors and the company, which can lead to conflicts of interest.

Some provisions in the Bill, such as those covering independent directorsand the delisting of companies, conflict with provisions under the SEBIAct and its regulations.

The Bill provides for a number of issues currently specified in the Act, tobe specified by the government in the rules. The government has notissued draft rules to the Bill so the impact of any possible change cannotbe estimated.

Fines have been increased and the range of offences which are punishableby imprisonment has been widened. The Bill does not require proof ofintent to commit an offence as a condition for criminal prosecution. Thisdiffers from the recommendation of the Irani Committee.
http://www.prsindia.org/index.php?name=Sections&action=bill_details&id=6&bill_id=145&category=&parent_category=http://www.prsindia.org/index.php?name=Sections&action=bill_details&id=6&bill_id=145&category=&parent_category=http://www.prsindia.org/index.php?name=Sections&action=bill_details&id=6&bill_id=83&category=&parent_category=http://www.prsindia.org/index.php?name=Sections&action=bill_details&id=6&bill_id=83&category=&parent_category=http://www.prsindia.org/index.php?name=Sections&action=bill_details&id=6&bill_id=83&category=&parent_category=http://www.prsindia.org/index.php?name=Sections&action=bill_details&id=6&bill_id=83&category=&parent_category=http://www.prsindia.org/index.php?name=Sections&action=bill_details&id=6&bill_id=83&category=&parent_category=http://www.prsindia.org/index.php?name=Sections&action=bill_details&id=6&bill_id=83&category=&parent_category=http://www.prsindia.org/index.php?name=Sections&action=bill_details&id=6&bill_id=83&category=&parent_category=http://www.prsindia.org/index.php?name=Sections&action=bill_details&id=6&bill_id=83&category=&parent_category=http://www.prsindia.org/index.php?name=Sections&action=bill_details&id=6&bill_id=145&category=&parent_category=http://www.prsindia.org/index.php?name=Sections&action=bill_details&id=6&bill_id=145&category=&parent_category=


36/40

The Companies Bill, 2009 PRS Legislative Research

August 16, 2009 - 2 -

PART A: HIGHLIGHTS OF THE BILL1

Context

The Companies Act, 1956 provides the legal framework within which companies function. It defines the relationship

between the management of a company, the shareholders who own the company, other stakeholders, and the government.

The Act has been amended 24 times since 1956. Bills which attempted a comprehensive revision of company law were

introduced in 1993 and 1997 but these lapsed. Some sections of the Companies (Second Amendment) Act, 2002 are yetto be notified. Another amendment Bill, proposing significant changes to the law, was introduced in the Rajya Sabha in2003. In 2004, the Ministry of Corporate Affairs issued a concept paper on a new company law and constituted an Expert

Committee under the Chairmanship of Dr. J.J. Irani to suggest a framework for such a law to replace the existing Act.2

The Committee submitted its report in May, 2005. The 2003 amendment Bill was withdrawn in October, 2008 and a newBill was introduced. However that Bill lapsed with the dissolution of the 14th Lok Sabha. It was reintroduced without

significant changes in the August, 2009. This brief is based on the 2008 Bill.

Three committees chaired by Justice V.B. Eradi (2001), Shri Naresh Chandra (2002) and Dr. J.J. Irani (2005) have

recommended changes to different aspects of company law and corporate governance.3 The proposed Bill incorporates

some of these recommendations.

Key Features

The Bill replaces the 1956 Act and consolidates a number of its provisions. It allows for a number of issues, currentlyspecified in the Act, or its schedules, to be specified in the rules. On a range of issues, it shifts the onus of regulation and

oversight over management away from the government and towards shareholders. On some issues, the Bill provides for

tighter control by shareholders over management decisions by requiring 75% majority of shareholder approval rather than

a simple majority. In cases where companies in financial distress have to be rehabilitated, the Bill gives much greater

powers to creditors to supervise a rescue plan and restrict the powers of company management. It seeks to strengthen

corporate governance by introducing new provisions related to independent directors and auditors. The Bill increasespenalties and establishes special courts to try offences.

Types of Companies

The Bill specifies the minimum criteria for the formation of different types of companies (see Table 1). The Billdoes not specify a minimum limit for paid-up capital.

The Bill defines an associate company as one in which another company controls between 26% and 50% of votingpower, and does not control its board of directors.

One person companies, dormant companies and small companies are subject to a less stringent regulatory frameworkTable 1: Types of Companies

Company Criteria for formation

Public Company At least seven shareholders.

Private Company Between two and fifty shareholders.

One Person Company One shareholder.

Small Companies Non-public companies with a paid up capital of less than Rs 5 crore or turnover less than Rs 20 crore. Cannot be a holding orsubsidiary company, charitable company, or that registered under any special Act.

Charitable Company At least one person; only for specified objectives. Dividends cannot be paid.

Dormant Companies Those formed for future projects/ to hold assets or intellectual property, and which have no significant accounting transactions; or

Companies which do not carry on any business or operation for 2 years or have not filed financial statements in that time.

Sources: The Companies Bill, 2009, PRS

Adjudicat ion Mechanism

The Bill establishes the National Company Law Tribunal (NCLT) to administer various provisions of company lawand adjudicate disputes between companies and their stakeholders. It also establishes an Appellate Tribunal to hear

appeals against orders made by the NCLT. The Bill provides for special courts to try offences.

The NCLT may ask the government to investigate a company on an application made by 100 or more shareholders ofthe company, or those who hold 10% or more of voting power.

The Bill introduces the concept of class action lawsuits by shareholders or creditors.


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Incorporation of Companies

The Bill introduces a new concept entrenchment. This provision allows for articles of association of the companyto include highly restrictive conditions for some amendments to some specified articles.

At the time of incorporation of the company, the Bill requires that the directors disclose their interest in othercompanies. Persons convicted of any offence in connection with the incorporation or management of a company

may not be able to incorporate a company.

Raising of Funds by a Company

False statements made in a prospectus issued for raising capital are punishable. The Bill extends this liability toexperts (such as merchant bankers or lawyers) who make misleading statements in the prospectus.

The Bill prohibits the issue of irredeemable preference shares. All preference shares, except those used to financespecified infrastructure projects, must mature within 20 years.

The Bill allows only management or employees to be offered shares at a discount. Such sweat equity shareholdersenjoy the same rights as other equity shareholders.

A company may issue debentures (bonds) which can be converted to equity. Only specified types of companies willbe allowed to issue secured debentures, which are backed by the assets of the company.

Companies are barred from taking public deposits, except from shareholders.

Administration of the Company

The Bill provides that at least one of the directors of a company should be resident in India for at least 182 days in acalendar year. Independent directors shall comprise at least one third of the boards of listed companies with a paidup capital above a prescribed limit. The Bill defines the duties of directors.

The Bill introduces the concept of key managerial personnel (CEO, CFO, MD and Company Secretary). Companieswith share capital above prescribed limits should have whole time key managerial personnel. The Bill prohibits

directors and key managerial personnel from insider trading.

Accounting and Audit

The Bill establishes the National Advisory Committee on Accounting and Auditing Standards. The committee willsubmit recommendations to the government on the formulation of accounting standards, after consulting the Institute

of Chartered Accountants of India.

Creditors, debtors, shareholders, guarantors, or those in other business relationships with the company, or theirrelatives or partners, cannot be appointed as auditors. The approval of 75% of shareholders of the company is neededto remove an auditor before the completion of his term.

Auditors cannot provide certain services to companies they audit. These include accounting and book keepingservices, internal audit, and management services.

Mergers, Compromises and Arrangements

A company, its shareholders, or its creditors can propose a compromise or arrangement by applying to the NCLT,which shall order a meeting of the company. Such compromises or arrangements may include a share-split, debtrestructuring, mergers or takeovers, or a reduction in share capital, but cannot include a buyback of securities.

For issues directly related to shareholders, objections can only be made by those who together hold 10% or more ofshares. In the case of creditors, only those who hold 5% or more of debt can object. The arrangement must beapproved by a 75% vote of shareholders, or creditors, as the case may be. All arrangements must be sanctioned by

the NCLT.

Where assets and liabilities of a listed company are being acquired by an unlisted company, the latter shall continueto remain unlisted.

A merger between two small companies or between a holding company and its subsidiary must be approved by aspecial resolution at a general meeting and by 75% of creditors by value of both companies.


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PART B: KEY ISSUES AND ANALYSIS

We analyze the main features of this Bill under five broad themes:

Constitutional Validity: The Bill provides for adjudication of company matters by the National Company Law Tribunal

set up by the Act. However, a similar body set up under a under a 2002 amendment to the Companies Act currently faces

a legal challenge in the Supreme Court.

Corporate Governance: The Bill requires companies above a certain size to appoint independent directors to theirboards. While such directors are not supposed to have significant financial relationships with the company, the criteriaproposed in the Bill for the appointment of directors are such that conflicts of interest are possible.

Conflict with other laws: Some provisions in the Bill conflict with provisions in the SEBI Act and its rules.

Implementation: The Bill provides for a number of issues, such as the format of financial statements, which are currently

specified in the Act itself, to be specified by the government in the rules. The government has not issued draft rules to the

Bill, so it is not known whether there would be significant changes from the prevailing system.

Corporate Restructuring: The Bill makes changes to the law on mergers and the rehabilitation of sick companies.

Constitutional Validity

Chapter

XXVIThe Bill establishes a National Company Law Tribunal and an Appellate Tribunal. The composition and powers of the

tribunal under the Bill are similar to those of the NCLT as established by the 2002 amendment to the Companies Act.Appeals from the Appellate Tribunal lie with the Supreme Court (and not High Courts).

The constitutional validity of the relevant amendment faces a challenge on the issue of barring appeals to the High Court.

A three-judge bench of the Supreme Court said in May 2007 that the question to be determined was whether such

'wholesale transfer of powers' as contemplated by the Companies (Second Amendment) Act, 2002 would offend the

constitutional scheme of separation of powers and independence of judiciary, so as to aggrandize one branch over theother.4 The matter is pending before a constitutional bench of the Supreme Court.

Corporate Governance

Independent DirectorsChapter

XIThe Bill requires public listed companies above a prescribed size to reserve a third of all seats on the board for

independent directors. It requires that independent directors (or their relatives) not do business with the company which

amounts to more than 10% of the turnover of the company in the past two years. Permitting financial transactions withthe company up to this point creates a potential conflict of interest. The listing agreement under the SEBI Act prohibits

independent directors from a material financial relationship with company but does not define the term material.

Statementof

Objectsand

Reasons

Unlike the 1956 Act, the Bill limits the number of directors on the board of a company to twelve, excluding the nomineesof lending institutions. Specifying a cap goes against the stated objective to provide a framework for responsible self-

regulation by allowing decisions to be left to shareholders.

Related Party TransactionsThe 1956 Act restricts transactions between a company and its directors, and certain other entities, on the grounds of

possible conflict of interest. Government approval is required in most cases. The Bill restricts such transactions only forpublic companies but broadens the definition of a related party to include managers of the company. The approval of

shareholders, rather than the government is now required (see Table 2).

Table 2: Comparison between Companies Act, 1956 and the Bill with respect to Related Party Transactions

Subject Companies Act, 1956 Companies Bill , 2008

Companies covered All companies. Only public companies.

Definition of relatedparties

Definition covers directors and their relatives andfirms and private companies in which they areinvolved.

Also includes (a) managers and relatives and those accustomed to Act according to theadvice of the director or manager. (b) public companies in which the director/ manager,along with their relatives, hold more than 2% of capital. (c) subsidiary/associate/holdingcompany or a company which shares a common holding company.

Approval Central government approval in most cases. Board approval; 75% shareholder approval for companies above a prescribed size.

Sources: Companies Act, 1956; Companies Bill, 2009; PRS

Clause 2 (1)

(zzy)

Clause 166

Clause 166

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Audit and Inspection of CompaniesThe Bill prohibits auditors from providing certain services, such as accounting and financial services, to companies they

audit in order to prevent conflict of interest. While prohibiting the same range of services as specified in the Bill, the

2003 Amendment Bill (now withdrawn) also allowed the government to add to the list of prohibited services. The 2008

Bill does not give the government the flexibility to notify other prohibited services.

Clause 127

The Bill does not require that the partners of a firm which audit the company be rotated on a periodic basis. The Naresh

Chandra Committee had recommended compulsory rotation of audit partners of a company every five years.

5

The IraniCommittee, however, had suggested that such decisions be left to shareholders of the company.6

Conflict with Existing Laws and Regulations

Insider TradingClause 173 The SEBI Act, 1992 prohibits insider trading in the securities of a listed company. It does not define the term insider. I

prescribes a penalty of Rs 25 crore or three times the profits made from such trading, whichever is higher, for thoseinsiders found guilty of the offence.7

The Bill bans only directors or key managerial personnel from insider trading. It prescribes a penalty of Rs 5 lakh to Rs 1

crore or imprisonment up to five years, or both, for those found guilty of the offence.

Independent DirectorsChapter XI The Bill requires all listed companies above a prescribed size to reserve a third of all seats on the board for independent

directors. Clause 49 of the listing agreement under the SEBI Act, which companies sign with stock exchanges, requirethose companies with a non-executive chairman to reserve one third of all seats on the board for independent directors.

Those companies with an executive chairman must reserve half of all seats on the board for independent directors.8

Delisting of CompaniesClauses

201 (3)-

(6) and

203(3)(h)

Companies whose shares trade on stock exchanges are subject to stricter standards of oversight and governance.

Companies can move to delist themselves from an exchange only if they meet certain criteria specified under the SEBI

Act.9 Only companies listed for three years can delist themselves. Existing shareholders must approve the delisting.

The price to be paid to such shareholders for their shares must be determined through a process specified