ANALYSIS OF COMPANIES (AMENDMENT) ACT, 2017
PART II
IMPORTANT AMENDMENTS MADE TO PROVISIONS RELATING TO INCORPORATION OF A COMPANY, PROSPECTUS AND
ALLOTMENT OF SECURITIES, SHARE CAPITAL AND ACCEPTANCE OF DEPOSITS.
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IMPORTANT AMENDMENTS MADE TO PROVISIONS RELATING TO INCORPORATION OF A COMPANY
- Members personally liable in case of reduction in the minimum number of members (Section 3A) – Enforced
Position before the Amendment Act
1.1 Under Companies Act, a private company is required to have minimum 2 members and a public company is required to have minimum 7 members.
1.2 Unlike section 45 of Companies Act 1956, which prescribed the consequences of reduction in the number of members below the aforesaid statutory minimum, the Companies Act, 2013 did not contain such provisions.
Position after the Amendment Act
1.3 When the minimum number of members falls below the statutory minimum (seven or two in case of public or private company respectively) and such a situation continues for a period exceeding six months, and the existing member is / aware of the default, then, such member(s) shall be severally liable for the payment of the whole debts of the company contracted during that time, and may be severally sued therefore.
2. Reservation of name of the Company (Section 4) – Enforced
Position before the Amendment Act
2.1 In case of seeking name availability for incorporation, the name reserved by the RoC was available for 60 days from the date of the application.
Position after the Amendment Act
2.2 The period for reservation of name is substituted from ‘60 days from the date of the application’ to ‘20 days from the date of approval’.
2.3 In case of change in name by an existing company however, the name reserved by the RoC shall be valid for 60 days from the date of approval.
Our Comments (in brief)
2.4 Considering that the timeline of name availability has been reduced to 20 days, promoters will have to expedite the submission of documents to the RoC for incorporation.
- Registered Office and Notice of every change of the situation of the registered office (Section 12) – Enforced
3.1 The company shall within 30 days of its incorporation have registered office instead of current requirement to have registered office on and from the 15th day of its incorporation.
3.2 Notice of every change of the situation of the registered office, shall be given to the RoC within 30 days instead of 15 days, as currently provided.
Our Comments (in brief)
3.3 A period of 15 days was too short as certain documents like lease deeds, rent agreements and other related documents were required to be submitted besides various approvals that may have to be obtained. Accordingly to address the concerns, the period is increased to 30 days.
- Authentication of documents, proceedings and contracts (Section 21) – Enforced
Position before the Amendment act
4.1 Only a KMP and any officer of the company, can authenticate documents on behalf of the company.
Position after the Amendment act
4.2 Apart from KMP and any officer of the company, any employee of the Company who is duly authorised by the Board can authenticate documents on behalf of the company.
IMPORTANT AMENDMENTS MADE TO PROVISIONS RELATING TO PROSPECTUS AND ALLOTMENT OF SECURITIES
- Matters to be stated in Prospectus (Section 26) – Enforced
Position before the Amendment act
5.1 Every prospectus issued by or on behalf of a public company which intended to get its securities listed on a stock exchange had to contain detailed information in relation to the company which was in addition to the requirements specified by Securities and Exchange Board of India (SEBI) and that of the legislative framework of SEBI Act, 1992 and Securities Contract Regulation Act.
Position after the Amendment act
5.2 The Amendment Act, 2017 empowers SEBI to prescribe the contents of a prospectus (in consultation with the Ministry of Corporate Affairs), where instead of detailed list of contents of the Prospectus, the prospectus shall state such information and set out such reports on financial information as may be specified by SEBI.
Our Comments (in brief)
5.3 Disclosures in the prospectus required under the Companies Act, 2013 and the Securities and Exchange Board of India Act, 1992 and the Regulations made thereunder are aligned by omitting the information, reports and declarations required in the Companies Act, 2013
- Civil liability for misstatement in prospectus (Section 35) – Enforced
Position before the Amendment act
6.1 In case a person subscribes for securities of a company or acts on any statement included in the prospectus which is misleading and as a consequence, such person has sustained any loss or damage, then, following persons would, inter alia, be held liable:
a. Director of a company at the time of issue of prospectus/consented to be named in the prospectus as a director
b. An expert referred under Section 26(5) of the 2013 Act (i.e. who is not engaged/interested in the formation/promotion of the company, has given his/her consent to the issue of the prospectus and has not withdrawn such consent before the delivery of a copy of the prospectus to the ROC for registration. Additionally, a statement to that effect has been included in the prospectus).
6.2 However, a person would not be held liable if he / she proves that, – he / she withdrew his / her consent to become a director before the issue of prospectus or the prospectus was issued without his/her knowledge and a public notice is given to that effect.
Position after the Amendment Act
6.3 The Amendment act provides relief to the Director, promoter etc. from any civil liability if such person(s) has relied on a misleading statement made by an expert and he had reasonable ground to believe and did up to the time of the issue of the prospectus believe, that the person making the statement was competent to make it and that the said person had given the consent required and had not withdrawn it.
Our Comments (in brief)
6.4 The Amendment would provide a sigh of relief to the persons specified in section 35(1) and who have given their consent/declarations depending on any expert opinion.
- Private placement of securities (section 42) –Not Enforced
Position after the Amendment Act
7.1 The Amendment Act simplifies the private placement process by doing away with separate offer letter details to be kept by company and reducing number of filings to RoC. Requirement to file Form GNL-2 has been discontinued.
7.2 The Companies are allowed to make offer of multiple security instruments simultaneously.
7.3 Time limit for filing return of allotment with the ROC for private placement is also reduced to 15 days from 30 days.
7.4 The use of the money has been linked with filing of a return with ROC wherein a company cannot utilise the private placement proceeds till the time that the return of allotment is filed with the RoC. Separate penalty provided for default in filing of return of allotment.
7.5 The amount of penalty for contravention has been limited to Rs 2 crores, which was earlier extending to the entire amount raised by private placement.
Our Comments (in brief)
7.6 Restriction on utilization of subscription money before making actual allotment and additionally before filing the allotment return to the RoC is unreasonable to some extent. Return filing is just a post contractual compliance. Companies requiring immediate funds would hence have to plan the private placement allotment on timely basis
IMPORTANT AMENDMENTS MADE TO PROVISIONS RELATING TO SHARE CAPITAL AND DEBENTURES
- Prohibition on issue of shares at discount (Section 53) – Enforced
Position before the Amendment Act
8.1 Companies are prohibited from issuing shares at a discount.
Position after the Amendment Act
8.2 Companies are now allowed to issue shares at a discount, to its creditors when its debt is converted into shares in pursuance of any statutory resolution plan or debt restructuring scheme in accordance with any guidelines or directions or regulations specified by the Reserve Bank of India.
Our Comments (in brief)
8.3 The Amendment will make a significant impact, as the bar in the Companies Act, 2013 against issuing shares at a discount forced bankers to convert the loans at least at par value of the equity.
- Sweat Equity Shares (Section 54) – Enforced
Position before the Amendment Act
9.1 Sweat equity shares (shares issued for consideration other than cash) can be issued only after expiry of one year from the date of commencement of business.
Position after the Amendment Act
9.2 Sweat equity shares can be issued at any time after registration of the company.
9.3 Company can issue such shares to directors or employees for providing their know-how and can attract talent by providing such incentives from the period it commences business.
IMPORTANT AMENDMENTS MADE TO PROVISIONS RELATING TO ACCEPTANCE OF DEPOSITS
- Matters relating to acceptance and repayment of deposits (Section 73 and 74) – Enforced
| # | Position before the Amendment Act
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Position after the Amendment Act
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Our Comments (in brief)
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| 1 | In accordance with sections 73(2)(c) and 73(5) of the 2013 Act, a company accepting deposits from its members or the public is required to deposit an amount not less than 15% of the amount of its deposits maturing during the current and the next financial year in a separate bank account with a scheduled bank. The said account is known as the deposit repayment reserve account and cannot be used by the company for any purpose other than the repayment of deposits. Private companies accepting deposits within the specified limits from their members are exempted from this requirement.
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The Amendment Act, 2017 changes the requirement for maintaining a deposit repayment reserve account in a scheduled bank to 20% of the amount of deposits maturing during the following financial year (earlier the requirement was 15% of the amount of deposits maturing during the financial year and the financial year next following).
Further 30th April is specified as the due date on or before which amount to be kept in a scheduled bank in a separate bank account each year.
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The pre-amendment provisions increased the cost of borrowing for companies and locked up a highpercentage of the borrowed sums. Post-amendment, there will be no need to deposit any amount in respect of deposits maturing in the next financial year.
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| 2 | Section 73(2)(d) mandated a company accepting deposits to provide for deposit insurance in the manner and extent as prescribed in the Companies(Acceptance of Deposits) Rules, 2014.
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Further the requirement of providing of deposit insurance is done away with.
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The omission of the requirement of deposit repayment insurance is a welcome step because though an insurance company is not prevented by the IRDA from devising an insurance policy to cover default risks, it is difficult to assess the risk and its likely exposure to liability as companies are not as tightly regulated as banks with particular reference to their financial efficiency and fulfilment of commitments.
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| 3 | To invite, accept or renew any deposits, section 73(2)(e) of the 2013 Act requires a certification from the company that no default has been committed either in the repayment of deposits or interest thereon, accepted either before or after the commencement of the 2013 Act. This requirement apparently covers all past defaults, without any time limit.
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The prohibition on accepting further deposits would apply indefinitely only to a company that has notrectified/made good earlier defaults. However, if acompany has made good an earlier default in repayment of deposits and interest due thereon, then it should be allowed to accept further deposits after a period of 5 (five) years from the date it repaid theearlier defaulting amounts. However, a full disclosureof all past defaults will be required.
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The Companies Law Committee observed that the prohibition on companies to accept deposits (if they have defaulted in repayment of deposits accepted earlier) was too harsh on companies which may have defaulted due to reasons beyond their control, such as industry conditions at some point of time in the past but have repaid such deposits with earnest efforts thereafter. Imposing a lifelong ban for a default anytime in the past would be inappropriate.
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| 4 | Section 74(1)(b) of the 2013 Act states that in respect of any deposit accepted by a company before the commencement of the Act, where the amount of such deposit or part thereof or any interest due thereon remains unpaid on such commencement or becomes due at any time thereafter, the company will repay it within 1 (one) year from such commencement or from the date on which such payments are due, whichever is earlier.
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The amount of deposits accepted by a company before the commencement of the 2013 Act could be repaid within 3 (three) years from the date of commencement of the 2013 Act (earlier the time period was one year) or before the expiry of the period for which the deposits were accepted (earlier it was the date on which such payments are due), whichever is earlier.
Any renewal of earlier deposits should be done as per the requirement of the 2013 Act.
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