Friday, April 8, 2016

Report of the Company Law Committee -II

I. Introduction:
The first part of this article was published in Taxmann's Corporate Professionals Today ,Vol. 35 , February 16 To 29, 2016, Pp. 325-339.
Carrying forward the spirit of enhancing 'ease of doing business' the Central Government has accepted mostly all recommendations of the Company Law Committee Report submitted in February,2016 and introduced the Companies (Amendment) Bill,2016 in the Lok Sabha on 16thMarch 2016. Major changes introduced in the Bill include -

Allowing incorporation of companies without specific object clause;

Raising money through private placement without regulatory oversight and just by filing return of allotment;

Allowing six months remedial period when minimum membership of a company falls below the prescribed minimum level;

Allowing authentication of documents by any employee of the company authorised by the Board;

Complexity involved in the preparation of prospectus arising out of dual compliance of company law and SEBI requirements is removed by elimination company law requirements - Matters to be stated in the prospectus and reports to be included therein shall be as per the SEBI Guidelines to be developed in consultation with the Central Government;


Sweat equity can be issued without waiting for one year : Time lag of one year from the commencement of business for the purpose of sweat equity issue is proposed to be omitted ;

Issue of shares at a discount has been permitted in case statutory resolution plan or debt restructuring scheme as per the Guidelines or regulations of the Reserve Bank of India;

Norms of raising deposit has been simplified by reducing the level of deposit repayment reserve, and elimination of deposit insurance;

Extending the time limit for repayment of deposit raised prior to the commencement of the relevant provisions of the Act ;

Introducing timeframe for filing satisfaction of charge;

Introducing register of beneficial owners - the proposed provisions of the amended section 90 detail out the related requirements ;

Convening extra-ordinary general meeting at a shorter notice of period of less than 21 days based on approval of 95% of the members eligible to vote as against 95% members eligible to attend;

Provision for simplified annual return for one person company and small company , and minor simplification for other companies;

Allowing unlisted company to hold annual general meeting at any place within India on approval of all members;
Also the Ministry of Corporate Affairs has notified Companies ( Share Capital and Debentures) Amendment Rules 2016 on 10th March 2016 and Companies (Incorporation) Second Amendment Rules, 2016 on 23 March 2016.
Among the unfinished agenda , the constitution of NCLT and NCLAT are at the advanced stage. The Ministry has also issued creditor -oriented draft Rules with respect to revival and rehabilitation of sick companies on 2nd March,2016.
In this article , we shall review various issues covered in the Companies (Amendment) Bill 2017 and amended Rules vis à vis the Company Law Committee Report ( CLCR).
II. Incorporation of Company and matters incidental thereto
1. Effect of number of members falling below the minimum requirement
Clause 3A is proposed to be inserted as a remedial provision to the cases when membership of a company falls below the prescribed minimum of seven in case of a public company and two in case of a private company. The CLCR ( Paragraph I2.7) suggested to fasten the continuing members with the liability for all debts incurred by the company till the prescribed limit is restored. The default should be remedied with 6 months.
The proposed provision allows six months time to rectify the default. Existing members are held liable for whole debts incurred if a company carries on business with reduced members for a period more than six months , and they may severally sued.
2. Relaxation of object clause
In the line of Paragraph I2.1 of CLCR, Section 4(1) ( c) is proposed to be amended to allow a company to engage in any lawful act or activity or business . However, the Memorandum may state specific object (s) or restrict certain objects.

This liberal approach will cause problem to the equity investors unless the SEBI Guidelines strictly regulates end use of money raised. The company will freely invest in money raised in various projects. Now only one defence is left to the shareholders to restrict the Board from moving out of an " object' for which money has ben raised to another is Section 180(a). Once the money raised is invested for the prescribed object, the directors would be able to sell the whole or substantially whole by passing a special resolution. Defence of changing the 'object clause' has been taken away. This may increase the propensity of siphoning off the money raised by changing lines of business.
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