Companies (Amendment) Bill 2014

The Lok Sabha, the lower house of the Parliament, has passed the Companies (Amendment) Bill, 2014, which will make it easier for corporates to do business and to ensure severe punishment for illegal money pooling activities, among other things. The amendments have been proposed in order to address some concerns raised by stakeholders.

The major concerns raised by the stakeholders included protecting confidentiality of board resolutions, as well as the provision of auditors being required to report suspected frauds at the companies audited by them.

Under the new norms, frauds beyond a certain threshold would need to be mandatorily reported by the auditors to the government, while cases below this threshold will be reported to the audit committee of the company’s board.

Also, the corporates have been exempted from the need of obtaining approvals of shareholders in the case of related party transactions valued lower than Rs. 100 or 10 percent of net worth. As per the previous system, the companies with a paid up capital of Rs. 10 crore or more were required to get shareholders' nod through a special resolution in case of related party transactions. This paid-up capital criteria have also been scrapped.

Besides, another amendment exempts related party transactions between holding companies and wholly owned subsidiaries from the requirement of approval of non-related shareholders.

Moreover, loans given by a company to wholly-owned subsidiaries and guarantees/securities on loans taken from banks by subsidiaries have also been exempted from the purview of related party transactions.

Provision for writing off past losses/depreciation before declaring dividend for the year is also included. Besides, winding up cases will be heard by two-member bench instead of a three-member Bench.

Certain other provisions have also been watered down. For example, the requirement to have independent directors on boards of private companies or certain types of public limited companies. Typically, private companies and some types of public limited companies are not supposed to have an independent director.

At the moment, any company with a turnover of over Rs. 1,000 crore or a net worth of over Rs. 500 crore or net profit of over Rs. 5 crore during a financial year is mandated to form a CSR committee with at least one independent director. Under the proposed amendments, some public limited companies and private companies (which do not otherwise the requirement of having an independent director) may constitute such committee without the independent director also.

The softening of provisions is coming within nine months after the law came into (nearly) full force. The upper house of Parliament still has to clear the amendments.

Contributed by Shruti Agarwal