The New Company Law : Some Aspects
Introduction
1. The New Company Law has been the pot boiler for quite some time now. Several Committees of experts had vetted the Bill. It was laid before the Parliament in December, 2011 and referred to the Parliamentary Standing Committee on Finance. The Bill of 2011 was passed by the Lok Sabha in December, 2012. The Companies Bill, 2012 was approved by the Rajya Sabha in 2013 and has been assented to by the President of India. It is now known as the Companies Act, 2013. It is meant to replace the Old Companies Act, 1956. The Old Act was quite right and there were no problems about it but times have changed. The economic conditions and the global scenario had to be taken into account. We cannot be stuck with old ideas forever.
The Companies Act, 2013, has its objects as facilitation of easy incorporation of companies, reliance on self-regulation by the corporate sector and also promotion of good governance on all fronts. Pioneering concepts have been introduced. Thus, for the first time the Act gives recognition to One Person Companies. It also incorporates principles of corporate social responsibility. Auditors and accountants will face tough time hereafter and will have to be extremely on guard while signing statements for the company. So also the responsibility of directors has gone up. The Act gives statutory recognition under the New Company Law to the Serious Frauds Investigation Office under the Ministry of Corporate Affairs. Mergers and acquisitions have got a new meaning. Each one of these subjects will require separate treatment at length. The Act contains 470 sections in 29 Chapters and Seven Schedules. Though it appears to be less voluminous, it looks as if what was stated in the various sections of the old law will henceforth be taken care of by rules and notifications to be issued, apart from the bare Act itself.
One Person Company (OPC)
2. The New Act brings into vogue a new entity in the form of One Person Company (OPC). Section 2(62) defines the OPC as a company which has only one person as a member. Liability, both legal and financial, will be limited to the company and not to the person. The old law required at least two persons to form a company. Section 2(68) defines a private company as including an OPC. The OPC will be treated as a private company. The person concerned must give a separate name and legal identity to the company. It is almost akin to a sole proprietorship. In the case of a sole proprietorship, there is an identity of the owner and entity and the liability is unlimited on the owner. Debt and finance will be the sole responsibility of the owner. Taxes have to be paid by him. In the case of OPC, there is a limited liability with a separate legal entity. It has to register itself as a separate entity. Relaxation is given to the OPC. It can have only one director. The individual being member shall be deemed to be the first director. It is not necessary that Board meetings should be held regularly. Provisions relating to General Meeting, Extraordinary General Meeting will not hold good in case of an OPC. Any resolution by the company can be communicated by the sole member to the company and noted in the minutes book. The Company Secretary will have to sign the financial statements and annual returns along with the director. Contracts by the sole member with the OPC should be stipulated by way of a memorandum or recorded in the minutes of the first meeting of the board of directors of the company held next after entering into contract. The Registrar of Companies will have to be informed within fifteen days.
The question arises : why did the Govt. think of introducing the concept of an OPC under the Indian Law? It has been explained by experts that the idea is to bring in the unorganised sector of proprietorship into the organized version of the private limited company. It will facilitate more favourable banking facilities and medium and small enterprises will enter into the corporate domain.
We are all familiar with the theory of piercing the corporate veil. Salmond on jurisprudence, twelfth edition brought out by P.J. Fitzgerlad (@ page 70) makes this point : "In recent years, an important motive for incorporation has been tax avoidance. Under a system of taxation where not only the amount, but also the proportion of tax payable increases with income, it becomes more useful to have a regular income each year than an income which may be very large one year and non-existent in the next. By means of the limited company, the taxpayer can contrive to spread a fluctuating income over the years and to divide a large income into smaller parts to be distributed within his family. How far such benefits will remain and continue to serve as a reason for incorporation is uncertain. What is clear is that over the last few years, the tax position has been one of the most important aspects of incorporation". There is bound to be issues concerning the member and the OPC hereafter.
Corporate Social Responsibility
3. The Companies Act, 2013 gives statutory recognition to the principles of Corporate Social Responsibility. Certain companies are now obliged to spend 2 % of their net profits on objects listed in Schedule VII of section 135. Schedule VII is reproduced below:
"Activities which may be included by companies in their Corporate Social
Responsibility Policies
Activities relating to:—
(i)
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eradicating extreme hunger and poverty;
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(ii)
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promotion of education;
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(iii)
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promoting gender equality and empowering women;
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(iv)
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reducing child mortality and improving maternal health;
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(v)
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combating human immunodeficiency virus, acquired immune deficiency syndrome, malaria and other diseases;
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(vi)
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ensuring environmental sustainability;
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(vii)
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employment enhancing vocational skills;
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(viii)
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social business projects;
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(ix)
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contribution to the Prime Minister's National Relief Fund or any other fund set up by the Central Government or the State Governments for socio-economic development and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women; and
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(x)
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such other matters as may be prescribed."
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Section 135 stipulates that it will apply to companies with net worth of Rs.500 crores or more or turnover of Rs.1,000 crores or more or a net profit of Rs. 5 crores or more. The company should constitute a special Committee of the Board for this purpose for formulating a policy indicating the activities and the amounts to be spent as per Schedule VII.
Corporate Governance
4. The new Act breaks fresh ground in the matter of corporate governance. Ever since the Cadbury Committee made its recommendations in the U.K, all countries have started talking of corporate governance. The powers and functions of the Board of Directors of the company are given a fresh look. The new law takes into account the Corporate Gender Gap Report of 2010 from the World Economic Forum. The report showed that India had the lowest percentage of female employees (23%) followed by Japan (24%), Turkey (26%) and Austria (29%), in report entitled Representation of Women in Business. The Act lays down that there should at least be one woman Director in every Board of public companies. At least one third of the total number of Directors should be independent Directors. The total number of Directors should not normally exceed fifteen. The Act also recognizes a non-executive Director not being promoter or key managerial personnel. He will be liable only in respect of acts of omission or commission by the company with his knowledge and consent. The Act gives formal statutory recognition to Nominee Directors of Institutions connected with the company by way of loan or other arrangements. Specific provisions have been made for disqualification of Directors. A person can hold not more than 20 Directorships. The present law limits it to fifteen. Duties of the Directors are specifically spelt out in section 166 of the new Act. Draft Resolutions of the Board can be circulated through electronic means. Listed companies are mandated to constitute Audit Committees with a minimum of 3 Directors. The Role and functions of the Audit Committee are listed in the Act. The new law also enables the setting-up of a vigil mechanism for Directors and employees to report genuine concerns of the company. Powers of the Board are enumerated to the extent they can be exercised by a Board's Resolution. Non-Government companies can contribute 7.5% of average net profits of 3 years to political parties. The limit was 5% under the old law. Detailed provisions have been made concerning related Party Transactions. The new Act separates the Offices of the Chairperson and the Managing Director. Provisions have been made for appointment of Key Managerial Personnel. There can only be one KMP for the company.
Serious Fraud Investigation Office
5. For the first time, the new Act enables the establishment of an Office to be called the Serious Fraud Investigation Office to investigate into frauds relating to a company. This gives statutory recognition to the Govt. of India ResolutionNo.45011/16/2003 -ADM –I, dt.2nd July, 2003. This is mentioned in Section 211 of the Companies Act, 2013.
Mergers and Amalgamations
6. The new law makes it easier for companies to go in for acquisitions, mergers and restructuring. The concept of takeovers is included in the new law. Section 232 recognizes demergers for the first time by mentioning 'division'. It also helps in mergers of the Indian companies with foreign companies and vice versa. These types of cross border mergers were not available under the Act of 1956. It is the Company Law Tribunal and not the High Court that has to sanction the scheme of amalgamation or division or takeover. At the same time, the new law disallows reverse merger of a listed company with an unlisted company. Under section 232, in case of a merger between the listed company and an unlisted company, the transferee-company shall remain unlisted after the merger. There can, therefore, be no possibility hereafter of backdoor listing through reverse mergers. The new law also has clear provisions to bar insider trading (section 195).
Role of Auditors
7. For the first time listed public companies are obliged to appoint Internal Auditors. Section 141 lays down conditions and qualifications for appointment as Auditors. The idea of Auditing Standard is now brought in by section 143. The Auditor has to comply with such Standard. There is a new provision (section 144) providing that the Auditor should not provide services like accounting and book keeping, internal audit, design and implementation of any financial information system, actuarial services, investment advisory services, etc. Stringent provisions have been made regarding the functioning and reporting by the Auditors. There is a limit of 20 companies which a person can audit. Annual returns must be signed by the Company Secretary in employment of the company and also by a Company Secretary in whole-time practice.
Class Action Suits
8. For the first time the Indian Company law recognizes the principle of class action suit. Sections 34, 35, 36 and 37 provide for the filing of a suit by any person, group of persons or any association of persons affected by any misleading statement or the inclusion or omission of any matter in the prospectus. Punishment is provided for fraudulently inducing persons to enter into agreements for subscribing to or under writing securities. The idea is borrowed from the American Law under which the class action provides a means by which, where a large group of persons are interested in a matter, one or more may sue or be sued as representatives of the class without need of every member of the class to join (Refer to Rule of Civil Procedure 23 in Black's Law Dictionary page 249). The new Act lays down a stringent regime for those accepting deposits from the public and also gives protection for whistle blowers. This will afford protection to small investors and make managements and promoters more accountable. It will put a check on the menace of vanishing companies and fly-by-night operators.
Conclusion
9. The Hon'ble Minister for Corporate Affairs is hopeful that the new law will promote transparency in business by tightening disclosure norms. It has provided for the establishment of the National Company Law Tribunal and the Company Law Appellate Tribunal. This should take away burdensome work from the High Court. A nagging thought will be that the new law has not bothered to take into account provisions in enactments like the Income-tax Act and the Foreign Exchange Management Acts. Much will depend on the way Rules and Notifications are drafted. The Government can justifiably claim that the new law would pave the way for a leaner and more contemporary law. It is necessary that at the end of the day companies are not made to feel what they have gained in the swings is lost in the round-abouts.
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CA SANJAY DEWAN
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