Update on the recent steps taken in order to ease doing business in India

AMENDMENTS TO COMPANIES’ ACT, 2013 AND RELATED RULES:

The Union Cabinet on 2nd December 2014 introduced an amendment bill in the Parliament proposing certain amendments to the Companies’ Act, 2013 (“Companies’ Act”). Post approval from the Lok Sabha (Lower House) and the Rajya Sabha (Upper House) of the Parliament, the amendment bill was finally assented to by the President of India on 26th May, 2015. These amendments are embodied in the Companies (Amendment) Act, 2015, most of provisions of which has been notified with immediate effect in the Official Gazette on and from 29th May 2015 (“Amendment Act”). The Amendment Act has also tried to address certain important misses / loopholes in Companies’ Act, 2013.

The following are the key highlights of Amendment Act:

• Removal of minimum capital requirements; 
• Removal of requirement of affixing Company’s Common Seal on certain documents;
• Omission of the requirement of filing commencement report with the Registrar of Companies;
• Maintenance of confidentiality in business conducted by Board of Directors of Companies;
• Additional condition in respect of declaration of dividend;
• Detection and reporting of fraud by Auditors of the Company;
• Grant of powers to Audit Committee of the Board relating to related party transactions;
• Easing of norms relating to loans to Directors etc;
• Easing of norms related to party transactions;
• Increase in punishment for violation of deposit acceptance norms from general public.

Removal of minimum capital requirements

In order to incorporate a new private limited or public limited company, the subscribers to the charter documents namely the Memorandum of Association need not arrange to pay any minimum capital. Earlier, for a new private limited company, the founders were required to pay up INR 100,000 (Indian Rupees One Hundred Thousand) as minimum capital and for a new public limited company, the founders were required to pay up INR 500,000 (Indian Rupees Five Hundred Thousand) as minimum capital. This is no longer required for incorporation of a new Indian company.

Removal of requirement of affixing Company’s Common Seal on certain documents

The requirement of affixing a Company’s Common Seal on certain documents such as a power of attorney and a share certificate has now been made optional. Hence, relevant provisions of the Companies’ Act, 2013 and relevant rules thereunder namely, the Companies (Share Capital and Debentures) Rules, 2014 and Companies (Registration of Charges) Rules, 2014 have been amended accordingly.

Omission of the requirement of filing commencement report with the Registrar of Companies

Earlier, before commencing business of a newly incorporated Company or exercise of any borrowing powers by the Company, such Company was required to file a commencement report with the Registrar of Companies to certify that all subscribers to the proposed paid-up capital have taken up the shares and also paid the respective subscription amounts into the Company and that the paid-up capital is not less than the minimum prescribed capital.

Maintenance of confidentiality in business conducted by Board of Directors of Companies

Earlier, public inspection and request for certified copies of Board of Directors resolutions passed using powers of Board of Directors under Section 179 was possible. Now with the amendment to the Companies’ Act, no person would be able to gain access to such resolutions through inspection or request for certified copies under Section 399. Accordingly, Companies (Registration Offices and Fees) Rules, 2015 have also been amended to that effect.

Additional condition in respect of declaration of dividend

The Amendment Act has not just simplified steps in incorporation and day to day management of a Company but has also tried to plug certain loopholes in the Companies’ Act, 2013. One such amendment includes addition of a condition to declaration of dividends. Accordingly, no Company would be entitled to declare dividend unless it has set off all carried over losses against the profits of the Company.

Detection and reporting of fraud by Auditors of the Company

Amendments have been made to the Companies’ Act, 2013 for reporting of frauds below a particular threshold (yet to be defined) to the Audit Committee or the Board of Directors and disclosure of such a report in the Board’s annual report. Earlier, all frauds in a Company, irrespective of the nature and size, were required to be detected and reported to the Central Government.

Grant of powers to Audit Committee of the Board relating to related party transactions

The amendments in this respect empowers the Audit Committee to provide an omnibus approval for related party transactions proposed to be entered into by the Company subject to such conditions as may be prescribed.

Easing of norms relating to loans to Directors, firms in which Directors are interested etc

The current prohibition on a Company giving loans to Directors, firms or persons in which such a Director may be interested has been eased by introduction of 2 more exceptions namely:

• any loan made by a holding company to its wholly owned subsidiary company or any guarantee given or security provided by a holding company in respect of any loan made to its wholly owned subsidiary company; or
• any guarantee given or security provided by a holding company in respect of loan made by any bank or financial institution to its subsidiary company:

Provided that the loans made under the above clauses are utilised by the subsidiary company for its principal business activities.

Easing of norms related to party transactions

A Company is able to approve certain related party transactions through a special resolution i.e. votes favouring the resolution should be atleast 3 times the votes against the resolution. With the amendments, Companies would be required to only pass an ordinary resolution i.e. votes favouring the resolution should be atleast 2 times the votes against the resolution. The provision has been further amended to exempt related party transactions between a holding company and its wholly-owned subsidiary from the requirement of shareholders’ approval provided the consolidated accounts of the wholly-owned subsidiary and the holding company are placed before the shareholders at the general meeting for approval.

Specific punishment for violation of deposit acceptance norms

No specific punishment was prescribed under the Companies’ Act in case a Company accepts deposits in contravention of provisions related to acceptance of deposits where the Company fails to repay the deposits/interest due within due date. This lacuna has now been corrected by inserting a provision which prescribes specific punishment for contravention of the deposit acceptance norms or in case of failure to repay the deposit or part thereof or any interest due thereon within the time prescribed with a fine which would not be less than INR 10,000,000 (Indian Rupees Ten Million) but which may extend to INR 100,000,000 (Indian Rupees One Hundred Million) for the Company in default, and every officer of such a Company who is in default would also be punishable with imprisonment which may extend to 7 years or with fine which should not be less than INR 2,500,000 (Indian Rupees Two Million Five Hundred Thousand) but which may extend to INR 20,000,000 (Indian Rupees Twenty Million) or with both.

Amendments to the Companies’ Act, 2013 in respect of applicability of certain provisions to private limited companies:

As a measure towards easing doing business by closely held corporates, the Central Government has notified directions either revoking or modifying the application of certain provisions of the Companies’ Act to private limited companies:

• Provisions relating the related parties transactions in Section 188 shall no longer apply between holding and subsidiary companies; 
• Provisions regarding the kinds of share capital and voting rights associated with such kinds of share capital shall not apply if the Articles of Association of the Company provide as such. Accordingly, private limited companies may take advantage of flexibility in issue of various kinds of share capital and related voting rights; 
• Provisions regarding length of notice to be provided to members of the Company and period between delivery of notice and opening of the offer, in respect of a rights’ issue shall not apply if atleast 90% of the members of the Company agree to lesser periods. 
• Adoption of employee stock option scheme would now need only an ordinary resolution i.e. votes favouring the resolution should be atleast 2 times the votes against the resolution instead of a special resolution i.e. votes favouring the resolution should be atleast 3 times the votes against the resolution; 
• Restrictions on purchase of own shares by a Company or lending to any person in order to acquire Company’s shares shall not apply to private companies if the following conditions are met: (i) if no other body corporate has invested in such private company; (ii) if the borrowings of such a Company is less than twice the share capital or INR 500,000,000 (Indian Rupees Five Hundred Million), whichever is less; and (iii) no default on such borrowing has occured; 
• Procedure relating the acceptance of deposits from members shall not apply if the monies accepted from members do not exceed the paid up share capital plus free reserves and the details are filed with the Registrar of Companies;
• Provisions regarding procedure for holding general meetings shall not apply if the Articles so provide;
• Resolutions passed by the Board of Directors of a private company under its powers under Section 179(3) need not be filed with the Registrar of Companies;
• A partner of a Chartered Accountant firm or a Chartered Accountant firm which holds the position of a statutory auditor in more than 20 Companies could now be appointed as a statutory auditor in One Person Companies, dormant companies, small companies, and private limited companies which have paid-up capital less than INR 1,000,000,000 (Indian Rupees 1 Billion).
• Cumbersome procedure relating to re-appointment of retiring director no longer applies;
• Requirement to vote on a motion to appoint each person as a director of the Company separately no longer applies;
• Restrictions of Board powers to borrow beyond aggregate of paid-up share capital plus free reserves, to sell whole or substantially whole of the undertaking etc, unless a special resolution is passed by shareholders, no longer applies;
• Now a director interested in a resolution before the Board may vote at the meeting after disclosing his/her interest;
• Provisions regarding loans to directors, firms in which directors are interested etc, shall not apply to a private company if the following conditions are met: (i) if no other body corporate has invested in such private company; (ii) if the borrowings of such a Company is less than twice the share capital or INR 500,000,000 (Indian Rupees Five Hundred Million), whichever is less; and (iii) no default on such borrowing has occurred;
• Provisions regarding ineligibility of a related party to vote at a shareholders meeting in case of resolution pertaining to approval of related party transactions shall not apply;
• Provisions relating to managerial remuneration, conditions and approval at a shareholders’ meeting shall not apply to managing directors, executive directors or managers of a private limited company.

AMENDMENTS TO CERTAIN RULES UNDER THE COMPANIES’ ACT, 2013:

Amendment to the Companies (Incorporation) Rules, 2014

Apart from the recent amendments to these rules pursuant to the Amendment Act, the Companies (Incorporation) Rules, 2014 were also amended on 1st May 2015, whereby an integrated process of incorporation of Companies was introduced, substituting the old process to some extent. A new integrated form INC-29 for making an application for incorporating a new Company was notified substituting the corresponding old ones. One may choose to use the old forms too. This integrated form allows founders of a new Company to comply with a range of obligations under the company incorporation process ranging from obtaining Directors Identification Number and Digital Signature Certificates to notice of situation of the registered office. Further, one may also apply for the Permanent Account Number (PAN) and Tax Deduction and Collection Account Number (TAN) as also registration under the Employee State Insurance Corporation Act, 1948, if applicable. Earlier, a Company would need to apply for PAN, TAN and ESIC registrations separately. This facility is available as per the procedure prescribed by the e-Biz portal on https://www.ebiz.gov.in. The e-Biz portal is continuously bringing and expected to bring under its ambit the facility of applying for more and more number of Central and State Government approvals. With these measures, it is expected that the Company incorporation process will become less cumbersome, more efficient and less time consuming.

Amendment to Companies (Share Capital and Debentures) Rules, 2015

Besides consequential amendments pursuant to the Amendment Act, the Companies (Share Capital and Debenture) Rules, 2014 was also amended on 18th March, 2015 and following are the key amendments which are noteworthy:

• In case of companies listed on a stock exchange, duplicate share certificates can now be issued within 45 days (as opposed to 15 days under the previous rule);
• Employee or director of an associate Company is no longer eligible to participate in any Employee Stock Option Plans/Schemes of a Company as they have been excluded from the definition of “Eligible Employees”; and
• In case of any preferential offer made by a company to one or more existing members (shareholders) of a Company only, the provisions relating to issue of letter of offer and obtaining completed application forms from such members will not be applicable.

FOREIGN DIRECT INVESTMENT (FDI) – REPORTING UNDER FDI SCHEME ON THE E-BIZ PLATFORM 

Reserve Bank of India has issued directions to all Categories – I Authorized Dealer Banks informing them about the enabling the use of the Virtual Private Network (VPN) accounts from National Informatics Centre (NIC) for accessing the e-Biz portal of the Government of India for filing of the Advanced Remittance Form and FCGPR Form under the FDI scheme through the e-Biz platform. The VPN account will be in the name of the individual users and will be coterminous with the lifetime of the Digital Signing (Class 2) certificates (which is for a maximum period of two years) issued by Institute for Development and Research in Banking Technology (IDRBT), Hyderabad; and the AD Category-I banks will be required to credit (through NEFT/RTGS) the payment in advance for the VPN accounts (@ INR 9,654/- per account for a block of two years) directly to National Informatics Centre Services Inc’s (NICSI) bank account.

We thank Ms. Sarika Raichur, Senior Consultant for India (external) to Noerr LLP, for her valuable inputs in preparing this article.

The information provided does not substitute legal advice in particular cases.