The government, on 16th March 2016, proposed the Companies (Amendment) Bill, 2016 in the Lok Sabha as per the recommendations of the Companies Law Committee (CLC). The Bill aims to ease the implementation of the existing Act of 2013 with the following suggestions:
- Modifications to major definitions: The bill, accepting the recommendation of the CLC, has suggested revamps to the definitions of associate company, subsidiary, joint venture, holding company, related party and financial year. As per the bill, for a subsidiary, the basis of deciding a subsidiary relationship would be ‘total voting power’, instead of the current ‘total share capital’ under the Section 2(87)(ii) of the Act of 2013. The bill also proposes to mandate the use of the Indian Accounting Standard 28 (Investment in Associates and Joint Ventures), while defining joint ventures.
- Regarding matters in the prospectus: Amending the Section 26(1) of the 2013 Act, the bill proposes to empower the SEBI to underline the contents in a company’s prospectus. This amendment aims to create a uniform system of disclosures in the prospectus, the regard to which can be made obligatory for all the companies.
- Appointment and qualification of Independent Directors: The Bill attempts to clear the air as regards the determination of those relationships, which may impact the independence of such a director. It suggests bringing in a test of materiality, on the basis of which such a determination can be made.
- Punishment for fraud: The bill proposes that instead of any fraud, only those frauds which involve at least a sum amounting to INR 10 lakh, or 1% of the total turnover of the company, shall be punishable under the Section 447. It further puts an additional proviso, stating that in a case where the fraud involves an amount less than the abovementioned limit and does not involve public interest, the punishment for such a fraud shall be imprisonment up to 5 years or with fine up to INR 20 lakh, or both.
- CSR: The bill proposes an amendment in the Section 135 of the current Act, which pertains to Corporate Social Responsibility. As per the bill, the eligibility criteria for determining the expenditure towards CSR should be calculated based on the immediately preceding financial year, thereby amending the current basis of the preceding three financial years.
The Bill, apart from the major changes listed above, suggests about 70 amendments to the Act of 2013. The major aim of the bill is to bring clarity to certain provisions, like the definition of holding companies, which have been debatable over the years. The Bill can be considered a welcome piece of legislation, as it will provide more clarity, uniformity and better implementation of the Act of 2013. These changes will go a long way in addressing the challenges faced by the companies from the current Act.