The Companies (Amendment) Bill, 2017: Understanding the Significant Changes Proposed in the Corporate Law Regime.

[Muskan Agrawal]

The author is a third-year student of National Law Institute University, Bhopal.

On July 27, 2017, the Lok Sabha passed the Companies (Amendment) Bill, 2017 (hereinafter referred to as “the Amendment Bill”).  If passed by the Rajya Sabha, it would add a string of changes in the Companies Act, 2013 (hereinafter referred to as “the Act”), thereby introducing many crucial nuances in the Act having significant impact on the manner in which Indian companies function. The Amendment Bill aims at improving overall corporate governance standards and investor protection.[1] The major amendments pertain to relaxation of pecuniary relationship of directors,  rationalization of related party provisions, omission of provisions relating to forward dealing and insider trading, doing away with the requirement of approval of the Central Government for managerial remuneration above prescribed limits, making the offence for contravention of provisions relating to deposits as non-compoundable,  and requiring holding of at least 20% voting rights instead of share capital by investors to constitute significant influence. The following part discusses few of the changes proposed.

Independent Directors

An independent director in relation to a company means a director who has or had no pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year.[2]

The Amendment Bill seeks to relax this pecuniary interest provision. In the definition of independent director, the term ‘pecuniary relationship’ is proposed to be replaced by ‘pecuniary relationship, other than remuneration as such director or having transaction not exceeding ten percent of his total income or such amount as may be prescribed.’[3] In other words, the limit of ten percent is provided under the Amendment Bill for benchmarking the independence of a director. This expands the scope of independent directors and gives firms more flexibility to pursue their professional relationship with independent directors who are practicing other professions as well. The 2005 JJ Irani Report on Company Law also recommended that the concept of ‘materiality’ be defined and 10% or more of recipient’s consolidated gross revenue or receipts for the preceding year form a material condition affecting independence.[4] However, this was not incorporated in the Act.

Significant Influence in Associate Company

The Act provides that to constitute significant influence, a holding of at least 20% total share capital is mandatory.[5] The amendment ties the concept of significant influence to total voting power instead of total share capital.[6] Further, the definition includes control or participation in business decisions. Control under Section 2(e) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (hereinafter referred to as “Takeover Regulations”) is defined as the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner. The term is similarly defined under Section 2(27) of the Act.

On March 14, 2016, SEBI sought comments from public on the bright line test for determining control by way of its discussion paper in which it enumerated certain rights which should not be considered as control.[7] For instance, veto rights not amounting to acquisition of control may be protective in nature rather than participative in nature i.e. such rights may be aimed with the purpose of allowing the investor to protect his investment or prevent dilution of his shareholding and not otherwise. In other words, the investor does not have power to exercise control over management of the business and policy making in relation thereto. On the other hand, the Amendment Bill provides that an investor will have significant influence in the company if he has control of at least 20% of total voting power, thus not completely incorporating the said bright line test. However, it must be noted that on September 8, 2017, SEBI scrapped the discussion paper and decided to continue with the current position of ascertaining acquisition of control as per the existing definition in the Takeovers Regulations which is in consonance with the Amendment Bill and the Act.[8]

Related Party

The Amendment Bill expands the scope of related party by including, among the other things, an investing company or venturer of the company under a related party.[9] An investing company or venturer will mean a body corporate whose investment in the company would result in the company becoming an associate company of the body corporate.[10]

In the Act, the word ‘company’ is used instead of ‘body corporate’ which results in the exclusion of foreign MNCs. For instance, any transaction between the parent MNC International Business Machines (IBM) with its Indian subsidiary IBM India Private Limited is not regarded as a related party transaction and therefore completely left out under the Act. This, it is submitted, was not the intent of the legislature. The legislative intent is proposed to be met through the Amendment Bill by explicitly including investing companies within related party.

The Amendment Bill also makes the definition of related party in concurrence with SEBI regulations. In the SEBI (Listing Obligations and Disclosure Requirements)  Regulations, 2015, both investing and investee companies are covered under related parties,[11] whereas in the Act, only the investee company as a related party of the investing company is included and not vice versa.

While the Amendment Bill meets its objective of improving overall corporate governance standards and investor protection by providing more clarity, the burden of heavy compliance still continues. The penalty rigour in realistic terms will ensure that the compliances are appropriate and not just apparent. Nonetheless, many aspects of the bill are in line with global best practices.

[1] Lok Sabha passes bill to amend companies law, THE ECONOMIC TIMES, (July 28, 2017), http://economictimes.indiatimes.com/news/economy/policy/lok-sabha-clears-bill-to-amend-companies-law/articleshow/59794867.cms.

[2] Section 149(6)(c), the Act.

[3] Section 149, the Amendment Bill.

[4] Report on Company Law, Expert Committee on Company Law, Ministry of Corporate Affairs, Govt. of India, available at http://www.primedirectors.com/pdf/JJ%20Irani%20Report-MCA.pdf.

[5] Section 2(6), the Act.

[6] The term ‘significant influence’ under Section 2(6) of the Amendment Bill is proposed to mean control of at least 20% of the voting power or control or participation in business decision under an agreement.

[7] Discussion Paper on Bright Line Tests for Acquisition of ‘Control’ under SEBI Takeover Regulations, SEBI, available at http://www.sebi.gov.in/sebi_data/attachdocs/1457945258522.pdf, para 27.

[8] Acquisition of ‘control’ under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, available at http://www.aibi.org.in/Sebipr/SEBI%20PR%2056%202017%20Acquisition%20of%20control%20under%20SEBI%20SAST%20Regulations%202011.pdf., para 26.

[9] Related party under Section 188 of the Act is defined as a company which is a holding, subsidiary or an associate company of such company or any company which is a subsidiary of a holding company to which it is also a subsidiary.

[10] Section 2(76), the Amendment Bill.

[11] Section 2(1)(zb), the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.