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Thursday, January 22, 2015

Amendment to the Companies Act, 2013

Brief summary of the amendment to the Companies Act, 2013 as passed in the Lok sabha and is subject to approval by the Rajya Sabha. 

1. Minimum paid up capital - The minimum paid-up capital requirement for private and public limited company has been dispensed with. This would attract more entrepreneurs towards company form of business structure.
2. Common Seal- Common seal of the company has been made an optional requirement. This would facilitate the business process and remove the procedural time lapses which were caused to comply with the requirement of affixing common seal.
3. Board resolution- Finally, MCA has recognized that the board resolutions are internal documents and would not be open for inspection of the public through ROC. This would keep the safeguard the internal and commercial discussions and decisions from being open to the rivals.
4. Ordinary resolution for related party transactions- The requirement of approval from the shareholders has been relaxed from that of a special resolution to an ordinary resolution. 
5. Related party transactions with subsidiaries- Approval from the board and shareholders is not required for transactions with wholly owned subsidiary whose accounts are consolidated with the Company. This is particularly important as even though these transactions are not on arm’s length basis then also these transactions would not require the approval of the board and the shareholders. Instead of special resolution, ordinary resolution is required by the shareholders in the general meeting.
6. Omnibus approval for RPT- Audit committee has also been expressly empowered in the Act to grant omnibus approval. This change is on the lines of the provisions of the Listing Agreement . It would exclude the routine transactions from the approval requirement on a case to case basis.
7. Dividend declaration- Companies are now prohibited to declare dividends before making provisions for writing off past losses/unabsorbed depreciation.
8. Unclaimed/unpaid  dividend- The drafting anomaly has been rectified and now only those equity shares in respect of which no dividend has been claimed or paid for consecutive 7 years shall be transferred to the Investors Education and Protection Fund (“IEPF”). Prior to this rectification, the position was that even those equity shares wherein dividend is claimed/paid would be transferred to IEPF.
9. Fraud reporting- Auditors have been dispensed with the obligation to red flag all the frauds in the company. Whereas, the frauds of less than the prescribed amount shall be disclosed to the audit committee and would be further disclosed in the board report, the frauds involving higher than prescribed amount shall be reported to the Central Government “CG”.  The threshold of the amount of fraud has not yet been notified, so auditors need to be on a watch for notification from MCA specifying such limits. 
10. Penalty for default in provisions of acceptance of deposits- Severe penalties (penalty of Rs.25 Lacs to Rs. 1 crore / imprisonment for maximum 7 years / Both) have been prescribed for default in compliance of provisions  relating to acceptance of deposits.
11. Bail Restrictions- Bail restrictions on offences relating to issue of shares, transfer of shares, reduction of share capital, auditors, inspection, investigation, false statements etc have been removed and are now applicable only to offence involving fraud.
12. Matters handled by special courts - Rationality has also been imparted in respect of the work-load of the special courts which are proposed to be established for offences under this Act by limiting the matters to only those wherein imprisonment of more than 2 years or more is prescribed. The residual offences wherein imprisonment is less than two years would be tried by the Metropolitan Magistrate or a Judicial Magistrate of the First Class.
13. Special bench for winding up- No special bench for winding up. To ensure speedy disposal of winding up cases by dispensing the requirement of a special three member bench of NCLT to deal with winding up cases, even two members can form a bench to deal with winding up matters. 

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