Cabinet clears Companies (Amendment) Bill, 2014

03 Dec 2014

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The union cabinet chaired by Prime Minister Narendra Modi on Tuesday approved the introduction of the Companies (Amendment) Bill, 2014 in Parliament, proposing a slew of changes to the Companies Act, 2013.

The changes in the Act, approved by the cabinet, are intended to make it easier for corporates to do business in India while also ensuring better compliance with regulations.

The 14 proposed amendments, which were approved by the Union cabinet, include a provision for severe punishment to those raising illegal deposits from the public – a fallout of the Sahara scam.

It also has provision that makes it mandatory for auditors to report frauds beyond a certain threshold to the government.

The Companies Act, 2013 was notified on 29 August 2013.

Out of 470 sections in the Act, 283 sections and 22 sets of rules corresponding to those sections have so far been brought into force.

Besides it proposes to exempt loans given by a company to wholly-owned subsidiaries and guarantees / securities on loans taken from banks by subsidiaries from the purview of related party transactions.

In order to make doing business in India easier as also address some issues raised by stakeholders such as chartered accountants and professionals, the government has proposed the following amendments in the Act:

  • The requirement of minimum paid-up share capital to be done away with, and make consequential changes;
  • Make common seal optional, with consequential changes for authorisation for execution of documents;
  • Prescribe specific punishment for deposits accepted, which was left out in the Act inadvertently;
  • Prohibit public inspection of board resolutions filed in the registry, in line with corporate demand;
  • Do away with the requirement of transferring equity shares for which unclaimed / unpaid dividend has been transferred to the IEPF even though subsequent dividend has been claimed;
  • Provide for writing off of past losses / depreciation before declaring dividend for the year (this was missed in the Act but included in the Rules);
  • Rectify the requirement of transferring equity shares for which unclaimed / unpaid dividend has been transferred to the Investor Education and Protection Fund (IEPF) even though subsequent dividends have been claimed (to meet corporate demand);
  • Incorporate an enabling provision 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 below the threshold also to be made in the board's report (as demanded by auditors);
  • Provide for exemption under section 185 (Loans to Directors) provided for loans to wholly-owned subsidiaries and guarantees / securities on loans taken from banks by subsidiaries (this was provided under the Rules but is being included in the Act as a matter of abundant caution);
  • Empowering Audit Committee to give omnibus approvals for related party transactions on annual basis. (to align with SEBI policy and increase ease of doing business);
  • Replace 'special resolution' with 'ordinary resolution' for approval of related-party transactions by non-related shareholders (to meet problems faced by large stakeholders who are related parties);
  • Exempt related party transactions between holding companies and wholly-owned subsidiaries from the requirement of approval of non-related shareholders (corporate demand);
  • Bail restrictions to apply only for offence relating to fraud under section 447 (though the earlier provision has been mitigated, the concession is made by the law ministry and ED);
  • Winding up cases to be heard by two-member bench instead of a three-member bench (removal of an inadvertent error); and
  • Special courts to try only offences carrying imprisonment of two years or more (to let magistrate try minor violations).

This is part of the major initiatives by the government to make changes in the country's regulatory framework to improve its global ranking for ease of doing business, where India has been ranked very low at 142nd position in the latest World Bank report.

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