Companies Law Committee report is harbinger of change: Experts

Chennai, Feb 2 (IANS) The recommendations of the Companies Law Committee (CLC) that would involve around 100 amendments to bring in changes to 78 sections in the Companies Act, 2013 and around 50 Rules to the Act should be implemented fast so that the law becomes business-friendly, say experts.

The CLC submitted its report to the government on Monday (February 1) and the Ministry of Corporate Affairs (MCA) has called for public comments on the report by February 15.

"The changes recommended seek to remove practical difficulties in complying with the law in its current form, without diluting the intent of the law," Sai Venkateshwaran, partner – Advisory and India Head – Accounting Advisory Services, KPMG in India, told IANS.

The committee was set up last year to look into the representations from the stakeholders on the provisions of the Companies Act, 2013, and the difficulties in compliance.

The Companies Act, 2013, brought in some significant changes with regard to accountability, disclosures, investor protection and corporate governance.

Terming the report as harbinger of change, Supreme Court advocate and company and insurance law expert D. Varadarajan said: "One of the striking features of the Committee’s recommendations is to do away with inspector raj and clipping the wings of the overzealous executive and ensuring smooth highway of growth and development."

Varadarajan said simplification of incorporation of companies by placing reliance on self-certifications, private placements of securities, and realigning of insider dealing provisions are some of the important salutary recommendations of the committee.

Removal of restrictions on layers of subsidiaries and investment companies, pruning of the definition of ‘relative’, rationalisation and fine-tuning of penal provisions, ESOPS to promoters working as employees and directors, simplification of disclosures requirements and others are included among other important salutary recommendations of the committee.

"These recommendations seem very necessary to depict country’s image as investor-friendly and, if approved, are likely to bring more foreign flows into the system," Sumit Naib, director, at the international tax advisory firm Nangia & Co told IANS.

The CLC has recommended that equity share capital should be the basis for deciding the holding-subsidiary company relationship and exclude the preference share capital from the calculation.

The panel also suggested removal of the restriction on the layers of subsidiaries and investment companies.

In order to make incorporation of a company easy the panel recommended allowing unrestricted objects clause in the Memorandum of Association.

"Allowing companies to have generic object clause ‘to engage in any lawful act or activity or business as per the law for the time being in force’ will give flexibility to carry on any legal business activity," Naib said.

As listed companies are covered under the Securities and Exchange Board of India (SEBI) Act and regulations, the provisions relating to forward dealing and insider trading to be omitted from Companies Act, the CLC recommended.

According to the CLC report, the companies may give loans to entities in which directors are interested after passing special resolution and adhering to disclosure requirement.

Naib said that when a company has insufficient profits or is running into losses, it has to seek approval in the form of special resolution from shareholders and in some cases from central government to pay the remuneration to the director.

"The recommended amendment replacing special resolution with ordinary resolution in some cases and even removing central government’s approval is very necessary to keep and attract good managerial talent," Naib said.

"The proof of pudding is in eating. There is no dearth of Committees and their recommendations, even in the past, but the will to act upon was found wanting. It is hoped that the recommendations of the Committee would be implemented in all eagerness," Varadarajan said.

The other major recommendations of the panel are:

– Requirement for annual ratification of appointment/continuance of auditor to be removed;

– Auditor to report on internal financial controls with regard to financial statements;

– Reducing requirement for maintaining deposit repayment reserve account from 15 percent each for last two years to 20 percent during the maturing year;

– Increased threshold for unlisted companies to comply with norms for the presence of independent directors, audit committee and nomination and remuneration committee;

– Test of materiality to be introduced for pecuniary interest for testing independence of independent directors;

– Limit on sweat equity to be raised from 25 percent of paid up capital to 50 percent for start-ups:

– Recognition of the concept of beneficial owner of a company proposed in the Act.