INDIAN COMPANIES ACT 2013- A General Review

The major landmark in the history of the development of Companies Act has been the derivation of THE INDIAN COMPANIES ACT 1956. And next being the Companies Act 2013, envisaged by the ministry of corporate affairs.

Before evaluating the pros and cons of the changes or revolution in corporate governance, legal aspect of both the acts, lets drove down the lane in the history of legislation of Joint Stock Companies.

The first legislative enactment on companies was passed in 1850 known as Joint Stock Companies Act based on English Statue of 1844. Subsequently, several enactments have been passed and repealed. In 1913, however, the companies law was thoroughly revised and with respect to the English Consolidation Act 8 of 1908. Thereafter, with repeal of 1908 act in United Kingdom, demand for revision of 1913 Act became pronounced. Hence, ultimately the Indian Companies Amending Bill of 1936 was introduced.

Subsequently, with change in economic scenario, Companies Act 1956 came into force. It was enacted with the object to consolidate the law relating to companies. The reason being, that the corporate sector is dominating the industry including the service sector and contributes almost 85% to the Indian economy. The act being the most significant corporate legislation that empowers the central government to regulate the formation of a new company, financing of the company, winding up of the company, Memorandum of Association and Articles of associations scope was widened. Due provisions for alteration was explicitly enumerated. The financing of the company was discussed in detail. Such were the provisions of the historical amendments which form the basic grundnorm of Companies Act in India. Other sundry add on were delegation of powers, winding up in case of mismanagement or oppression, power of central government to appoint advisory, etc.

In consideration of the changes in the national and international economic environment,

globalization, stringent business environment conditions, expansion and growth of economy, the Central Government decided to repeal the Companies Act 1956 and enact a new scope and provision to meet the changed national and international needs of economic growth and development and for the following purpose a new bill was forwarded. The amendments to the Bill were first introduced in August 2008. However, it was withdrawn as the Lok Sabha was dissolved. It was again introduced in Parliament in 2009 and sent to the Standing Committee, which presented its report in August 2010. The revised bill 2011 was again reviewed by the Standing Committee as new provisions were included. Eventually, in 2013 the companies bill got enforced after it got presidential accent. The new act comprises of 29 chapters, 470 sections and 7 schedules as against 658 sections and 14 schedules in the Companies Act 1956. The amended bill is being referred to as historic by Sachin Pilot, minister of Corporate Affairs. It aimed to create many transformations, firstly being the most significant is the ONE MAN COMPANY clause. One man company are those companies in which a single person virtually holds the whole of the share capital with few extra members holding the remainder. Its being coeval to existing sole proprietorship form of entity, the only difference being that the one man company will be regarded as separate legal entity distinct from its owner. Being the largest holder of shares, he has the authority over the affairs of the company as a managing director and enjoys complete control over the company. This form of company is already prevalent in China, USA, Singapore, and certain countries in Europe. It maybe averred that with the adherence of one man company as a legal corporate entity of business or entrepreneurship the growth of all the sectors of the economy will be balanced; the unorganized system will get a legal recognition. It will further help the small and new entrepreneurs to enlarge their scale of business and attract private funds and equity. It will remove the burden of unlimited liability, as the risk shall be delegated. The bill defines One man company as a company which has only one person as a member. This is a paradigm shift in the entire concept of a companys formation, operation and management from the existing provisions of The Companies Act 1948, wherein a minimum two members are essential for bringing the company into existence,

for both public and private companies, irrespective of the fact whether they are limited by shares or guarantee. The bill explicitly excludes one man company from the condition that minimum 2 members are required to form a company. This implies that all the provisions of the act which is applicable to a private company shall also be applicable to one man company unless otherwise excluded from its compliance. Section 3 clearly states that one man company shall be treated as a private company for all legal purposes with only one member. Certain privileges are also given to one man company. They are as follows: They do not need to prepare cash flow statement The financial statement signed by one director will suffice Provisions relating to conducting extraordinary general meetings, notice convening such meetings and procedures to conduct such meeting does not hold good for them. In case of one person company, as an alternate of annual general meeting or extraordinary general meeting, the resolution maybe passed by the sole member to the company and entered in the minutes book, signed and dated.

Secondly, the pioneer modification is the CORPORATE SOCIAL RESPONSIBILITY clause. The new act has made it mandatory for the companies to keep aside 2% of the average net profit of the preceding 3 years for CSR activities.CSR will apply to firms that have a net worth in excess of Rs. 500 crore, or a turnover of Rs. 1000 crore or more or a net profit of 5 crore or more. The boards report must disclose the composition of the CSR Committee. Now this clause is something of a new caliber which will make companies socially responsible along and supplement their motive of profit maximization. There were mixed reviews regarding this provision. The companies are expecting to get tax exemptions in some cases. Another merit of CSR is that companies can contribute to social welfare along with profit motive. The NGOs and other organizations working for social welfare issues may benefit from this clause, as necessary capital for their organization will be readily available. Social welfare will eventually lead to increase in standard of living, ensuing to economic growth. The demerit from a companys point of

view is that it would be pinching during the recession or economic slowdown as apparently the companies will make low profits and it will be a burden for them to create charge for CSR. The benefits of CSR: The rationale for CSR activity is quid pro quo, corporate earns profits by optimum utilization of resources and so a portion of the benefit derived by them should be channelized for development and growth. The intention of the policy is to urge the profit makers to support the social, economical, environmental needs of the country. It shall also improve the goodwill of the company as one which is society oriented. Significantly, there is no penalty for defaulting on CSR norms. Only an explanation needs to be annexed by the board in its report for the noncompliance.

Thirdly, another important amendment is MULTILAYER SUBSIDIARIES clause. Under this clause, the companies are not allowed to keep more than two layer of subsidiary. Big business houses usually have hundreds of subsidiary throughout the world that act as the profitable ventures for the holding company. These multi layer subsidiary makes it tough for the investors or creditors to figure out actual financial position of the company they are dealing with, allowing companies to divert funds. This was the grievance of the Satyam Scandal where investigators found it difficult to track the flow of funds from the scam affected firm. But again, the two level subsidiary has its own demerits; the companies are jittery that this clause is restricting their ability to expand their scale of business. The bill confers powers on the Central Government to prescribe the number of layers of subsidiaries that a specific class of company may have. In terms of making investments, clause 186 of the bill states that a company cannot make investments through more than two layers of investment companies. The provision evolved from scams of the past. On the contrary, the business may get severely affected due to restriction on investment subsidiaries. The concerns which require huge amount of funds may suffer.

Next, fourthly, the clause is related to RESERVES. Now it is no more mandatory to transfer funds from the profits to the reserve. Usually the companies find it difficult during slack profits to transfer funds to reserve as well as pay dividends to the equity shareholders.

Fifthly, the clause relates to ARRANGEMENT AND AMALGAMATION. Merger and Amalgamation is proposed in the application of compromise and arrangement under section 230 (i) of the company or (ii) of the creditors, or (iii) of the members of the company (iv) of the liquidators of the company under liquidation, may order the meeting (A) Creditors or class of creditors or (B) of the members or class of members, to be called, held and conducted in the manner directed by the tribunal. Now there is provision for fast track merger. It basically means, merger between two or more companies or between holding company and its subsidiary. In fast track approval companies need not file schemes with Tribunal. Initially, Indian companies were restricted to merge with foreign companies. The new bill facilitated amalgamation of foreign & Indian company after taking prior approval of RBI under section 234. The transformations in compromise and amalgamation procedures have also been simplified.

Sixthly, another significant transformation in present bill is the revaluation of the RIGHTS AND STATUS OF MINORITY SHAREHOLDERS. Now minority shareholders of the company may also offer to sell their shares to the majority shareholders at the price determined in accordance with the rules and regulations as may be prescribed. Minority shareholders may also offer to be majority shareholder by purchasing their equity shareholding at the price determined by registered valuer.

Seventhly, the most technical is the introduction of e-governance. E-governance has been given due importance in the new bill. It is proposed for various company processes like

maintenance and inspection of documents in electronic form, financial statements to be revealed on company website, maintaining books of accounts online, keeping record of minutes, proxies in e form. Announcement of board meeting and invitation to shareholders are to be published on internet. Eighthly, new provision relating to acceptance of deposits by companies is another pioneer development. Contemplation of new bill would reveal that the existing provisions of 1956 contained in section 58A to 58AAA have been completely revalued. According to Companies act 1956, the provisions of acceptance of deposits are contained in sections 58A, 58AA, 58AAA. The new bill which overrides the old law, the law relating to acceptance of deposits is contained in chapter V comprising of section 73 to 76. Section 58AA concocted the law which dealt with acceptance of deposits from small shareholders and intimating the default in repayment of deposits. This section is expunged in the new law. Similarly, section 58AAA, which said about making any offence connected with acceptance u/s 58A or 58AA is removed in the new act. Section 58A was related with the way to monitor the manner in which deposits are to be invited and accepted. This section does not make difference between deposits from members and public. Vis--vis the new companies bill, section 73 is at par with section 58A of the old bill. Section 73 reads, On and after the commencement of this act, no company shall invite, accept or renew deposits under this act from the public except in a manner provided under this chapter Therefore, it may be clearly inferred the deposits from public is restricted generally. Under the existing provisions no credit rating in respect of public deposits is required whereas under the new law u/s 73, it is mandatory to obtain credit rating and the same is required to be disclosed in the circular issued in this behalf to its members for inviting deposits. Similarly, maintenance of deposit repayment reserve equal to 15% of the amount of deposits maturing during a financial year and next following financial year in a scheduled bank is mandatory now. Besides, now it is also mandatory to provide such deposit insurance in such manner as may be prescribed. The improved provisions of the new bill will aid the creditors of the company to

know the credit worthiness of the company and they may have the knowledge of the use their deposits are put into. The new bill appears flexible as well, as it also provide the creditors guarantee for repayment.

Next overriding effect is related with Disclosures. The Bill requires the financial statements of all companies to be signed by the chief financial officer (CFO), if any, among others. This has a significant change in attestation. Initially, the listing agreement for listed companies does not require the CFOs to sign financial statements. Rather they have to certify to the board that these statements are free from material defect. Criminal cases may be filed on directors for offences like misappropriation of funds, the companies bill provides for criminal liability for directors of a company for offences. They are responsible to ensure true and fair view of the records. The bill says that the company should have the audited accounts for all subsidiaries, including foreign ones.

Ninthly, the concept of INDEPENDENT DIRECTOR has also been given prominence. Then there is provision for COMPULSORY WOMEN DIRECTOR. This provision will help to reduce gender inequality in companys stratum. Tenthly, the concept of SMALL COMPANIES have been introduced which shall be subjected for lesser stringent regulatory framework. Provision for conversion of companies already registered has been introduced. Registration process has been made faster, for the first time articles may contain provisions for entrenchment. Companies Act, 2013 requires the company to register the particulars of every charge created by it on its property or assets or any of its undertaking including pledge.

Eleventh, other pioneer development in the new act is the omission of statutory meeting. Now it is no more mandatory to hold statutory meeting after the formation of the company. Initially the act was rigid as it was obligatory for a company to hold statutory meeting within the period of not more than 6 months. And in case of non compliance of this provision, the Tribunal would order for winding up of the company.

Twelve, CLASS ACTION SUITS: Under this provision, the small investors with mutual benefit and interest may sue the management of the firm, auditors or other shareholders in case of error, fraud or misrepresentation on their part. This is an empowering clause for the advantage of the minority shareholders. It reduces the inequality of the bill, as it strengthens the legal independence of the minority. It shall bring efficiency in the working of the company encouraging fair and prudent practice of business. Initially class action suits had been filed under the guise of Public Interest Litigation which does not provide much assistance to the distressed shareholders. Another remedy which the shareholders may avail is by filling claims against oppression and mismanagement before Company Law Board. There are few drawbacks of the suit filed under the Companies Act, 1956 which has been addressed in the Bill. 1. Under the bill, the depositors can file class action suits, but not for oppression and mismanagement, 2. Oppression and mismanagement case can be filed against the company and its statutory appointees only, while a class action suit can be filed against an expert or advisor or consultant or any other person and also against an auditor as the case maybe. 3. Petitions under oppression and mismanagement can be filed for past mismanagement and to prevent for its recurrence, while class action suits can even resist the management or directors of company to take certain actions which may result in future adverse consequences. Significant features that have been introduced vide clause 245 of the bill are Class action suits can be filed by members and deposit holders only. Other stakeholders such as creditors, bankers, debenture holders etc. are deprived of filing suits for class action. This averts unnecessary legal action which may arise and hamper the growth of the company There is a threshold limit in terms of the support required for bringing an action. The class action must be supported by at least 100 shareholders or deposit holders. Another requisite is the determination of the bonafide intention of the

shareholders The tribunal may impose cost on the shareholders if it finds the suit has been filed in frivolous manner. Thirteen, quorum of the public company has been increased from 5 to 30 members personally present depending upon the number of members as follows: 1. Upto 1000 members= 5 members should be present 2. From 1001- 5000 members= 15 members present

3. More than 5000 members= 30 members personally present. The increase in quorum has brought rigidity in the Bill yet it tends to bring more participation in the companys management, which shall reduce the need for proxies.

Succinctly, we can conclude that companies bill 2013 is incumbent to the present economic situation and conducive for the growth of the governance. Other minor inclusions also include the following: There is prohibition on issue of share on discount; shares can either be issued at par or at premium. Certain criteria for winding up by NCLT has been deleted protocol for winding up issued when number of members fall below prescribed limit, non commencement of business in one year, etc. Now private companies can also grant loan to their directors or to any other person in whom the director is interested. Need to prepare consolidated financial statement in case a company has 1 or more subsidiaries.

Hence, with all these new clauses, the Indian corporate sector is destined to reach new milestones at par with the international standards.