Issues and challenges for new company act amendment bill

Aniket Reddy-130 Lovenish Ruhela-131 Ronak Shah-141 Aniket Tawde-161 Vipul Tenpe-162 Pankaj Vhatkar-172

Background
Companies (Amendmen t) Bill, 2003 introduced on 7th May, 2003 Companies Bill, 2008 introduced in Loksabha on Oct. 23, 2008 The companies Bill, 2011 introduced in Loksabha on 14th Dec. 2011

Concept paper on new company law on 4th August, 2004

Reintroduce d companies bill,2009 on 3rd Aug, 2009

On 19th Dec. 2012 Loksabha passed the companies bill

Background

Companies Act, 1956

13 parts 658 sections 15 schedules

Companies Bill, 2009 18 chapters 426 clauses

Companies Bill, 2011 29 chapters 470 clauses 7 schedules

Redefining the takeover code

Increase in threshold limit from 15% to 25% Open offer size increased from 20 % to 26% ITC holds 14.5% stake in Hotel Leela Many promoters with stake range 20%-30% FDI to 26%-49% Max. promoter shareholding limit of 75%

Impact on M&A horizon

Pricing of Share (highest of following)
The negotiated price Volume weighted avg. price of last 52 weeks Highest rice paid in last 26 months Volume weighted avg. price of 60 days

Impact on M&A horizon

Provision for cross border mergers Small companies merger Reverse merger

A (Listed)

B (Unlisted)

Impact on M&A horizon

Dispensation of meeting of creditors and shareholders Introduction of NCLT Abolition of trust shares

Impact of GAAR
Impermissible avoidance agreement Power to tax authorities Impact on cross border deal, investment into India Issue of misuse & ineffective implementation

Corporate Social Responsibility (Clause 135)

Net worth of Rs. 500 crore or more, or turnover of Rs. 1,000 crore or more, or net profit of Rs. 5 crore or more in a financial year. Corporate social responsibility (CSR) committee. Three or more directors, of which at least one would be an independent director. At least two per cent of the average net profits made during the three immediately preceding years.

Cont.
Mr. J. J. Irani, former director of Tata Sons,
People will find ways to skirt anything that is mandated, he told Financial Express in an exclusive interview.

Issues & Challenges:

Concerns during recession or slow-down Additional work in terms of recruitment, policy formulation, monitoring etc.

Serious Fraud Investigation Office (SFIO) (Clause 211)

provide statutory powers to SFIO charges shall be treated as a report filed by a Police Officer. SFIO shall have power to arrest in respect of certain offences. Stringent penalty provided for fraud related offences. Issues & Challenges

Not sufficient manpower with SFIO

Mandatory Appointment of Women Directors(Clause 149)

Provision:
Mandatory appointment of women directors in every company except one person company.

Issues & Challenges:

Not enough number of women of director spirit Female members of the business

families would be appointed on boards of companies

Director
Director liable as an officer in default even if he is aware of the contravention, merely by virtue of receiving the proceedings of the meeting.
That is to say, it is not a good defence for a director to say that he did not participate in the proceedings where an alleged contravention arose.

However, curious question is if the director has not participated in the decision-making, and subsequently became aware of the same, how does he avert it?

And therefore, how does he save himself from being a party to the offence?

Key Managerial People

CEO and CFO defined in the Act

CEO defined based on designation, not function

KMP defined to include CEO, CFO, CS, WTD and other notified designations

Key Managerial People

Clause 203, in a rather confused language, puts a bar on appointment of a Chairperson and the Managing director However, the section is Confusing

As it stands, the bar is only on appointment as Chairperson by articles, and the managing director/CEO at the same time That is, if the articles name the person as Chairperson, he cannot be appointed as MD The section does not apply to a multi-business company Multi-business issue to be detailed in rules to be framed

Linkage with profits brought even in case of minimum remuneration

2.5% of profits, or 5% with special resolution This may actually be meaningless in case of loss or inadequacy

Sick Companies
What is a sick company

Unfortunately the law does not define sickness with reference to loss of net worth or inability to pay The law leaves sickness to be determined by the NCLT

Who may make a reference

Secured Creditors with 50% or more outstanding debt who have unpaid debt after 30 days of notice The company CG or SG or a scheduled bank

E-Governance
Provision: (Clause 20, 120, 128) E-Governance proposed for various company processes like maintenance and inspection of documents in electronic form, option of keeping of books of accounts in electronic form, financial statements to be placed on companys website, holding of board meetings through video conferencing/other electronic mode; voting through electronic means.

E-Governance
Issues & Challenges: Lack of Transparency Speed of Decision Making Disruption of Services Results could be doctored Infrastructure

Security
Integration of Fragmented E-Governance Setup

One person Company

One person only as a lawful private company Minimum 1 and maximum 15 directors Essential to nominate one person who becomes member of OPC after death of subscriber Challenge:

No clause if nominee predeceases the subscriber Differentiation between OPC and private company

Other salient features

Limit on maximum number of members increased from 50 to 200 1/3rd of the total number of directors as independent directors- listed public companies E-governance One woman director being made mandatory in some prescribed classes of companies

Mandatory Rotation of auditors(Clause 139)

Appointment by members in general meeting for five years. Instead of rotation of audit firms, rotation of audit partners (after 5 to 7 years) Joint audits be considered in some very large. Appointment of auditors be considered for block of 3 years in stead of 5 years. Rotation of partners could be after 9 years 3 blocks of 3 years each. More transparency in ethical way of financial reporting

Mandatory Internal Audit for prescribed classes of companies (Clause 138)

Unlisted companies may be exempted from the provisions of this Clause. Appointment of external person as internal auditor

Prescribed Companies shall be required to conduct internal audit of functions and activities of the company by internal auditor appointed by the company.

Duties of Auditors (Clause 143)

Right of access at all times to the books of account and vouchers of the company Right to access records of subsidiaries for the purpose of consolidation of financial statements Report to the members of the company on the accounts examined by him and on every financial statements

Secretarial Audit (Clause 204)

Duty of the company to give all assistance and facilities to the company secretary Contravenes the provisions of this section, the company, every officer of the company or the company secretary in practice, who is in default, shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.