PROJECT REPORT

ON

AN INSIGHT INTO THE

COMPANIES (AMENDMENT) ACT, 2017

(As prescribed by the Institute of Company Secretaries of India)

SUBMITTED BY :

K.ANUPRIYA

REGISTRATION NUMBER : 340061587/02/2014

 CONTENTS

1. PREFACE………………………………………………………………………………….3

2. ACKNOWLEDGMENT…………………………………………………………………...4

3. INTRODUCTION………………………………………………………………………….5

4. BACKGROUND…………………………………………………………………………...6

5. DEFINITIONS……………………………………………………………………………..7

6. INCORPORATION OF COMPANY…………………………………………………….11

7. PROSPECTUS AND ALLOTMENT OF SECURITIES………………………………...13

8. PRIVATE PLACEMENT………………………………………………………………...14

9. SHARE CAPITAL AND DEBENTURES……………………………………………….16

10. ACCEPTANCE OF DEPOSITS BY COMPANIES……………………………………..17

11. REGISTRATION OF CHARGES………………………………………………………..18

12. BENEFICIAL OWNERSHIP…………………………………………………………….19

13. MANAGEMENT AND ADMINISTRATION…………………………………………...21

14. DECLARATION OF DIVIDEND………………………………………………………..24

15. ACCOUNTS OF COMPANIES………………………………………………………….25

16. AUDIT AND AUDITORS………………………………………………………………..29

17. APPOINTMENT AND QUALIFICATION OF DIRECTORS…………………………..30

18. MEETINGS OF BOARD AND ITS POWERS…………………………………………..37

19. RELATED PARTY TRANSACTIONS………………………………………………….41

20. APPOINTMENT AND REMUNERATION OF KEY MANAGERIAL PERSONNEL...43

21. MISCELLANEOUS………………………………………………………………………46

22. CONCLUSION…………………………………………………………………………...51

23. BIBLIOGRAPHY………………………………………………………………………...52
PREFACE

The Companies Act, 2013 (Act) was the legislative outcome of a process that had begun a
decade earlier. Desiring a simplified and compact law with flexible rule making powers for
'ever changing business models', the Central Government constituted the JJ Irani Expert
Committee on Company Law (Irani Committee). Unfortunately, the process from committee
report to enactment resulted in a rather voluminous statute with reams of rules, riddled with
drafting ambiguities and regulatory overlap. Consequently, numerous stakeholders reported
challenges in implementing the provisions of the Act. Despite an initial amendment and a
flurry of clarifications, orders and rules, the Central Government set up another committee,
the Companies Law Committee (CLC) in 2016 to see where 'the shoe pinches'.

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. In fact, since its enactment, more than 100 amendments have been made to
the 2013 Act.

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.

In India, the Companies Act regulates the incorporation of a company, responsibilities of a

company and its directors, and the dissolution of a company. The 2017 Amendment Act
consists of 93 amendments to the 2013 Companies Act, resulting in changes related to legal
definitions, corporate governance, and management compliance. It impacts different aspects
of business management in India, including key structuring, disclosure, and compliance
requirements. The new law is an important feature of the Modi government’s economic
reforms agenda, and aims to improve the ease of doing business in India. The Amendment
Act also irons out existing policy inconsistencies between financial regulatory mechanisms,
such as the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India
(RBI).

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ACKNOWLEDGMENT

I hereby express my profound gratitude and indebtedness to my guide Mr. Vinod

Surana, Advocate and CEO of Surana & Surana International Attorneys and Mr. Sanjay
Kumar Mehta, Advocate for their valuable guidance and encouragement in preparing
this project. I would also like to thank the Institute of Company Secretaries of India
(ICSI) for giving me an opportunity to do this project.

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INTRODUCTION

The enactment of the Companies Act, 2013 was one of the most significant legal reforms in
India in the recent past, aimed at bringing Indian company law in tune with global standards.
The 2013 Act had far reaching implications that significantly changed the manner in which
corporates operated in India. The Act introduced significant changes in the company law in
India, especially in relation to accountability, disclosures, investor protection and corporate
governance.

In view of the extent and scope of changes, the stakeholders took some time to come to terms
with the new regime with the new provisions and encountered some difficulties in the process.
Several representations were made to the Government on the practical difficulties faced
during implementation. Though a few immediate amendments were made in May, 2015 by
the Companies (Amendment) Act, 2015, the Government continued to receive representations
that the Act needed further review.

The 2017 Amendment Act addresses these difficulties in implementation and makes
significant changes to the Companies Act, 2013 which are aimed at ease of doing business,
easier corporate governance and stringent penal provisions for defaulting companies. The
underlying theme of the Amendment Act is to simplify the law, eliminate redundancies,
provide clarity for provisions which were considered ambiguous, address specific concerns of
stakeholders and rationalize penal provisions.

The amendments under the Companies (Amendment) Act, 2017, were guided by the
following principles:

 addressing difficulties in implementation owing to stringent compliance requirements;

 facilitating ease of doing business in order to promote growth with employment;
 harmonization with the Accounting Standards, the Securities and Exchange Board of India
Act, 1992 and the regulations made thereunder, and the Reserve Bank of India Act, 1934
and the regulations made thereunder;
 rectifying omissions and inconsistencies in the Act;
 Carrying out amendments in the provisions related to qualification and selection of
members of National Company Law Tribunal (‘NCLT’) and National Company Law
Appellate Tribunal (‘NCLAT’) in accordance with the Supreme Court’s directions.

The major amendments include simplification of the private placement process,

rationalization of provisions related to loan to directors, doing away with the requirement of
approval of the Central Government for managerial remuneration above prescribed limits,
aligning disclosure requirements in the prospectus with the regulations. These amendments
have been discussed in detail in the following chapters.

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BACKGROUND

The Ministry of Corporate Affairs constituted the Companies Law Committee (the ‘Committee’) under the
chairmanship of the Secretary, Ministry of Corporate Affairs vide an office order dated 4th June, 2015.

The CLC met for more than eight times between July, 2015 and January, 2016. The CLC invited suggestions
from the public on an online e-platform specifically created for this purpose, during the period 18th June, 2015
to 31st July, 2015.

Six groups were set up to review the suggestions received during the public consultation. Each group was
convened by a member of the CLC, and consisted of subject-matter experts, industry representatives, lawyers,
company secretaries, cost accountants, chartered accountants and investors’ representatives.

The Committee finally submitted its recommendations to the Central Government in the form of a report on
February 1, 2016.

In March 2016, the Government of India introduced Companies (Amendment) Bill, 2016 in the Lok Sabha to
amend Companies Act, 2013, (2013 Act), on the basis of recommendations of the report submitted by the
Companies Law Committee and based on comments received from various stakeholders.

The Bill was subsequently referred to the Parliamentary Standing Committee on Finance chaired by Dr. M
Veerappa Moily in April 2016, for further examination.

The Amendment Bill was tabled again in Lok Sabha and passed on 27 July 2017.

The Rajya Sabha also passed the Amendment Bill on 19 December 2017

The 2017 Amendment received the assent of the President of India on 3 January 2018.

As on date of this report, few provisions of the Amendment Act, 2017 have been notified and they came into
different dates such as 09th February 2018, 21st March 2018, 07th May 2018, 13th June 2018 and 05th July 2018.

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DEFINITIONS

ASSOCIATE COMPANY

The definition of associate company under Section 2(6) of the Companies Act, 2013 provided
for control of at least 20% of total share capital or control of or participation in business
decisions under an agreement in ascertaining whether a company exercises a significant
influence over another company. For this purpose, total share capital comprises the aggregate
of paid up equity share capital and convertible preference share capital. However, this
definition resulted in the following anomalies:

 The relationship may be decided merely based on the ownership of the convertible
preference share capital, which are in substance only loans. It will lead to treating the
voting shares on par with the non-voting shares.

 This definition is not in correspondence with Accounting Standards 23. According to AS-
23, it is 20% of voting power held by a company in another company that determines
significant influence. It leads to a situation where a company holding 20% of total share
capital comprising of non-voting shares (eg. preference shares) will be considered as an
associate company as per Companies Act, 2013 and not under AS 23.

 This definition also did not include the various innovative and complex ways by which a
company exercises control over the other.

Thus, to avoid the abovementioned discrepancies, the term ‘significant influence’ has been
amended to mean control of at least twenty per cent of the total voting power, or control of or
participation in taking business decisions under an agreement. Further, the term joint venture
has also been defined to make sure that this definition is consistent with definition of joint
venture in Accounting Standards 28. However, the term 'joint arrangement' used in the
definition of joint venture continues to be ambiguous.

It is common in companies with private equity infusion that some shareholders enjoy more
voting power vis-a-vis their holdings by virtue of agreements. For example, a person may be
holding 10% of total share capital but may be entitled to more than 20% or more than 50% of
total voting rights. In such cases, after amendment, the company will become an associate
company or subsidiary company of the investor company, as the case may be.

HOLDING COMPANY AND SUBSIDIARY COMPANY

Section 2(46) of the Act defined a holding company as a company of which such other
companies are subsidiary companies. Section 2(87) of the Act defines a subsidiary company,
and Explanation (c) to Section 2(87) clarifies that the expression company includes a ‘body

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corporate’. In the 2017 Amendment Act, an Explanation similar to Explanation (c) to Section
2(87) has been included in Section 2(46), so that a company incorporated outside India could
be considered to be the holding company of another company, for the purposes of the Act.

The intention behind this proposed amendment is to harmonize the provisions of Section
2(87) with Section 2(46) and to include a foreign holding company within the ambit of this
definition. This ensures that adequate disclosures are made when transactions are entered into
with overseas holding companies.

Section 2(87) of the Companies Act, 2013 defined the term 'subsidiary company' based on the
control over more than one-half of the total share capital as one of its grounds. This definition
results in the same issues and challenges pointed out in the definition of 'associate company'.
Hence, the relationship is now based on total voting power rather than on total share capital.

DEBENTURES

The definition of the term 'debenture' under the Companies Act, 2013 was vast and broad as it
included any other instrument of a company evidencing a debt. The inclusion of the above
phrase resulted in the inclusion of instruments such as commercial papers and other money
market instruments which were often used as an important short-term fund-raising source by
eligible companies; and were well regulated under RBI regulations.

The 2017 Amendment Act includes a proviso to the definition of debentures in Section 2(30)
to exclude the instruments referred to in Chapter III-D of the Reserve Bank of India Act, 1934
and other instruments as may be prescribed by the Central Government in consultation with
the Reserve Bank of India.

Exclusion of certain instruments from the definition of the term 'debentures' is consistent with
the amendment made to Rule 18 of the Companies (Share Capital and Debenture) Rules, 2014
in March 2015, whereby commercial papers and other similar instruments were excluded
from the purview of this definition as they were regulated by the RBI guidelines and
notifications. As a result of this amendment, companies raising short term funds will get their
much-needed relief as it would reduce their filing requirements.

FINANCIAL YEAR

Section 2(41) of the Companies Act, 2013 gave the National Company Law Tribunal, the
authority to allow a company or a body corporate, which is a subsidiary or a holding company
of a company incorporated outside India, to follow a different financial year

This benefit is now extended to associate companies as well. Associate company of a

company incorporated outside India are now allowed by the Amendment Act of 2017 to apply
to the Tribunal to follow a different financial year for the purpose of ease of convenience in
preparation of consolidated financial statements.
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 INTERESTED DIRECTOR

Section 2(49) of the Companies Act, 2013 that defined the term 'interested director' has been
omitted by the 2017 amendment due to its redundancy. Section 184(2), though does not
define interested director, lists the nature of interests to be disclosed by them and this
explanation in essence provides clarity. Further, the only reference to ‘interested director’ was
in Section 174(3), and an Explanation to that provision clarified that the meaning of the term
‘interested director’ would be the same as for the purposes of Section 184(2).

KEY MANAGERIAL PERSONNEL

Section 2(51) of the Companies Act, 2013 limited the number of persons who were eligible to
be designated as key managerial personnel of the Company. The Companies Law Committee
was of the view that flexibility must be granted to the Companies to decide as to who can be
designated as the KMP of a Company. The 2017 Amendment Act now grants such flexibility.
The Board of directors can now appoint such officer not more than one level below the
director who is in whole time employment as the KMP of the Company.

It is a fact that the stakeholders and the Board of Directors look towards certain KMP for
formulation and execution of policies as observed by the J.J. Irani report on Company Law.
However, currently, very few persons, limited to top management, were entitled to be
designated as KMPs. This amendment is expected to bring more ease in doing business by
giving flexibility to the Board of Directors to designate other personnel in whole time
employment as KMPs.

NET WORTH

Section 2(57) of the Act defines the term 'net worth', and specifies various amounts that are to
be taken into consideration while calculating it. The net worth of a company must reflect its
intrinsic value. Hence, the Amendment Act of 2017 has included the debit or credit balance of
the profit and loss account in the computation of net worth of a Company.

SMALL COMPANY

The 2017 Amendment Act has increased the following thresholds which can be prescribed for
the purpose of determining a company as a small company :

 Paid up share capital has been increased from INR 5 crore to INR 10 crore;
 Turnover for the immediately preceding financial year has been increased from INR 20
crore to INR 100 crore.

Small companies get some benefit in terms of lower compliance requirements and this
amendment would result in many companies meeting the definition of a small company.

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 TURNOVER

Section 2(91) of the 2013 Act defined the term 'turnover' to mean the aggregate value of the
realization from the sale, supply or distribution of goods, or on account of services rendered,
or both, by the company, during a financial year. This definition does not provide clarity on
whether the indirect taxes such as Goods and Services Tax or excise duty will be included in
or excluded from turnover. The definition was tagged to gross amount realized from the
customer rather than the amount recognized in the financial statements.

The Company Law Committee Report suggested that excise duty and other taxes to be
specifically excluded from the purview of this term as a company collects these indirect taxes
on behalf of the Government and therefore, must be excluded from revenue. Thus the 2017
Amendment Act has substituted the definition of the term turnover to read as follows:
'Turnover' means the gross amount of revenue recognized in the profit and loss account from
the sale, supply or distribution of goods or on account of services rendered, or both, by the
company during a financial year.

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INCORPORATION OF COMPANY

The Government of India in order to achieve its motive of ‘Ease of Doing Business’ and to
boost the industrial sector and start ups decided to revisit the Companies Act, 2013 and thus,
constituted the Company Law Committee. Accordingly, the Company Law Committee in its
report, proposed amendments to be made to the provisions relating to incorporation of
companies for the purpose of carrying forward the spirit of enhancing business growth and
development.

These amendments have been proposed to make the process of incorporation simpler and
provide greater flexibility for carrying out business. Accordingly, the major highlight of the
changes in Incorporation chapter of the Companies Act, 2013 is as enumerated below.

REDUCTION IN NUMBER OF MEMBERS BELOW STATUTORY MINIMUM

Section 3A has been inserted in the Companies Act 2013 by means of the 2017 Amendment
Act. This insertion provides for the liability of the certain members when the number of
members fall below the statutory minimum and continues to carry on business for more than
six months. In such cases, those members of the Company during the time it carries on
business after those six months and is well aware of the fact that the number of members have
fallen below the statutory minimum, will be severally liable for payment of debts contracted
by the Company during such period and may be severally sued.

Section 3(1) of the 2013 Act provides for the minimum number of persons required for
formation of a company. However, the minimum number of persons required for continuation
of a company after it is formed and legal consequences of number of members falling below
the minimum number is not provided in the Act. The Committee felt that suitable provisions
should be made to provide for consequences of number of members falling below the
prescribed minimum Similar provision was there in Section 45 of the 1956 Act.

TIME LIMIT FOR NAME RESERVATION FOR INCORPORATION OF

COMPANY

The Amendment Act of 2017 reduced the period of reservation of name in Section 4(5) of the
2013 Act from 60 days from the date of application to 20 days from date of approval in case
of incorporation of a new company. However, in case of name change of an existing
company, the name is reserved for a period of 60 days from the date of approval. The Central
Registration Centre (CRC) was constituted by the MCA vide notification dated 22nd January
2016, to establish a faster communication channel for name reservation. Thus, the period for
name reservation was reduced. This reduction in the period of reservation is intended to bring
about efficiency in the system, reduce misuse, to speed up the process and to weed out the
non-serious applicants in the early stage.

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 AFFIDAVITS REPLACED BY DECLARATIONS

Section 7(1)(c) now requires the subscribers to the memorandum of association and the first
directors to give a declaration instead of an affidavit in Form INC-9 that he is not convicted of
any offence, or that he has not been found guilty of any fraud or misfeasance or of any breach
of duty to any company under this Act or the previous Act and that all the documents filed
with the Registrar are correct, complete and true. A self declaration makes the process much
easier than obtaining an affidavit.

The Company Law Committee felt that the requirements with respect to affidavits could be
replaced with self-declarations to reduce additional documentation burden and to prevent the
delay in incorporation of the company.

REGISTERED OFFICE OF COMPANY

Two amendments were brought in Section 12 of the 2013 Act:

 The company shall within 30 days of its incorporation have registered office instead of the
earlier requirement to have registered office on and from the fifteenth day of its
incorporation. Prior to the amendment, the interpretation of erstwhile Section 12(1) of the
Act was such that it would not allow a company to have its registered office immediately
on incorporation, or earlier than the fifteenth day of its incorporation, whereas a company
could have its office from the day of its incorporation.

 Further, the notice of every change of the situation of the registered office has to be filed
with the Registrar within 30 days of the change instead of 15 days. The Company Law
Committee felt that the time period for notifying change of office is short, especially when
various approvals are required and hence the time period was extended.

AUTHENTICATION OF DOCUMENTS, PROCEEDINGS AND CONTRACTS

Apart from Key Managerial Personnel and any officer of a Company, Section 21 now permits
an employee of the Company, duly authorised by the Board, to authenticate documents,
proceedings and contracts on behalf of the Company.

The Company Law Committee opined that since the definition of 'officer' under Section 2(59)
included top level management persons in a company, it would be practically very difficult
for only such top level persons to sign the documents, without providing for any other
employee to sign, even with a board resolution. The Committee noted that since any
authorization for employees would be backed by a board resolution, it would be expected of
the Board to exercise due care while authorizing any such employee. This amendment is
likely to bring substantial flexibility in conducting business operations and an ease in doing
business.

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PROSPECTUS AND ALLOTMENT OF SECURITIES

MATTERS TO BE STATED IN THE PROSPECTUS

The Amendment Act 2017 empowers the Securities and Exchange Board of India (SEBI) to
prescribe the contents of a prospectus in consultation with the Central Government.
Accordingly, a public company is not required to provide the detailed list of contents as stated
in clause (a), (b) and (d) of section 26(1) of the Companies Act, 2013 and these clauses have
been omitted by the 2017 Amendment Act.

The Company Law Committee noted that SEBI is in the process of simplifying the contents of
the prospectus/offer document by amending the provisions of SEBI (ICDR) Regulations,
2009 so as to reduce the volume of disclosures since these offer documents were becoming
too long, too detailed, and repetitive as also too difficult to understand. This amendment is
aimed at harmonizing the provisions with SEBI requirement and to avoid a regulatory
overlap.

CIVIL LIABILITY FOR MIS-STATEMENTS IN PROSPECTUS

Section 35 of the 2013 Act prescribed that in case a person subscribes for securities of a
company acting on any statement included, or omission of any matter, in the prospectus
which is misleading and as a consequence, has sustained any loss or damage, the directors,
promoters and experts were held liable. However, a person will not be held liable if he/she
proves that:
 he withdrew his consent before the issue of the prospectus, and that it was issued without
his authority or consent; or
 that the prospectus was issued without his knowledge or consent, and a reasonable public
notice was issued on becoming aware of the issue.

The Amendment Act of 2017 adds a new provision which states that a person would not be
held liable with respect to a misleading statement purported to be made by an expert or
contained in what purports to be a copy of or an extract from a report or valuation of an
expert, subject to the following:
 he had reasonable ground to believe and did up to the time of the issue of the prospectus
believe, that the person making the statement was competent to make it; and
 the expert had given the consent required by section 26(5) to the issue of the prospectus
and had not withdrawn that consent before delivery of a copy of the prospectus for
registration or, to the defendant's knowledge, before allotment.

The purpose of the amendment is to provide immunity to directors and promoters when they
have relied on expert opinion and it would be appropriate to hold experts liable for statements
prepared by them.

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PRIVATE PLACEMENT

Section 42 of the Companies Act, 2013 read with section 62, laid down the framework for
private placement of securities. This section has been completely replaced by the 2017
Amendment Act as the requirements and procedures under the old section were cumbersome,
time consuming, requiring elaborate, sensitive and significant disclosure. The Amendment has
made significant changes in the law relating to private placement and make it unquestionable
so as to prevent the malpractices taking place in the companies. The amendment has the made
the procedure for private placement more structured, transparent and time-oriented. However,
the new section is yet to be notified by the Central Government. The significant changes
include:

1. Change in the marginal heading of Section 42: Erstwhile Section 42 dealt with ‘Offer
or invitation for subscription of securities on private placement’. Substituted section 42
has been titled as ‘Issue of shares on private placement basis’. This leads to a general
perception that revised Section 42 shall not apply to issue of non-convertible debentures
on a private placement basis. Though the marginal note refers to issue of shares, the
meaning of private placement clearly refers to ‘securities’. It cannot be interpreted that
‘securities’ referred in Section 42 refers to the expression, ‘shares or other securities’
explained in Rule 13 of Companies (Share Capital and Debentures) Rules, 2014.

The Company Law Committee in its report recommended that since Non-Convertible
Debentures are pure borrowings and do not form part of equity capital, the proviso to
Rule 14(2)(a) may be amended to prescribe that the relevant board resolution under
Section 179(3)(c) would be adequate in case the offer under Section 42 is for debentures
up to the borrowing limits permissible for Board under section 180(1)(c) of the Act. This
would also align the requirements with that of section 180(1)(c). It was, however, felt that
the said Board resolution should clearly mention that the offer of debentures being
approved by Board is through private placement under Section 42 and certain other
minimum details as may be prescribed in the rules be provided in the Board resolution.
Private companies (who have been given exemption from Section 117(3)(g) through
section 462 notification) should either be required to file board resolutions under Section
179(3)(c) or pass a special resolution. The intent was only to exempt the requirement of
seeking shareholder's sanction if the company has already obtained approval of the
shareholders under Section 180(1)(c). Apart from this, compliance of entire section is
required.

2. Multiple offers can be made: The companies would be allowed to make offer of multiple
security instruments simultaneously. It was pointed out that companies might be required
to simultaneously issue, different forms of instruments, such as preference shares or non-
convertible debentures, for meeting their financial requirements.

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 The Committee recommended that, subject to the limit on the number of persons to whom
the offer of securities can be made, a company could, at the same time keep open more
than one issue of securities (that is, of equity share or preference share or debenture) in a
year to such classes of investors as may be prescribed by Rules in order to provide greater
flexibility in raising capital/loans while not compromising on regulatory concerns.

3. Person to whom offer to be made: The board of directors are to identify the select group
of persons to whom the private placement is to be made. The earlier Section 42 did not
specifically state that private placement should be only to ‘identified persons’ though it
was implied in earlier section 42(7). However, it has now been expressly stated.

4. Right to renunciation: The private placement offer letter and application form shall not
carry any right of renunciation, which means that when a particular person denies or
rejects to subscribe shares, he cannot transfer the right to subscribe shares to another
person. It was observed by the Committee that renunciation of rights was being used as a
way to bypass the provisions of preferential allotment. Hence, it is proposed that only the
person in whose name the offer letter is issued can apply for subscription.

5. Contents of private placement offer letter: The Private Placement process has been
simplified by doing away with separate offer letter details to be kept by company and
reducing number of filings to Registrar. In order to ensure that investor gets adequate
information about the company which is making private placement, the disclosures made
under Explanatory Statement referred to in Rule 13(2)(d) of Companies (Share Capital
and Debenture) Rules, 2014, is proposed to be embodied in the Private Placement
Application Form. There would be ease in the private placement offer related
documentation to enable quick access to funds

6. Time limit for allotment of securities: When a company makes allotment of securities
under the private placement route, it should file the return of allotment in Form PAS-3
within 15 days of allotment instead of 30 days. In case the company defaults in filing the
return of allotment within the time period prescribed above, the company, its promoters,
and directors shall be liable to a penalty for each default of one thousand rupees for each
day during which such default continues but not exceeding twenty-five lakh rupees.

7. Utilization of allotment money: The company will not be allowed to utilise the money
raised through private placement unless allotment has been made and return of allotment
in Form PAS-3 has been filed with the Registrar.

8. Filing of forms with the MCA: The requirement to file Form PAS-4 and Form PAS-5 in
E-Form GNL-2 within thirty days of circulation of the offer letter has been done away
with. The norms have been made strict to ensure that Form PAS-3 is filed within thirty
days of allotment as the underlying objective is to ensure that the entire process of
allotment is completed within 90 days.

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SHARE CAPITAL AND DEBENTURES

RELAXATION OF PROHIBITION ON ISSUE OF SHARES AT DISCOUNT

Companies are now allowed to issue shares at a discount to its creditors when its debts is
converted into shares in pursuance of any statutory resolution plan or debt restructuring
scheme in accordance with any guidelines or directions or regulations specified by Reserve
Bank of India under the Banking (Regulation) Act, 1949 or the Reserve Bank of India Act,
1949.

Earlier, issue of shares at discounted price were prohibited and any such shares issues by the
company was void. For financially distressed companies where the lenders have triggered the
insolvency and bankruptcy proceedings or some other restructuring mechanism, the book
value of the company is typically lower than the face value of the shares of the Company
owing to accumulated losses incurred by the Company. In such a situation, if the conversion
of debt into equity shares is only at face value, then this would to a breach of the borrowing
company's contractual commitment which pertains to conversion of debt at the lowest
possible price. This condition is found in most financing documents but due to Section 53, the
commercial objective between the parties failed to be met.

The purpose of this amendment was to overcome the above-mentioned shortcoming and to
enable restructuring of a distressed company. It would address the concern that when a
company goes into insolvency and its equity value is eroded and it is not a viable proposition
to convert loan into shares at face value. The amendment to section 53 is meant to address the
gap between the Companies Act and the Insolvency and Bankruptcy Code.

Further the term 'discounted price' has been replaced with the term 'discount' to remove
ambiguity, as the Company Law Committee opined that the term 'discounted price' could be
misinterpreted to mean a price lower than the market value of shares, and not lower than its
nominal value, as intended in section 53 of the Companies Act, 2013.

ISSUE OF SWEAT EQUITY SHARES

Section 54 of the Companies Act, 2013 was amended to omit the requirement of completion
of one year time period from the date of commencement of business as a condition to issue
sweat equity shares. After the amendment, sweat equity shares may be issued at any time after
registration of the Company without requiring to wait for one year. This is an enabling
provision for startups as it gives the Company the option to issue shares to its employees
instead of cash benefits. It also aids in bringing a sense of ownership among the employees
and in attracting talent. However, this poses a major risk for startups by reducing the period
within which employees are granted sweat equity shares and dilutes the ownership of such
startup companies which may always not be favorable.

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ACCEPTANCE OF DEPOSITS BY COMPANIES

INCREASE IN AMOUNT TO BE DEPOSITED IN DEPOSIT REPAYMENT

RESERVE ACCOUNT

The requirement to deposit 15 per cent of the amount of deposits maturing during the current
and next financial year in a separate account in a scheduled bank known as the deposit
repayment reserve account has been increased to 20 per cent of the amount of deposits
maturing during the current financial year only. There is no need to deposit any amount in
respect of deposits maturing in the next financial year.

The purpose of the provision is to safeguard the interest of the depositors. The Company Law
Committee observed that under the earlier provisions, it resulted in additional cash flow
burden on the Company which would increase the cost of borrowing for the company as well
as lock-up a high percentage of the borrowed sums. Also, the Act now prescribes the time
limit within which the deposit has to be made, that is, on or before the 30 th day of April each
year. However, this amendment is yet to be notified by the Central Government.

OMISSION OF REQUIREMENT OF DEPOSIT INSURANCE

Section 73(2)(d) of the Companies Act, 2013 mandated a Company accepting deposits to
provide for deposit insurance. However, this requirement was deferred every year to the end
of the financial year or till such time deposit insurance was made available, whichever is
earlier. However, according to the Department of Financial Services (DFS), no insurance
companies were providing such products as they found it difficult to assess the difficulty,
liability and risk associated with deposit insurance as companies are not as tightly regulated as
banks with particular reference to their financial efficiency and delivery of commitments.
Hence, the requirement of deposit insurance has been omitted.

IMPACT OF DEFAULTS COMMITTED IN THE PAST

Section 73(2)(e) of the Companies Act, 2013 required a certification from the company that
no default has been committed in the repayment of deposits, accepted earlier, or the payment
of interest on such deposits before accepting any new deposits. This requirement covers all
past default without any time limit. The Companies Law Committee observed that this
requirement was harsh on companies which might have defaulted due to reasons beyond their
control, such as industry conditions in the past, but repaid such deposits with earnest efforts
thereafter By virtue of the 2017 amendment, companies which had defaulted can now accept
deposits after a period of five years from the date of making good the default after providing a
full disclosure of the past defaults. Acceptance of deposits after a cooling period of five years
will help the genuine companies to raise deposits.

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REGISTRATION OF CHARGES

EXEMPTION TO REGISTER CERTAIN CHARGES

The Companies Act, 1956 provided for a specific list of charges which had to be mandatorily
registered. However, the 2013 did not have any such list. In the absence of such a list, the
definition of the term 'charge' has widened and pledges and liens were also required to be
registered, which were exempted under the 1956 Act.

It was stated before the Committee that registration of pledges and liens created various
practical difficulties, relating to the quantum and frequency of registrations required,
particularly for NBFCs and Clearing Corporations. Therefore, Section 77 was amended to
exempt the registration of certain charges and such charges are proposed to be prescribed by
the Central Government in consultation with the Reserve Bank of India. A negative list is
expected to be provide by the Central Government soon, listing the specific charges that does
not require registration. This might exclude registration of charges once again for pledges, etc.
as was there in the erstwhile Companies Act, 2013.

APPLICATION FOR REGISTRATION OF CHARGES

According to Section 78 of the Companies Act, 2013, the charge holder can only register the
charge only in case the company fails to do so within the period specified under Section 77,
which was understood to be three hundred days.

However, Section 78 was amended to allow the person in whose favour the charge has been
created to file the charge on the expiry of thirty days from the creation of charge where a
company fails to do so. This change is clarificatory in nature.

SATISFACTION OF CHARGES

Under Section 82 of the Companies Act, 2013, a company was required to intimate to the
Registrar of the payment or satisfaction of charge within a period of thirty days from the date
of payment or satisfaction of the charge. Under Section 77 of the 2013 Act, the Registrar has
the power to grant extension of time upto three hundred days of creation of charges, for
registration of charges.

However, power to grant extension of time was not given to the Registrar in case of
satisfaction of charges. The Committee felt that there was a need to synchronize both the time
periods. The Committee felt that, as it would generally be in a company’s interest to report
satisfaction of charges, there should not be any regulatory concern in allowing similar
timelines as allowed for registering a charge. Accordingly, a proviso was inserted in Section
82(1) to vest with the Registrar the power to grant extension of time upto three hundred days
from the payment or satisfaction for intimating the satisfaction of charges.

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BENEFICIAL OWNERSHIP

RETURN OF BENEFICIAL INTEREST DECLARATION

Section 89 of the Companies Act, 2013 allowed the return of beneficial interest declaration to
be filed on payment of additional fee within 270 days from the date by which the return
should have been filed. Under the 2017 Amendment Act, the time limit of 270 days have been
done away with and the return can be filed at any time on payment of prescribed additional
fees.

DEFINITION OF BENEFICIAL INTEREST

Section 89 of the 2013 Act required certain disclosures to be made by the person having
‘beneficial interest’. In the absence of the definition of the definition of the term ‘beneficial
interest’, it was not possible to implement this section effectively and there was no mandate to
maintain a separate register for beneficial ownership. Section 89 after the 2017 amendment
includes a definition of beneficial interest, which is an inclusive definition. Definition of the
term ‘beneficial interest’ in shares, is now linked to the right or entitlement of a person to
exercise rights attached to shares or to participate or receive the dividend or other
distributions relating to shares.

REGISTER OF SIGNIFICANT BENEFICIAL OWNERS IN A COMPANY

Section 90 has been substituted by the 2017 Amendment Act that requires all individuals
holding, either individually or through one or more persons or trust, beneficial interest of
more than 25 per cent in the shares of a company or the right to exercise or the actual
exercising of significant influence or control over a company, to make a declaration to the
company about such beneficial interests. It further requires companies to maintain a register
of such beneficial interest and keep such register open for inspection by any member.
Companies will also be required to file a return of significant beneficial owners of the
company. Companies and officers of the company not complying with these requirements are
strictly penalized.

INVESTIGATION OF SIGNIFICANT BENEFICIAL OWNERSHIP

Obligation is cast upon the company under Section 90 to give notice and obtain information
from any person whom the company knows or has reasonable cause to believe to be a
significant beneficial owner of the Company and is not registered as such with the Company.
In case information asked is not provided, the Company shall apply to the Tribunal for an
order directing that the shares in question be subject to restrictions with regard to transfer of
interest, suspension of all rights attached to the shares. The objective is to ensure the

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 appropriate identification of actual beneficial ownership to safeguard the misuse of corporate
entities for the purpose of tax evasion, money laundering, corrupt or other illegal purposes.

Obligations and liabilities of an individual Significant Beneficial Owner:

i) Every individual who is a Significant Beneficial Owner in relation to a company is

required to declare his beneficial interest to the company, however, the Central
Government is empowered to exempt certain class of person from making such
declaration.

ii) It will be interesting to see whether the exemption provided under extant section 89 to a
trust which is created, to set up a mutual fund or venture capital fund or such other fund as
may be approved by the Securities and Exchange Board of India, will be made available
for section 90 as well.

iii) Failure by an individual who is a Significant Beneficial Owner to make a declaration as

required above will result into fine which shall not be less than Rs. 1 Lakh but which may
extend to Rs. 10 Lakh and where the failure is a continuing one, with a further fine which
may extend to Rs. 1,000 for every day after the first during which the failure continues;

Further, if any person willfully furnishes any false or incorrect information or suppresses
any material information of which he is aware in the declaration made under this section, he
shall be liable to action under section 447, which attracts penalty for commission of fraud.

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MANAGEMENT AND ADMINISTRATION

ANNUAL RETURN

Section 92(3) mandates the filing of an extract of the annual return as a part of the Board’s
report. This requirement is leading to duplication of information being reported to the
shareholders. To avoid the duplication and reduce the burden on the companies, the 2017
Amendment Act has made significant changes in the reporting requirements of the annual
return:

 Omission of the requirement to disclose indebtedness of the company and names,

addresses, countries of incorporation, etc. of the Foreign Institutional Investors.
 The Central Government may prescribe an abridged version of annual return for One
Person Company, small company and such other class or classes of companies as may be
prescribed.
 The requirement to include extract of annual return in the Board's Report has now been
replaced with the need to upload the copy of the annual return on the website of the
Company, if any and only the link must be disclosed in the Board's Report. However, no
clarity has been provided for those companies without websites.
 Time limit of 270 days within which the annual return could be filed on payment of
additional fees has been done away with (Section 121). They can file the annual return
any time on payment of prescribed additional fee (i.e., Rs. 100 for every day of default).

NO RETURN TO BE FILED IN CASE PROMOTERS' STAKE CHANGES

Section 93 of the 2013 Act required listed company to file a return with the Registrar, in a
prescribed form with respect to changes in the number of shares held by promoters, and top
ten shareholders. This information was also required to be filed with Stock Exchanges/SEBI,
and thus led to duplication of reporting. Moreover, required filings under the 2013 provisions
were cumbersome as changes in individual holding, and not the changes that are linked to the
paid up share capital were to be informed. This has led to an increase in the amount of filings
being made under the Act. Hence, this requirement has been omitted.

PLACE FOR KEEPING REGISTERS AND RETURNS OF THE COMPANY

The proviso to Section 94(1) deals with the place of keeping and inspection of registers,
returns, etc. at any place in India other than the registered office of a company. The
requirement of filing special resolution in advance with the Registrar for keeping of the
registers and returns at a place other than the registered office of the company has been
omitted. The Committee recommended that this requirement be omitted, since it did not serve
any purpose, particularly because the special resolution passed after changing the place was in
any case to be filed as per the requirements of Section 117(3)(a).

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Further, Section 94(3) allowed any member, debenture-holder, other security holder or
beneficial owner or any other person to take extracts or copies from any register (or the
entries therein), or index or return. The register of members contained various personal details
of shareholders, like their PAN card details, E-Mail ID, address of members, which ought not
to be used for commercial purposes. The Committee suggested that such personal
information, as may be prescribed in the Rules, should not be made available publicly.
Accordingly, the Amendment Act 2017 inserted a proviso to that effect.

HOLDING OF ANNUAL GENERAL MEETING

Section 96(2) of the 2013 Act required holding of Annual General Meeting (AGM) at the
registered office of the company or at some other place within the city, town or village in
which the registered office of the company is situate. Section 96 has been amended to allow
unlisted companies to hold AGM in any place in India, if consent is received from all
members in advance. The underlying objective of this amendment is to bring about ease of
doing business.

HOLDING OF EXTRAORDINARY GENERAL MEETING

Section 100 of the 2013 Act deals with calling of extraordinary general meeting of the
Company. The explanation to Rule 18(3) requires that an EGM shall be held only in India.
The 2017 Amendment Act has included a proviso to Section 100(1) to provide relaxation to
wholly owned subsidiaries of companies incorporated outside India to hold their EGM outside
India. However, a company other than wholly owned subsidiary of a company incorporated
outside India must hold their EGM within India only.

NOTICE OF MEETING

The proviso to Section 101 (1) of the 2013 Act allowed for convening of general meeting of a
company by giving a shorter notice than the required twenty-one days, provided that consent is
given by not less than ninety-five percent of the members entitled to vote at such a meeting.
Private companies have been given flexibility to make suitable provisions through their AOA.
The Committee was of the opinion that obtaining the approval of ninety-five percent members
entitled to vote at a meeting, especially at a short notice, could be difficult.

The 2017 Amendment Act now provides separate criteria for Annual General Meetings and other
General Meetings:

 In case of an AGM, consent of 95 per cent of the members entitled to vote needs to be
obtained.

 In case of other General Meetings, if the company has a share capital, consent of majority in
number of members entitled to vote and who represent not less than 95 per cent. of such part

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 of the paid-up share capital with voting rights needs to be obtained and in case of a company
not having share capital, consent of not less than 95 per cent. of the total voting power.

Where any member of a company is entitled to vote only on some resolution or resolutions to be
moved at a meeting and not on the others, then his vote with respect to shorter notice shall only
be counted for the purpose of the resolution on which he can vote.

The amendment to Section 101 essentially restores similar provisions prescribed under 1956 Act.
Further, this considers both number of members as well as the proportion of paid up share capital
held by the members. Also, the Committee opined that the requirement of 95 per cent of the
voting power to be applicable in the case of EGM only as obtaining 95 per cent of members is
difficult and EGMs are conducted for urgent and special business that requires quick action.

POSTAL BALLOT

Section 110(1)(a) provided for mandatorily transacting certain items through postal ballot. The
mandatory requirement of a postal ballot was no longer relevant for companies which are
required to conduct voting using electronic means, as this mode equally provides for that no
shareholder is deprived of his right to vote on resolutions in case he cannot attend the
AGM/general meeting. This irrelevant requirement to transact business through postal ballot has
been done away with by the 2017 Amendment Act.

The 2017 Amendment Act amended Section 110 by permitting companies which are required to
conduct voting using electronic means, to transact certain items in general meetings, which were
earlier required to be mandatorily transacted through postal ballot.

RESOLUTIONS AND AGREEMENTS TO BE FILED

The 2017 Amendment Act has amended Section 117 as follows:

 Banking companies have been exempted from filing resolutions passed to grant loans, give
guarantees or provide security relating to certain transactions in the ordinary course of its
business. Such an exemption has been granted as information provided by banks may violate
their confidentiality obligations towards their customers.

 The sub-section pertaining to filing of resolutions which accord consent for sale of an
undertaking and borrowings above specified limits has been omitted. This requirement to file
this resolution was already covered by Section 117(3)(a) itself and it was redundant to
include it again under section 117(3)(e).

 Time limit of 270 days within which resolutions and agreements could be filed on payment
of additional fee has been done away with. A company can now file resolutions and
agreements with the Registrar at any time on payment of prescribed additional fee.

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DECLARATION OF DIVIDEND

COMPUTATION OF PROFITS

The 2017 Amendment Act clarifies that for the purpose of computation of profits of the
Company for the purpose of declaration and payment of dividend any amount representing
unrealized gains, notional gains or revaluation of assets and any changes in carrying amount
of an asset or of a liability on measurement of the asset or the liability at fair value should be
excluded.

The wording used in Section 123 of the Companies Act, 2013, prior to amendment suggested
that compliance with respective rules was required only when dividend was declared out of
amounts already transferred to reserves. Since surplus in the Profit & Loss account is also a
free reserve and does not represent an amount transferred to reserves, it was not clear whether
a company will be required to comply with the respective rules when it declares dividend out
of the surplus in the Profit & Loss Account. The 2017 Amendment Act clears this ambiguity.

In the case of inadequate or absence of profits, dividend can be declared out of accumulated
profits earned by the company in previous years and transferred by the company to free
reserves (instead of reserves). This ensures that companies will have freedom of utilizing the
balance standing in the Profit and Loss Account (and not transferred to reserves) for payment
of dividend in case of inadequacy of profit in a year.

INTERIM DIVIDEND

Companies were facing issues with respect to interpretation of the provisions related to
interim dividend. The ambiguity related to whether interim dividend for a particular financial
year could only be declared during that particular financial year period, thus, restricting the
ability of companies to declare interim dividend after the close of the financial year, but
before the AGM. The provisions relating to interim dividend have also been amended as
follows:
 The Board of Directors of a company may declare interim dividend during any financial
year or at any time during the period from closure of financial year till holding of the
annual general meeting out of the surplus in the profit and loss account or out of profits of
the financial year for which such interim dividend is sought to be declared or out of profits
generated in the financial year till the quarter preceding the date of declaration of the
interim dividend.

 In case the company has incurred loss during the current financial year up to the end of the
quarter immediately preceding the date of declaration of interim dividend, such interim
dividend shall not be declared at a rate higher than the average dividends declared by the
company during immediately preceding three financial years.

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ACCOUNTS OF COMPANIES

CONSOLIDATED FINANCIAL STATEMENTS

Section 129(3) of the Act required a company having a subsidiary, a joint venture, or an
associate company, to prepare a ‘Consolidated Financial Statement’, in addition to its stand-
alone financial statements. An explanation to Section 129(3) provided that for the purposes of
this sub-section, the word subsidiary shall include associate company, and joint venture. Since
this explanation was not clear, it was deleted. The section has been amended to provide for
consolidation of the accounts of associate companies in addition to its subsidiaries in the same
form and manner as that of its own in accordance with applicable accounting standards. The
company is also required to attach along with its financial statement, a separate statement
containing the salient features of the subsidiary and associate companies.

RE-OPENING OF ACCOUNTS ON COURT’S OR TRIBUNAL’S ORDER

Section 130 of the Act provides for the re-opening of accounts, after due approval from a
court or a Tribunal.

 The Proviso to Section 130(1) provides that the court or the Tribunal shall give notice to
the Central Government, the Income-tax authorities, SEBI or any other statutory
regulatory body or authority concerned and shall take into consideration any
representations made by them before passing any order under this Section. It was
suggested that other concerned parties, like a company or the Auditor/Chartered
Accountant of the company should also be given an opportunity to present their point of
view. Accordingly, the amended Section 130(1) provides that any other concerned person,
in addition to authorities already specified, shall be given notice before passing an order
for re-opening of accounts and the court or the Tribunal shall also take into consideration
the representations made by the other person.

 Section 130 of the Act did not specify any limit on the period for which the accounts can
be re-opened. It was pointed out that it would be a heavy burden on companies if they
have to maintain their accounts forever, or beyond a reasonable time limit because of this
provision of re-opening of accounts. The Committee noted that Section 128 of the Act
required a company to keep its accounts for a minimum period of eight years, unless a
direction was issued under a proviso to Section 128(5) by the Central Government. Thus,
amendment was made to Section130 to allow the re-opening of accounts to be restricted to
eight years, unless a longer period is required through a specific direction issued by
Central Government, under Section 128(5).
This will ensure the aligning of the provision of re-opening of accounts with the
provisions relating maintenance or preservation of records.

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 FINANCIAL STATEMENTS AND BOARD’S REPORT

The following are the major amendments made to Section 134 of the Companies Act, 2013:

 Financial statements (including consolidated financial statements) can now be signed by

the Chief Executive Officer (‘CEO’), even if he is not a director. Earlier, CEO was
required to sign only if he was acting as a director. The underlying objective was that, in
case a company did not have a managing director, the Chief Executive Officer,
irrespective of whether he was a director or not, being a KMP, was responsible for the
overall management of the company and thus, was mandated to sign the financial
statements.

 In case of Board report, those disclosures which have been provided in the financial
statement shall not be required to be reproduced in the report again.

 In place of extract of the annual return, only the web address, if any, where annual return
has been placed shall be mentioned

 Instead of exact text of the policies, key feature of policies along with its web link shall be
disclosed in Board report.

 Changes that reflect that the need for self-evaluation by the Board has been removed.

These amendments are targeted at ensuring that there are no repetitive disclosures, remove
redundancies and reduce the length of Board’s Report as it was becoming expensive to collate
all the information and produce them.

CORPORATE SOCIAL RESPONSIBILITY

The 2017 Amendment has addressed various practical issues that were arising in the
implementation of CSR related requirements. The major amendments to Section 135 is as
follows:

 Companies which are not required to appoint Independent Directors shall constitute CSR
committees to have two or more directors in such cases.

 Section 135 (1) requires every company having a net worth of Rupees Five Hundred
Crore or more; or a turnover of Rupees One Thousand Crore or more; or a net profit of
Rupees Five Crore or more, during any financial year, to constitute a CSR Committee. It
was not clear as to whether any financial year refers to current financial year or

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 immediately preceding financial year. The ambiguity with respect to the words ‘any
financial year’ has been removed and replaced with the words ‘preceding financial year’.

 The Explanation below Section 135(5) provides that for the purpose of this provision, the
‘average net profit’ shall be calculated in accordance with Section 198. The term ‘average
net profit’ in section 135(5) has been replaced with the words ‘net profit’, to remove any
ambiguity.

 The Central Government has been empowered to prescribe sums which shall not be
included for calculating ‘net profit’ of a Company.

RIGHT OF MEMBERS TO COPIES OF AUDITED FINANCIAL STATEMENTS

1. Circulation of financial statements at shorter notice:

Section 136 provides for the circulation of annual accounts to the members, twenty-one
days in advance. However, it does not provide for a shorter notice period to circulate the
annual accounts. The Committee felt that it would be appropriate that clarity allowing
financial statements to be circulated at a shorter period in accordance with the provision
for shorter notice meeting under Section 101 be provided in Section 136. Accordingly, the
2017 Amendment allows audited financial statements and other documents to be sent at
shorter notice if consent of the members as given under Section 101 is obtained.

2. Financial statements of subsidiaries:

It was required for every company having a subsidiary or subsidiaries, to place separate
audited accounts in respect of each of its subsidiaries on its website, if any. The
Committee considered to exempt unlisted companies from the requirement of uploading
financial statements of all subsidiaries on the website of the holding company. These
provisions are now applicable only to listed companies and they can place on their
website, if any the separate audited accounts of its subsidiary or subsidiaries. For unlisted
companies, while they are not required to place the audited/unaudited financial statements
of the subsidiaries on their website, they still have to make it available to their members
who asks for it (Amendment to Section 137).

3. Provisions relating to foreign subsidiaries:

With respect to foreign subsidiaries, the amended provisions are:

 If such foreign subsidiary is required to get its consolidated financial statements
audited as per the local laws of its country, then such audited consolidated financial
statements should be placed on the website of the company.

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  If such foreign subsidiary is not required to and hence does not get its financial
statements audited as per any law in the country of its incorporation, then the
unaudited financial statements of such entity (in English) should be placed on the
website.

With regard to listed companies, this amendment is a big relief since they no longer have
to ensure that the financial statements of their foreign subsidiary are audited, if there is no
requirement under any law in that jurisdiction that mandates an audit. It appears that MCA
has considered the hurdles as well as cost and efforts involved in getting the audit of
foreign subsidiaries done in making this amendment.

4. Filing of financial statement with Registrar:

Similar amendment has also been made in section 137 which requires companies to file
financial statements of subsidiary. Companies can now file the unaudited financial
statements of foreign subsidiaries if such foreign subsidiary is not mandated to get its
audit done as per the laws of the country where it is incorporated.

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AUDIT AND AUDITORS

RATIFICATION OF APPOINTMENT OF AUDITORS

Section 139(1) provides that the shareholders at the Annual General Meeting shall appoint an
auditor of a company and that his appointment shall be ratified every year at the AGM.
However, this section does not provide clarity on the consequences of non-ratification.
Explanation to Rule 3 of the Companies (Audit and Auditors) Rules, 2014 clarified that in
such case the Board would appoint an auditor as per the procedure laid down in the Act. This
seemed to tantamount to removal of the previous auditor before the end of this term of 5
years. However, section 140 with respect to removal of auditor requires a special resolution as
well as an approval by the Central Government.

To remove the ambiguity and inconsistency between the two provisions, the requirement for
ratification of appointment of the auditor, under section 139, at each annual general meeting
has now been removed by the 2017 Amendment Act. Consequently, an auditor will
necessarily be appointed for 5 years and any removal of the auditor before the end of his term
will have to be in compliance with the requirements of section 140.

ELIGIBILTY OF AUDITORS

With respect to the persons who are not eligible to be appointed as an auditor of a company
under section 141, one of the restrictions was on ‘any person whose subsidiary or associate
company or any other form of entity, is engaged as on the date of appointment in consulting
and specialized services as provided in section 144’. The above restriction has been replaced
with a person who, directly or indirectly, renders any services referred to in section 144 to the
company or its holding company or its subsidiary company. The term ‘directly or indirectly’
is referred back to the explanation to section 144. This amendment widens the scope of
disqualifications by extending it to ‘indirect’ rendering of services as well. It also attempts to
align the eligibility criteria with the provisions related to restriction on the auditor on
providing certain services.

POWERS AND DUTIES OF AUDITORS

 The auditor of the holding company now has the right to access the records of associate
company in addition to the subsidiaries in so far as it relates to the consolidation of its
financial statements.
 Further, the reporting requirement related to internal financial control systems has now
been replaced with ‘internal financial controls with reference to financial statements’.
 Additionally, the auditor now has to comment on certain aspects related to managerial
remuneration.
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APPOINTMENT AND QUALIFICATION OF DIRECTORS

RESIDENT DIRECTOR

 Section 149(3) of the 2013 Act required a company to have at least one Director to have
stayed in India for a total period of not less than one hundred and eighty-two days in the
previous calendar year. The 2017 Amendment Act now requires at least one director to
have stayed in India for a period of 182 days during a financial year instead of calendar
year. It also states that this requirement of 182 days in India is for the current financial
year and not for the previous financial year.

While the CLC had recommended a change from using calendar year to financial year to
determine the residency status of a director, the Amendment Act has taken this one step
further by requiring the director to stay for at least 182 days in India in the current
financial year (as opposed to the previous financial year). As the Companies Act 2013
measures various aspects on a financial year basis, the criteria for residency is also now
measured on a financial year basis rather than calendar year.

The change brings about flexibility for non-residents, especially those forming part of
the senior management of a foreign company, to act on the Board of the Indian company
without any gestation period and reduces the dependency on external persons already
resident in India. Having said that, such action comes with an increased burden of
compliance on the Indian company to ensure that a director appointed as a resident
director meets the mandatory requirement to not fall foul of the law.

This amendment also reduces the hardship particularly for foreign companies as they
may not be able to find a resident director at the time of incorporation of an Indian
subsidiary. Now this provision has been suitably modified to accommodate such
companies to have first directors who previously may not have been residents in India.

 For a newly incorporated entity, this limit would apply proportionately for the period of
incorporation. The earlier requirements for residency in the previous year forces a new
subsidiary of a company incorporated outside India to appoint an individual/professional
unconnected with the company as Director, which did not aid in any way in Board
decision making and many a time leads to unnecessary disputes.

The amendment related to resident director addresses practical issues faced by

corporates, particularly in setting up new entities by applying the requirement
proportionately. It is noteworthy that a similar exemption was already provided in case
of Specified IFSC Company [Refer MCA notification dated for 4th January 2017]. Now,
such a provision has been extended to all companies.

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 INDEPENDENT DIRECTOR

The 2017 Amendment Act has revised the eligibility criteria for Independent Directors
under Section 149 of the Act.

 Earlier the section prohibited any kind of pecuniary relationship between the proposed
director and the company, its holding, subsidiary, or associate company or their
promoters or directors during the preceding two years and the current financial year. The
amendment now excludes remuneration received by the independent directors as well as
any other transaction which does not exceed 10 per cent of his total income or such other
amount as prescribed from the ambit of the term pecuniary relationship.

 With respect to relatives of independent directors, the section prohibited all ‘pecuniary
relationships or transactions’. The 2017 Amendment Act now prescribes limits for
specific pecuniary relationships between relatives of the directors and the company, its
holding, subsidiary, or associate company or their promoters or directors rather than a
general threshold. The revised sub-section relates to security or interest in the company,
indebtedness, guarantee or security in connection with debt and any other pecuniary
transaction or relationship.

The terms “pecuniary relationship” and “transaction” have been referred at various
places in Section 149(6) of the 2013 Act. Pecuniary relationship presupposes existence
of assignment. Previously, Section 149(6)(c) of the Act does not distinguish transactions
on the threshold of materiality. Such a provision caused adversity to the directors and
company. It created confusion over determination of what quantum of pecuniary
interests should be considered as “Pecuniary transactions”. Non-prescription of the
“threshold” lead to a situation where neither the director can purchase any product or
receive any services from a company nor the company can receive any services from the
director.

Further, Absence of the “threshold” gave rise to few absurdities like having directors on
the Board of companies which are in the business of Fast Moving Consumer Goods like
soaps, toothpastes, food items, etc. which are procured or used by any individual in their
routine life for trifle purposes. Such transactions being pecuniary in nature has fallen
within the ambit of this sub-clause, making it challenging to appoint independent
directors on the Board of any company.

In fact, by considering the representations from Industry Chambers, Professional

Institutes and other stakeholders, the Government came up with clarification on
pecuniary transaction. However, it does not redress all the queries relating to the
“pecuniary transaction”, specifically on the context of “materiality”.

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 This Act distinguishes and brings the concept of materiality into the Independent
director. It is interesting to note that even though the word “materiality” is absent from
the text of the section, the amendment provides the effect of the “materiality test” by the
usage of the threshold. Provision of suitable threshold ropes in the concept of
“materiality” with respect to the pecuniary relationship under the Companies Act, 2013.
Previously no such clarity was provided on the threshold which resulted in great
hardship to the directors and the companies as even transactions involving monetary
interests however miniscule they may be was hit by the condition given in clauses (c) of
sub-section (6) of section 149, hence disqualifying the director from being independent.

 Earlier an individual was restricted from being appointed as in independent director in

case he or his relative was a KMP or employee of the Company or its holding, subsidiary
or associate company during the preceding three financial years. The 2017 Amendment
provides that where a relative is an employee, the restriction relating to employment will
not apply for the employment during preceding three financial years.

This is a welcome change. If any relative is holding any position in the Company which
will not have impact on the independence of the Independent director, then there is no
point of including such relative’s employment as the criteria for disqualification. If the
relative is not holding any significant position as a KMP, then a person may become an
independent director even though he is a relative of the Employee.

Company Law Committee report further states that relative should not be holding
following positions for a person to become an Independent director:
(1) KMP
(2) Director
(3) One level below Board position

This provision was in line with Section 141(3)(f) of the principal Act. However, the
amendment act has not considered the (2) and (3). The provision stands as the relative
should not be a KMP and he may hold any other position in the Company, holding,
subsidiary and associate.

DIRECTORS IDENTIFICATION NUMBER

Under Section 152 and 153 of the 2013 Act, every individual intending to be appointed as
the director of a company should hold a Directors Identification Number and was required to
make an application to the Central Government for the allotment of the same. The 2017
Amendment Act has proposed to empower the Central Government to recognize any other
identification number to be treated as director identification number. It is expected that
Central Government will notify either PAN or Aadhar as DIN.
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 RELAXATION OF FURNISHING OF DIRECTORS IDENTIFICATION
NUMBER

This amendment is consequential to the amendment in Sec.152 (3). Since, a person may be
appointed as the Director by holding any other prescribed identification number in addition
to DIN, the obligation to intimate the Company of any other identification number is also
added under this section.

The Central Government is exceedingly eager to bring the concept of Aadhar into the
Companies Act. This Amendment has paved way for all the required cushion to bring in
Aadhar as the Identification number for the Directors under this Act. It is pertinent to note
that the concept of Aadhar is brought pursuant to Aadhar (Targeted Delivery of Financial
and other Subsidies, benefits and services) Act, 2016. Aadhar is a 12 digit Unique
identification number issued based on their biometric and demographic data.

Through this amendment, the government is making Aadhar almost compulsory for
regulatory filings made by key managerial personnel and directors under the Companies
Act. This may be an attempt to weed out bogus or Shell entities.

RIGHT TO STAND FOR DIRECTORSHIP

Section 160 provided that a director, other than a retiring director, is eligible for
reappointment provided that such a person has given a notice of his candidature and
deposited the prescribed amount. The need to deposit the prescribed sum of money posed
certain issues such as in case of persons outside India recommended by the Board or
independent directors who were eligible for reappointment. The Committee opined that in
case these appointments are recommended by the Nomination and Remuneration Committee
or the Board, the need to deposit the amount has been removed in such cases.

The 2017 Amendment Act has clarified that the requirement to deposit the prescribed
amount will not be applicable in following scenarios:

 Appointment of independent directors;

 Directors who are recommended by the Nomination and Remuneration Committee; and
 Directors who are recommended by the Board of Directors.

The intention behind the Section 160 is to permit a common person to stand for directorship
of a company and at the same time the provision prescribes a hefty deposit of Rupees one
lakh lac to deter frivolous and vexatious proposals and misuse of the provision. Hence, this
provision should not be applicable to a person who is proposed to be appointed as a director
by the Board of Directors of the company directly.

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As per wordings used in Section 160, it will be applicable in cases of appointment of
directors other than retiring directors. Retiring director means a director retiring by rotation
at the meeting. Thus, it seems to be applicable in following cases:

a) Appointment of additional director as director at AGM

b) Appointment of a director to fill casual vacancy
c) Any other person seeking appointment as director at general meeting (including alternate
director etc.)

ALTERNATE DIRECTOR

Section 161(2) deals with the appointment of a person as an alternate director by the Board.
This Section does not prohibit the appointment of an existing director as an alternate director
and that same individual acting as a director and alternate director for some other director of
the same company leads to conflict of interest and also ambiguity in the calculation of
quorum. Accordingly, Section 161 has been amended to prohibit an existing director in a
company to be appointed as an alternate director in the same company.

This section prohibits the existing director from being appointed as the alternate director, as
it may create a conflict of interest. In addition, it creates a confusion with respect to the
computation of Quorum, Process of Voting and determination of interested director. Hence,
the Amendment Act prohibited such appointment. Previously, there was no equivalent
provision in the Principal Act and it paved way for a view that an existing director can also
be appointed as an alternate director for another director.

FILLING UP OF CASUAL VACANCY

Section 161(4) authorizes the Board of a public company to fill a vacancy caused by
vacation of the office of any director before the expiry of his term, however subject to the
Articles of the company. The 2017 Amendment extends the ability to fill up casual vacancy
to the Board of Directors of the private companies also, provided that all such appointments
are approved by the members in the immediate next general meeting.

This amendment provides right to fill a casual vacancy to be made available to the Boards of
private companies as well. Previously, the power of the board to fill the casual vacancy in
the office of a director appointed by the Company in general meeting applies only to Public
company. By virtue of this amendment, it has been extended to private companies also.

Under the principal Act, casual vacancy relating to private company is completely regulated
by the Articles of the association of the Company. Post Amendment Act, the provisions of
this section is applicable to private company, whether it is a subsidiary of a public company
or not.

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The Amendment Act further requires approval from the members in the immediate next
general meeting. Thus, the casual vacancy shall be filled by the Board at the Board meeting
and subsequently approved by the members in the immediate next general meeting.

DISQUALIFICATION FOR APPOINTMENT AND VACATION OF OFFICE OF

DIRECTOR

1. Disqualification due to default:

The 2017 Amendment Act has inserted a proviso to Section to Section 164(2), which
provides that if a person is appointed as a director of a company which has defaulted in
filing of financial statements and annual return or repayment of deposits or payment of
interest or redemption of debenture or payment of interest thereon, he shall not be
disqualified for a period of 6 months from the date of appointment. This is a significant
amendment as it allows a grace period of 6 months for a newly appointed director
ensures that the person getting appointed does not attract a disqualification for the
defaults done before she/he was appointed and also provides a time period to set the
default right. The 2017 Amendment Act inserts a new proviso under section 167(1)(a)
stating that in case a director incurs a disqualification under section 164(2), his office
will become vacant in all companies where he holds directorship, except in the company
which is in default under section 164(2).

2. Disqualification due to order of Court:

Further, one of the provisos has been substituted in Section 164 which provides that if a
director of a private company has been disqualified under section 164(1)(d), 164(1)(e) or
164(1)(f), the disqualification will continue to apply despite the fact that an appeal or
petition has been filed against the order of conviction or disqualification. Earlier, the
disqualification did not take effect if there was an appeal or petition filed within 30 days
and until expiry of seven days from the date on which such appeal or petition is disposed
of. Section 167 has also been amended to ensure that a sitting director does not vacate
office in certain cases where appeal has been preferred.

NUMBER OF DIRECTORSHIPS

The 2017 Amendment Act provides that for the purpose of ascertaining the limit of
directorships under section 165, the directorship in a dormant company would not be
considered. Such companies would be inactive and having insignificant transactions and
therefore not impacting on the temporal resources of the Director. If such an exemption was
not given, it would discourage individuals from being a director in such companies.

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Section 165 prohibits a director from holding the office of a director in more than twenty
companies at any given point of time. The legislative intent in fixing the upper limit in this
section appears to be given an impetus to Corporate Governance by ensuring that a person is
able to give quality time to companies in which he is a director and does not take on more
than what he can effectively handle. On the other hand, the dormant company is an inactive
company and does not have any significant transactions. Therefore, there is no just in
reckoning the dormant non-operative company for the computation of 20 number.

Now in this Amendment Act thoughtfully such companies have been excluded the dormant
companies been reckoned for the purpose of computation of number of directorships. This
provision will encourage the persons to take up the position of director in such companies.

RESIGNATION OF DIRECTOR

The proviso to Section 168(1) requires that a resigning Director should file a copy of his
resignation along with the reasons for resignation with the Registrar, within thirty days. The
intent is to address likely misuse by some companies of the Director’s name after his
resignation. However, since majority of the companies will not fall in this category, the
filing of Form DIR-11 forwarding a copy of resignation has been made optional.

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MEETINGS OF BOARD AND ITS POWERS

BOARD MEETINGS THROUGH AUDIO-VISUAL MEANS

The 2017 Amendment Act provides flexibility to directors under section 173 to attend board
meetings through video conferencing or any other audio-visual mode, provided the quorum
for physical presence is met. This amendment brings about ease in doing business while
retaining the requirement to maintain quorum through physical presence. The complete bar
on attending meetings through video conferencing or any other audio-visual mode was quite
unnecessary and did not serve any purpose since there was already a minimum required
physical presence to meet the quorum.

AUDIT COMMITTEE

Section 177 with respect to Audit Committee has been amended as below:

 With respect to listed companies, audit committees are now required to be constituted
only by listed public companies instead of every listed company. Rule 6 prescribes class
of companies, in addition to listed companies, as required under Section 177 where the
Board of Directors should constitute an Audit Committee. Suggestions were received to
revise the thresholds so that these requirements do not apply to smaller unlisted
companies.

 It further provides that in case of related party transactions (other than those covered
under section 188), if the audit committee does not approve certain transactions, the
audit committee will make its recommendations to the Board. The Board will have to
consider these recommendations and approve these related party transactions even if
they were otherwise not covered under the approval requirement of section 188. The
flexibility provided to the Audit committee to ratify transactions that were initially not
approved by them is similar to the flexibility provided to the Board of Directors under
section 188.

 The 2017 Amendment Act also provides that where directors or officers of the company
enter into related party transactions involving less than INR 1 crore without obtaining
the approval of the Audit Committee, such transactions will have to be ratified by the
Audit Committee within a period of three months from the date of transaction. In the
absence of ratification, such transactions will be voidable at the option of the Audit
Committee. Further, if the transaction is with the related party to any director or is
authorized by any other director, the director concerned will need to indemnify the
company against any loss incurred by it.

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 The above requirement related to transactions other than the ones covered by section
188, do not apply to transactions between a holding company and its wholly owned
subsidiary company. Further, by not requiring audit committee approval for transactions
between holding company and its wholly owned subsidiary company not falling under
section 188, the 2017 Amendment Act aligns the requirement to those under the SEBI
LODR.

NOMINATION AND REMUNERATION COMMITTEE

Section 178 has been amended as follows:

 Instead of every listed company, every listed public company shall constitute a
Nomination and Remuneration Committee.
 The Nomination and Remuneration Committee will specify methodology for effective
evaluation of performance of Board and committees and individual directors either by
the Board, Committee or an independent external agency and the Committee can review
the implementation of evaluation system.
 The remuneration policy is required to be placed on the website of the company. Earlier
the remuneration policy itself was required to be included in the Board’s report, making
the report lengthier.

COMPUTATION OF MAXIMUM LIMITS ON BORROWING POWERS OF

THE BOARD

In order to fix the maximum borrowing limits that the Board can approve under section
180(1)(c), the 2017 Amendment Act now requires security premium to also be included in
the computation along with paid up share capital and free reserves. Securities premium is
now required to be considered for fixing the maximum borrowing limits along with paid up
share capital and free reserves, which is appropriate, since securities premium also forms
part of the capital of the company.

LOANS TO DIRECTORS

Section 185 has been completely revamped and the major amendments are as follows:

1. Loan to following parties is allowed subject to special resolution of shareholders and that
the loan is utilized by the borrowing company for its principal business activity only. and
certain other prescribed conditions
 any private company of which any such director is a director or member;
 any body corporate at a general meeting of which not less than twenty- five per cent.
of the total voting power may be exercised or controlled by any such director, or by
two or more such directors, together; or

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  any body corporate, the Board of directors, managing director or manager, whereof
is accustomed to act in accordance with the directions or instructions of the Board, or
of any director or directors, of the lending company

2. Interest rate applicable to a company which provides loans or gives guarantees or

securities in the ordinary course of its business prescribed in the proviso is now required
to be aligned with the tenor based rate of a government security as provided under
Section 186(7).

3. The prohibition continues to exist in case of loans, guarantees or security given for loans
in case of:
 any director of the company or a company which is its holding company or
 any partner or relative of such director or any firm in which any such director or
relative is a partner.

The purpose behind the introduction of the provision is to ensure that persons who hold a
fiduciary relationship with the company, such as directors do not misuse their powers by
facilitating loans towards themselves or companies they are interested in so that any conflict
of interest between the company and directors can be avoided. The CLC observed the
provision to be highly disproportionate as the overarching effect of this provision is not
restricted to the intent behind its enactment. Company laws across the world do not
contemplate for such restrictive provisions on the grant of loans to directors. If the
shareholders themselves approve of such transactions regarding utilization of their funds in a
certain manner, the law need not be overly restrictive. The CLC acknowledged on the one
end that this provision obstructed genuine transactions between a holding company and its
wholly-owned subsidiaries with common directors and that at the same time this route was
adopted to draw off funds by controlling shareholders. Therefore, a middle ground was
adopted by relaxing the provision with increased safeguards.

LOANS AND INVESTMENT BY COMPANY

1. Loans to employees:

Section 186(2) of the 2013 Act contains specific prohibitions/restriction on provision of

loan, guarantee, security, etc. to a person or body corporate. The term ‘person’ in the
section seemed to cover employees too. The Companies Law Committee was of the
view that loans which are given to employees as part of service conditions or pursuant to
an approved scheme for all employees by the Company should not be covered under this
section. The 2017 Amendment Act clarifies that for the purpose of this sub-section, the
term ‘person’ does not include any individual who is in employment of the company.
Loans to employees does not fall under the ambit of this section.

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2. Loans and investments by holding company:

The Companies Law Committee acknowledged that there are difficulties being faced in
genuine transactions due to the complete embargo on providing loans to subsidiaries
with common directors, but at the same time there is no doubt that the route has been
misused in the past for siphoning of funds by controlling shareholders. The Committee
noted that limited relaxation has already been provided to private companies not having
other body corporates invested in them and therefore any further relaxation should be
subject to greater safeguards. Therefore, amended Section 186 states that shareholders’
approval will not be required where a loan or guarantee is given or where a security has
been provided by a company to its wholly owned subsidiary company or a joint venture
company, or acquisition is made by a holding company, by way of subscription,
purchase or otherwise of, the securities of its wholly owned subsidiary company.

PROHIBITION ON FORWARD DEALING AND INSIDER TRADING IN

SECURITIES

The Companies Act 2013 vide Sections 194 and 195 restrict forward dealing by directors
and KMPs and insider trading by any person including directors and KMPs respectively.
The aforesaid provisions are seemingly applicable in respect of both private and public
companies. However, the concepts of forward dealings in securities and insider trading
prohibitions may not be entirely relevant in case of private companies. The Committee
opined that SEBI Regulations are comprehensive in the matter and these sections have been
omitted.

This omission has 3 essential implications. Firstly, forward contracting and insider
regulations do not apply to private companies and public unlisted companies. Reading
section 12A of the SEBI Act with Rule 3(1) and 4(1) of SEBI (Prohibition of Insider
Trading) Regulations, (“PIT Regulations”) the insider trading norms only apply to
‘securities that are listed or proposed to be listed.’ Secondly, an appropriate authority for
investigating and prosecuting insider trading has been streamlined. Prior to the amendment,
SEBI (under section 458), the Registrar (under section 206 or 207), Central Government
(under section 210) and NCLT (under section 222) were bestowed with overlapping powers
to deal with insider trading under the Act. However, reading Regulation 10 of the PIT
Regulations with section 15G and 15I of the SEBI Act, the authority for prosecution of
insider trading offences lies with SEBI. Thirdly, jail term as a penalty for insider specified in
section 194 and 195 of the Act has been done away with. As per section 15G of the SEBI
Act, the only penalty is a monetary penalty of 25 crores or thrice the amount of profits made
out of insider trading. However, a general provision namely, section 24 of the SEBI Act can
be invoked for imposing imprisonment if the provisions of the Act are contravened.

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RELATED PARTY TRANSACTIONS

DEFINITION OF RELATED PARTY

Section 2(76) of the Companies Act, 2013 defines the term ‘related party’. The following
inclusions have been made to related party definition:

 Section 2(76)(viii) replaces the word company with body corporate thereby extending the
definition of related parties to body corporates as well. This amendment ensures that
entities incorporated outside of India such as the holding/subsidiary/ associate/fellow
subsidiary of an Indian company are also included in the purview of related party of an
Indian company. Prior to the amendment, the companies or entities incorporated outside
India were excluded from the purview of the definition of related party. This was not the
intention of the government as such interpretation would have seriously diluted the
compliance requirements with regard to related party. This defect has now been rectified.

The implication of the changes in the definition of related party shall apply prospectively
for all companies as the notification enforcing the amendment does not mention anything
regarding the retrospective application of the amendment. Accordingly, companies will
have to consider compliances relating to transactions entered with such new related
parties. Further, the changes brought in the definition of related party has surely widened
the provisions of related party however will also increase compliance burden on the
companies.

 An investing company or venturer of a company has been included in the definition of a

related party which is defined as follows. While investee companies were being
considered as related parties (Eg: a subsidiary or associate), the investing parties were not
covered till now as a related party, which has now been addressed in this amendment.

RELATED PARTY TRANSACTIONS

1. Voting by related party:

The second proviso to section 188(1) restricted any member who is a related party from
voting at the general meeting to approve a related party transaction. Under the 2013 Act,
it was noted that the compliance of requirement under the second proviso of section 188
posed some practical difficulties, particularly in cases where all parties in case of joint
ventures and closely held public companies were related parties. Thus, another proviso
was included which provides that the requirement related to restriction on voting by
relatives in the general meeting shall not apply to a company in which ninety per cent or
more members in numbers are relatives of promoters or related parties.

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 The Central Government notified by the MCA on 9th February 2018 with a purpose to
kick ahead to the Indian government movement 'Ease of Doing Business' has allowed
participating at the General Meeting to cast votes while passing an ordinary resolution
for the purposes to enter into contracts or arrangements with any related party upon
satisfaction either of the following conditions:

a) Not less than 90 % of the members, in numbers, of the Company relatives of the
promoters.
b) Not less than 90 % of the members, in numbers, of the Company's related parties.

2. Non-ratification of related party transactions:

Additionally, with respect to transactions which are voidable on account of not obtaining
board or shareholder approval, currently section 188(3) specified that such transactions
are voidable at the option of board. The 2017 Amendment Act now extends that to the
shareholders as well since there could be transactions which are entered into without
obtaining the shareholders’ approval as required under the provisions. Non-ratification
of transaction shall be voidable at the option of the Board or shareholders, as the case
may be.

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APPOINTMENT AND REMUNERATION OF KEY
MANAGERIAL PERSONNEL

APPOINTMENT OF KEY MANAGERIAL PERSONNEL

The 2017 Amendment allows a person beyond the age of seventy years to be appointed as
managing director or whole-time director or manager even when such appointment has not
been approved by special resolution provided the following conditions are satisfied:

 Passing of ordinary resolution for such appointment; and

 The Central Government is satisfied, on an application made by the Board, that such
appointment is most beneficial to the company.

Further in respect of appointment of managing director, whole time director or manager,

approval of Central Government shall only be required in case the appointment is not in
accordance with the matters specified in Part I of Schedule V.

MANAGERIAL REMUNERATION

The 2017 Amendment Act clarifies the following with respect to payment of managerial
remuneration by amending Section 197 as follows:

1. Public companies can now pay remuneration to their directors, including Managing
Director and Whole-Time Director and manager in respect of any financial year
exceeding eleven per cent of the net profit of the company only with an approval in the
general meeting. The approval of Central Government is no longer required.

2. In the absence of profits or inadequate profits, companies need to make payments to the
directors in accordance with provisions of Schedule V and need not obtain the Central
Government approval.

3. Payments made to a Managing Director or Whole-Time Director or manager in excess of

individual limits will now require an approval by special resolution in the general
meeting.

4. Central government approval is now not required for waiving the recovery of excess
remuneration paid to directors. Companies only need to obtain an approval by special
resolution within 2 years from the date the excess remuneration becomes refundable.

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5. Where a company has defaulted in payment of dues to any bank or public financial
institution or non-convertible debenture holders or any other secured creditor, the prior
approval of the bank or public financial institution concerned or the non-convertible
debenture holders or other secured creditor, as the case may be, will be required both in
case of payment of remuneration in excess of individual limits to Managing Director or
Whole-Time Director or manager and where the company plans to waive the recovery of
excess remuneration paid

6. Additional reporting responsibilities have also been brought about for the auditors. The
auditor of the company is now required to make a statement as to

 whether the remuneration paid by the company to its directors is in accordance with
the provisions of this section

 whether remuneration paid to any director is in excess of the limits laid down under
this section and

 give such other details which are yet to be prescribed.

7. Also, from the commencement of the 2017 Amendment Act, any application made to the
Central Government under the provisions of this section as it stood before such
commencement, which is pending with that Government will abate, and the company
should, within one year of such commencement, obtain the approval in accordance with
the provisions of this amended section

Accordingly, Section 200 has also been amended to allow only a company to fix the
remuneration within the limits specified in this Act, at such amount or percentage of profits
of the company as it may deem fit, while according its approval under section 196, to any
appointment or to any remuneration under section 197 in respect of cases where the
company has inadequate or no profits.

CALCULATION OF PROFITS

The following amendments have been to Section 198 with regard to computation of profits
for the purpose of managerial remuneration:

 credit for profit arising by way of premium on shares or debentures of the company
which are issued or sold by an investment company shall be allowed as credit to the
profit and loss account.
 credit shall not be given for any amount representing unrealized gains, notional gains or
revaluation of assets

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 sums related to excess of expenditure over income, which had arisen in computing the
net profits in accordance with this section in any year, in so far as such excess has not
been deducted in any subsequent year preceding the year in respect of which the net
profits have to be ascertained, shall be allowed as a deduction.

The amendments have now clarified that profit on sale of investment for investment
companies will not be excluded for the purpose of calculation of profits as that is their main
business activity. Also, section 198 of 2013 Act does not provide for the deduction of
brought forward losses of the years prior to the commencement of the 2013 Act. This has
now been rectified by adding a requirement to deduct losses related to any year insofar as
such losses have not been deducted in any subsequent year.

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MISCELLANEOUS

INSPECTION, INQUIRY AND INVESTIGATION

 The Central Government has been empowered to appoint inspectors for determining true
persons who have or had beneficial interest in shares of a company or who are or have
been beneficial owners or significant beneficial owner of the company. Prior to this
amendment, section 90 included this provision and it also referred back to section 216 for
the purpose of investigation. Consequently, this amendment has simply realigned the
sections and consolidated all the provisions relating to investigation under one section.
 As per the amended Section 223 of the Companies Act, 2013, a copy of inspector’s report
(both interim and final) shall be made available only to members, creditors or any other
person whose interest is likely to be affected, on their request. Under the earlier provision,
any person can request for the copy.

PURCHASE OF MINORITY SHAREHOLDING

Section 236 of the 2013 Act dealt with the purchase of minority shareholding. This provision
refers to the acquisition of shares of a company. While Sections 236 (4), 236 (5) and 236 (6)
make a reference to a ‘transferor company’, the term ‘transferor company’ has not been
defined in the section itself. The Companies Law Committee felt that the use of the term
‘transferor company’ in the said Section 236 without providing for a context may ostensibly
include even transfer of assets by a company, thereby including amalgamations and mergers
within the ambit of this provision, which did not appear to be the intention. Accordingly, in
2017 Amendment Act, the words 'transferor company' has been substituted with the words
'company whose shares are being transferred' for providing clarity in sub-sections (4), (5) and
(6) and that Section 236 only applies to the acquisition of shares.

REGISTERED VALUERS

Section 247(2)(d) of the Act, prior to amendment, provided that the valuer shall not undertake
valuation of any assets in which he has a direct or indirect interest, or becomes so interested at
any time during or after the valuation of assets. The Act does not provide any time limit in
this regard. This results in an impracticable situation where the registered valuer has to ensure
his independence both before and after valuation for an indefinite period of time.

Thus the 2017 Amendment Act addresses this issue by diluting the restriction on appointment
of a registered valuer by providing that that registered valuer can be appointed for valuation of
an asset in which he has a direct or indirect interest or becomes so interested during a period
of three years prior to appointment as valuer or three years after valuation of assets. Hence,
the valuer is required to ensure independence for three years before and three years after the
valuation of the asset.

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 COMPANIES CAPABLE OF BEING REGISTERED

Under section 366, the 2013 Act allowed conversion of partnership firms, etc. into companies
registered under 2013 Act. However, it allowed conversion of only those entities which had
seven or more members. Since various entities referred to in the section (which can be
registered under the 2013 Act) could be formed even with less than seven persons, restriction
for the entities to consist of seven or more members was reviewed. The 2017 Amendment Act
now replaces the need for seven or more members with ‘two or more members’, provided that
in case of members less than seven, the conversion would be to a private company.

FOREIGN COMPANIES

 Section 379 of the Act provides that where not less than fifty percent of the paid-up share
capital of a foreign company is held by one or more citizens of India, or companies/body
corporates incorporated in India, such companies shall comply with the provisions of
Chapter XXII, and other provisions of the Act, as may be prescribed, with regard to the
business carried on by it in India, as if it were a company incorporated in India. However,
there is no clarity with regard to the position on the applicability of the provisions of
Chapter XXII, to those body corporates that were covered within the definition of Section
2(42), but did not fall within the category indicated in Section 379 of the Act. Now the
2017 Amendment Act clarifies that the remaining body corporates as covered within the
definition of foreign company, will also need to comply with the provisions of Chapter
XXII, as applicable.

 Section 384 has been amended to provide that the provisions of section 92 and section 135
shall apply to a foreign company as they apply to a company incorporated in India.

 It also provides that the Central government may exempt any class of foreign companies,
that it specifies in an Order with respect to the same, from any of the provisions of
sections 380 to 386 and sections 392 and 393.

FEES FOR FILINGS

Section 403(1) allows a company to file documents belatedly up to two hundred and seventy
days from the date on which such document becomes overdue for filing by paying additional
fee and without attracting liability for prosecution/penal action. Delayed filings beyond two
hundred and seventy days can still be done with the maximum additional fee but the company
is also liable for prosecution/penal action. Certain provisos have now been added to the
section in order to distinguish between filing of annual return (section 92) and financial
statements (section 137) and other filings required under the 2013 Act.

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 Consequently, the first amended proviso now deals with section 92 and 137 and does not
prescribe an outer limit (such as the 270 days prescribed earlier) for delayed filing.

It requires that any delayed filing beyond the timeline prescribed in the respective section
will now need to be done along with the payment of additional fee which is prescribed as
a minimum of INR 100 per day and may further be prescribed at different amounts for
different classes of companies.

 The second proviso deals with all other delayed filings which need to be submitted along
with payment of additional fee.

 The amendment also addresses defaults on two or more occasions and requires payment of
higher additional fee in such cases.

Owing to the cases of delay in filing under section 92 and 137, the 2017 Amendment Act has
enhanced additional fees substantially to deter non-compliance.

NATIONAL COMPANY LAW TRIBUNAL AND APPLELLATE TRIBUNAL

The following are the major amendments that have been made Chapter XXVII of the
Companies Act, 2013:

 Amendments have been made with respect to eligibility for technical members forming
part of the constitution of the National Company Law Tribunal and the Appellate
Tribunal.

 Appeal against the order of National Financial Reporting Authority (NFRA) may be
preferred to the National Company Law Appellate Tribunal (NCLAT) instead of separate
appellate authority.

 The provisions relating to constitution of Special Committee, the committee that appoints
the members of the National Company Law Tribunal and the Appellate Tribunal, has been
amended to align it with the directions given by the Supreme Court in this regard.

ESTABLISHMENT OF SPECIAL COURTS

The Central Government has been authorized to establish or designate Special Courts for the
purpose of speedy trial of offences and for faster prosecution of defaulting companies. Till the
time a Special Court has been established, the trial of offences is proposed to continue as
follows:

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 Single Session Judge or Additional Sessions Judge - For offences punishable with
imprisonment of 2 years or more
 Metropolitan Magistrate or Judicial Magistrate of First Class - For other offences.
NCLT to compound offences punishable with fine as well as those offences punishable
with fine or imprisonment.

FACTORS FOR DETERMINING PUNISHMENT

New section, Section 446A has been inserted which provides for the following factors which
the court or special court may consider for determining the level of punishment:

i) size of the company;

ii) Nature of business carried on by the company;
iii) Injury to public interest;
iv) Nature of the default; and
v) Repetition of the default.

LESSER PENALTIES FOR ONE PERSON COMPANIES OR SMALL

COMPANIES

It is proposed to provide relief to OPC and Small co., in case of failure to comply with the
provisions of sub-section (5) of section 92 (Annual Return), clause (c) of sub-section (2) of
section 117 (Resolutions and agreements to be filed), sub-section (3) of section 137 (Copy of
financial statement to be filed with Registrar). In case of default, such company and officer in
default of such company shall be punishable with fine or imprisonment or fine and
imprisonment, as the case may be, which shall not be more than one-half of the fine or
imprisonment or fine and imprisonment, as the case may be, of the minimum or maximum
fine or imprisonment or fine and imprisonment, as the case may be, specified in such sections.

The Committee observed that small businesses need to be encouraged by laying down a more
liberal regime and wherever disproportionate punishments are proposed these need to be
reduced. Further, the Committee felt that the procedural and technical non compliances
should attract less stringent punishments as compared with violations for substantive
requirements.

PUNISHMENT FOR FRAUD

Section 447 of the Act lays down the punishment for any person found guilty of fraud. This
section was too broad and minor defaults resulted in severe penalties, which were non
compoundable. The Committee observed that the provision has a potential of being misused
and abused and may also have a negative impact on attracting professionals in the post of
directors etc.

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Therefore, the following amendments were made to Section 447 of the Act:

 A person guilty of fraud involving an amount of at least 10 lakh rupees or 1% of

turnover of the company, whichever is lower shall be punishable with imprisonment for
a term which shall not be less than 6 months but which may extend to 10 years and shall
also be liable to a fine which shall not less than the amount involved in the fraud but
which may extend to three times the amount involved in the fraud.

 Further that where the fraud involves an amount of less than 10 lakh rupees or 1% of the
turnover of the company, whichever is lower and does not involve public interest, any
person guilty of such fraud shall be punishable with imprisonment for a term which may
extend to five years or with fine which may extend to twenty lakh rupees or with both.

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CONCLUSION

The various amendments to the 2013 Act will provide much needed relief to stakeholders in
terms of clarity, reduction in compliance burden and simplification of procedural
requirements. Above measures are aimed to enhance ease of doing business and promoting
healthy corporate environment in India. Amendments to sections on appointment of auditors,
loans and investments by companies, related party transactions, managerial remuneration,
etc. strike the right balance between improving corporate governance and reducing the cost
of compliance without compromising the interests of stakeholders.

A complete understanding of the Companies (Amendment) Act, 2017 suggests that the
amendments have been guided by the following principles:

a) Need to balance the interest of various stakeholders like companies, professionals,

investors, regulators, etc.
b) Need to simplify processes or doing away with unnecessary procedures.
c) Need for greater transparency and disclosures in view of lesser regulatory interference
and greater self-regulation.
d) Bringing greater clarity in language of the provisions of the Act, wherever required.
e) Pros and cons of addressing issues through subordinate legislation i.e. Rules versus
amendment in the Act.
f) Compliance requirements for various class of companies versus public interest.
g) Levels of punishment for non-compliance and the necessity to improve compliance.

However, the Act has failed to address certain issues such as failure to provide the meaning
of joint arrangement in the definition of joint ventures, statutory resolution plan in case of
issue of shares at discount, etc. In view of the extent and scope of changes that has been
introduced by the 2017 Amendment Act, it will definitely take time for the stakeholders to
come to terms with the new regime with the new provisions and understand the difficulties
in the process of implementation of these provisions.

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BIBLIOGRAPHY

PRIMARY SOURCES

 Companies Act 2013 along the rules, notifications and circulars issued and notified by
Ministry of Corporate Affairs.
 SEBI Regulations
 Insolvency and Bankruptcy Code

SECONDARY SOURCES

 Report of The Companies Law Committee, February 2016, Ministry of Corporate

Affairs, Government of India
 Companies Amendment Act, 2017: an overview of key changes, EY.
 Highlights of The Companies (Amendment) Act, 2017, Institute of Company Secretaries
of India.
 Companies (Amendment) Act, 2017 received Presidential assent, KPMG.
 Companies (Amendment) Act 2017, Deloitte.
 Companies (Amendment) Act 2017: A step forward, GrantThornton.

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