Companies (Amendment) Bill, 2014

By:CA Kamal Garg

[B. Com (H), FCA, DISA (ICAI), LLB]

Punishment for deposits accepted [Section 76A]

• Nature of Contraventions u/s 73 or u/s 76:1. Acceptance of / Invitation for Deposits;2. Repayment of Deposits/ Interest thereon, within

stipulated time• Punishment:

1. Company: Fine > Rs. 1 Cr. but < Rs. 10 Cr.;2. Officer in Default:

Imprisonment < 7 years; or Fine > Rs. 25 Lakhs but < Rs. 2 Cr.; or BothIf default is wilful with intention to deceive then liable to face action u/s 447 too

Related Party Transactions

Summary of Section 188 Approvals

Approval 1 Approval 2 Approval 3 Approval 4

BOD Approval Prior OR Approval Prior SR Approval Prior SR Approval [with SR for OPP]

Always If Paid-up Share Capital > Rs. 1 Cr.

If Paid-up Share Capital > Rs. 10 Cr., irrespective of amount involved in contracts

If amount involved in specified contracts more than Rule 15 limits, irrespective of amount of Paid-up Share Capital

Contract at ALP: BOD Approval not required u/s 188

Contract at ALP: OR Approval not required u/s 188

Contract at ALP: SR Approval not required u/s 188

Contract at ALP: SR Approval not required u/s 188

If relative appointed to OPP without knowledge of Director, then SR approval can be taken in next 3 months

Sec. 188 not applicable for: (i) appointment of MD/ WTD/ Mgr/ Chairman/ Banker/ Debenture Trustee; (ii) contracts between Govt. Companies; (iii) appointment in Professional Capacity (as it’s not OPP)

Amendments proposed in the Bill• The requirements for SR are now substituted with

OR;• However, OR is not required for:

1. transactions entered into between a holding company and its wholly owned subsidiary

2. whose accounts are consolidated with such holding company; and

3. are placed before the shareholders at the GM for approval.

Audit Committee [Section 177]

• Audit Committee is required accord approval for related party transactions of the company [Section 177(4)(iv)];

• Such approval was required on individual transaction basis;

• Now Audit Committee may make omnibus approval for related party transactions proposed to be entered into by the company subject to such conditions as may be prescribed

Other Amendments

• Omitting of minimum paid-up capital requirements to promote ‘ease of doing business’:“The minimum capital requirement can be an obstacle for potential entrepreneurs….. To reflect the relevant barrier to entry, the paid-in minimum capital has been used rather than the required minimum capital……………"[World Bank's Doing Business 2014 Report, page 28]"Research shows that the existence of a minimum capital requirement directly hinders business development and growth."“In South Asia only India and Maldives still have minimum capital requirements.”In India it is about $1,900; in Maldives, $135.”

Other Amendments• Making it optional for a Co. to have a common seal:

In Pancharan Dhara v. Monmatha Nath Maity [2006] 69 SCL 401 (SC), the Supreme Court held that so far as the question of putting up of the seal of the company was concerned, it is a relic of the days when medieval barons, who could not read or write, used their rings to make a characteristic impress. Making this medieval relic mandatory in this era of digital signature makes no sense. Making this "medieval relic" non-mandatory would contribute immensely to ease of doing business;It seems that taking a cue from Supreme Court's "medieval relic" remarks, the proposed Companies (Amendment) Bill, 2014 proposes to make the common seal optional and also make consequential changes for authorization and execution of documents.

Other Amendments• Prohibiting public inspection of board resolutions filed

in the Registry:• Section 117(3)(g) of the Act requires a company to file with

the ROC the Board resolutions passed under 179(3) of the Act;

• This would mean that such Board resolutions would be open to public inspection under section 399(1) of the Act;

• Serious apprehensions were expressed by corporates that allowing such Board resolutions to be opened to public inspection would hurt their competitive position;

• The Amendment Bill has now provided that “no person shall be entitled under section 399 to inspect or obtain copies of such resolutions”

Other Amendments• Requirement to set-off entire unabsorbed past

losses before declaring dividend:

• Section 205(1)(b) of the Companies Act,1956 required that the company shall not declare dividend unless:

• it has provided, in respect of each previous financial year, the loss for that year (after providing for

depreciation) or the amount of depreciation provided,

whichever is lower

Example

Year Profit / (Loss)

before depreciation

Depreciation Profit /

(Loss) after depreciation

2011-12 (20000) 25000 (45000) 2012-13 5000 25000 (20000) 2013-14 28000 30000 (2000) 2014-15 100000 30000 70000

• Thus, under the 1956 Act, the company was required to set off only Rs. 47000 out of the Rs. 67000 unabsorbed losses and depreciation from its profit of 2014-15 (Rs. 70,000) before declaring dividend

• The company's divisible profits would be Rs. 23,000

Year

Amount to be set-off before

declaring dividends

Remarks

2011-12 25000 Depreciation is lower than the amount of loss

2012-13 20000 Loss is lower than depreciation

2013-14 2000 Loss is lower than depreciation

Total 47000

• This is against the concept of prudence which demands that the entire unabsorbed loss and depreciation of past years of Rs. 67,000 be set off against profits of 2014-15 before a dividend is declared and accordingly divisible profits should be only Rs. 3,000;

• Accordingly Rule 3(5) (but not the 2013 Act) provides that no company shall declare dividend unless carried over previous losses and depreciation not provided in previous year or years are set off against the profit of the company for the current year;

• Thus, in this example, under the 2013 Act, entire Rs. 67,000 (unabsorbed losses) will have to be set off and divisible profits will be only Rs. 3,000;

• To avoid the Rule being struck down as ultra vires on technical grounds, the Companies (Amendment) Bill, 2014 proposes to incorporate the provisions of Rule 3(5) in the 2013 Act itself

Other Amendments

• Prescribing thresholds for reporting of frauds by auditors to Central Govt.:

• Section 143(12) as well as Rule 13 issued thereunder require reporting of frauds to Central Government by the statutory auditor irrespective of materiality or amounts involved;

• The Bill proposes to amend the 2013 Act to incorporate enabling provisions to prescribe thresholds beyond which fraud shall be reported to the Central Government (below the threshold, it will be reported to the Audit Committee);

• Disclosures for the latter category also to be made in the Board's Report

Thank Youcakamalgarg@gmail.com, 9811054015