The Companies (Amendment) Act, 2017 introduces several amendments to the Companies Act 2013, realigning provisions to improve corporate governance and ease of doing business in India while continuing to strengthen compliance and investor protection.
One of the most significant legal reforms in recent times is the enactment of the Companies Act, 2013 (2013 Act) which overhauled the erstwhile Companies Act, 1956 (1956 Act). Though the 2013 Act was a step in the right direction as it introduced significant changes in areas of disclosures, investor protection, corporate governance, etc., there were multiple instances of conflicts and overreach within the legislation leading to difficulties in its implementation.
Accordingly, the Companies Law Committee (CLC) was constituted in June 2015 with the mandate of making recommendations to resolve issues arising from the implementation of the 2013 Act. Based on the recommendations of the report of the CLC, the Government introduced the Companies (Amendment) Bill, 2016 (Bill) in the Lok Sabha on 16 March 2016, which was passed by the Lok Sabha on 27 July 2017 and by the Rajya Sabha on 19 December 2017. The Companies (Amendment) Act, 2017 (Amendment Act) received the assent of the President on 3 January 2018, but different provisions of the Amendment Act will be brought into force on different dates by the Central Government. Proposing a slew of changes, the Amendment Act seeks to realign many provisions to ease corporate governance and doing business in India while continuing to strengthen compliance and investor protection.
Some of the key changes that have been brought about under the Amendment Act include:
- Definitions of Holding, Subsidiary and Associate Companies: The definitions of holding and subsidiary companies have been revised to address the anomalies created by the previous definitions. The definition of the associate company has been expanded by enlarging the concept of ‘significant influence’.
- Issuance of Shares: Certain key changes have been implemented in relation to the issuance of shares at a discount, issuance of sweat equity shares and the private placement process.
- Directors and KMP: Various provisions relating to the definition of KMP, residency requirement of a resident director, the pecuniary relationship of an independent director with his company, etc. have changed. The Amendment Act has also introduced relaxations in loans given by a company to its directors and persons in whom the directors are interested. Importantly, the Amendment Act has done away with restrictions on forwarding dealings by whole-time directors and KMP and the prohibition on insider trading given the pre-existing SEBI regulations on these aspects.
- Ease of Incorporation, Doing Business and Compliance: The Amendment Act contains various provisions relating to simplifying the incorporation process, annual return and board’s report, allowing flexibility in convening general meetings, etc.
- Corporate Governance: Relaxations in corporate governance measures have been introduced under the Amendment Act, such as eliminating the Central Government’s approval for fixing managerial remuneration, allowing related members to vote on special resolutions for approving related party transactions in certain circumstances, permitting designated employees of a company to authenticate documents on the company’s behalf, etc.
There are various other key changes in relation to loans and guarantees by companies, beneficial ownership of shares, materiality threshold for fraud, increased compliance by foreign companies, etc.