Indian Parliament Passes the Companies Bill, 2012

August 22, 2013

On August 8, 2013, India’s upper house of Parliament passed the Companies Bill, 2012 ("Companies Bill"). The Companies Bill is a new legislation that is intended to replace the existing [Indian] Companies Act, 1956, as amended ("1956 Act") which currently governs Indian companies. The Companies Bill was previously passed by India’s lower house of Parliament in December, 2012[1]. The Companies Bill will come into effect after it receives assent from the President of India and is notified by the Government of India ("Government"). The Companies Bill requires the Government to notify each provision of the Companies Bill separately before such provisions become legally applicable to Indian companies.

Background

The Government introduced the Companies Bill with the primary aim of protecting the interest of employees and small investors of Indian companies and ensuring greater transparency in the operation of Indian companies.

This client advisory is intended to highlight certain key concepts of the Companies Bill even before this very important and much awaited legislation becomes law. Various provisions of the Companies Bill will become effective only upon the framing by the Government of rules, regulations and other legislation. It is expected that this subordinate legislation will be prescribed by the Government, prior to the Companies Bill being brought into effect. We will update our client alerts as these rules and regulations are issued by the Government. 

Key Highlights of the Companies Bill

The following are some of the key changes sought to be made by the Companies Bill, with particular relevance to foreign investors:

• One Person Company: The Companies Bill permits one person companies, i.e., a single individual is permitted to set up a company as the sole shareholder. In contrast, the minimum number of members required to set up a company under the 1956 Act is two.

• Small Company: The Companies Bill has introduced the concept of ‘small companies’, to be determined based on prescribed share capital and turnover thresholds. Small companies have been favoured with relaxation from certain provisions of the Companies Bill that are applicable to other classes of companies, such as those relating to board meetings, reporting requirements, etc. 

• Associate Company: The Companies Bill has introduced the definition of an associate company, i.e., a company in which another company has a significant influence, but which is not a subsidiary of such company. A joint venture is also treated as an associate company of a company if such company has significant influence over the joint venture. ‘Significant influence’ is defined to mean the ability to control at least twenty per cent of the total share capital or business decisions under an agreement. The concept of associate companies under the Companies Bill is relevant in the context of various reporting requirements, related party transactions, etc.

• Dormant Company: The Companies Bill gives recognition to a new category of companies called dormant companies, i.e., companies that have no significant accounting transactions and have been incorporated and registered for a future project or to hold an asset or intellectual property or companies that are inactive. Such companies are exempted from certain requirements under the Companies Bill that are applicable to active and operational companies. Dormant companies are permitted to have a minimum number of directors, make only specific filings, etc., all of which are yet to be prescribed by the Government.

• Holding and Subsidiary Companies: The Companies Bill has widened the definition of a subsidiary to include a company in which the holding company exercises or controls more than half of the ‘total share capital’ either on its own or together with one or more of its subsidiary companies. In contrast, the 1956 Act refers to control of more than half of the ‘equity share capital’ to determine whether a company is a subsidiary of the other.

• Investments by Companies:  The Companies Bill specifically prohibits Indian companies from making investments through more than two layers of investment companies. The two exceptions to this provision are (a) an Indian company is permitted to acquire a company incorporated outside India if such other company has investment subsidiaries beyond two layers in compliance with the laws of such country, and (b) a subsidiary company is required to have further downstream investment subsidiaries under applicable law.

• Inter-se Transfer Restrictions: The Companies Bill expressly recognizes share transfer restrictions between shareholders of a public company and allows shareholders to enforce such restrictions as contractual obligations. The 1956 Act does not contain a similar provision and specifically provides that shares of a public company are freely transferable. This has led to a lot of ambiguity and been a subject of judicial scrutiny in India as to whether such share transfer restrictions between shareholders of public companies are enforceable. The new provision will help clear this existing ambiguity.

• Issue of Shares at Discount: The Companies Bill prohibits issuances of shares at a discount. The only exception to this is the issuance of sweat equity shares, which may be issued at a discount in accordance with provisions of the Companies Bill.

• Buy-back of Shares: The Companies Bill mandates that an Indian company cannot buy-back its shares for a period of twelve months from the date of completion of a previous buy-back offer. 

• Financial Year: The financial year of an Indian company is now required to end on March 31st of every year. Companies which are subsidiaries or holding companies of foreign companies requiring consolidation outside India are permitted to have different financial year end with the specific approval of the National Company Law Tribunal ("NCLT"). Existing companies are given a period of two years to align their financial year end accordingly.

• Mergers: Certain categories of mergers, such as those between a holding company and its wholly-owned subsidiary and between two small companies, are now permitted under the Companies Bill, without the requirement of a court process.

• Outbound Mergers: The 1956 Act only permits a merger of a foreign company with an Indian company. The Companies Bill specifically permits Indian companies to merge with foreign companies, with the approval of the Reserve Bank of India. 

• Auditors: The Companies Bill has introduced stricter norms for auditors of Indian companies. One of the key changes is that listed Indian companies are compulsorily required to rotate their auditors every five years (in case of individual auditors) and ten years (in case of an audit firm). Auditors have also been expressly restricted from providing certain services such as management services and investment related advice to companies that they audit and to the holding and subsidiary companies of such companies.

• Directors: Under the 1956 Act, all directors of an Indian company can be non-resident Indians. The Companies Bill requires at least one director of an Indian company to be resident in India for more than 182 days in a financial year. Further, certain classes of companies (to be prescribed by the Government) are required to have at least one woman director on their board.

• Independent Directors: Currently, other than the listing agreement which Indian listed companies execute with stock exchanges, the term ‘independent director’ has not been defined or dealt with under the 1956 Act. The Companies Bill provides that at least one-third of the board of directors of certain classes of companies (to be prescribed by the Government) in addition to listed companies, should comprise of independent directors. The term ‘independent director’ is also defined in the Companies Bill. 

• Board Meetings: The Companies Bill permits directors to attend board meetings through video conferencing and other electronic means for such directors to be considered towards constituting a quorum, provided that the proceedings of such meetings can be recorded and stored. A minimum notice period of seven days is required to convene a board meeting. If a board meeting is required to be called at a shorter notice, at least one independent director is to be present at such meeting (failing which any decision taken in such meeting will not be considered final unless it is ratified by an independent director). 

• Key Managerial Personnel: The Companies Bill defines the term ‘key managerial personnel’ ("KMP") of a company to include the chief executive officer, managing director, company secretary, whole time directors and the chief financial officer. Every prescribed class of company will be required to appoint a chief executive officer or managing director, company secretary, whole time director and a chief financial officer. A KMP of a company cannot be KMP of any other company other than a subsidiary of such company.

• Related Party Transactions: The Companies Bill specifically defines a ‘related party’ in relation to a company. Additionally, while the 1956 Act required a company to obtain the prior approval of the Government for certain categories of related party transactions, the Companies Bill has dispensed with this requirement. The Companies Bill instead requires a company to obtain shareholders’ approval by way of a special resolution for certain categories of related party transactions to be prescribed by the Government.

• Whistleblower Protection: The Companies Bill requires listed companies and certain other classes of companies (to be prescribed) to establish a ‘vigil mechanism’ for directors and employees to report their concerns and to provide adequate safeguards against the victimization of whistleblowers.

• Corporate Social Responsibility ("CSR"): Companies with a net worth of INR 5,000,000,000 (approximately USD 81 million) or more, or a turnover of INR 10,000,000,000 (approximately USD 162 million) or more, or a net profit of INR 50,000,000 (approximately USD 810,000) or more, during a financial year, are required to constitute a ‘corporate social responsibility committee’ of their board of directors, consisting of three or more directors. At least one of such directors is required to be an independent director. The committee is required to recommend a CSR policy to the board of directors. The board is required to ensure that at least two percent of the average net profits of the company during the three immediately preceding financial years are spent by such company in the current financial year towards CSR initiatives.

• Class Action Suits:  The Companies Bill now specifically permits a specific number of shareholders or depositors to file an application before the NCLT if they are of the opinion that the management and control of the affairs of the company is being conducted in a manner that is prejudicial to the interests of the company, its shareholders or creditors. Various remedies can be sought by the applicants under such proceedings including damages, compensation, restriction against passing of a resolution or declaration of a resolution to be void, etc.