ASSOCHAM views on implementation of Companies Act, 2013
The new Government, under the leadership of Shri. Narendra Modi, has initiated a range of bold and positive steps towards reviving the economy, along with superior and effective governance. Clearly, the deliberation on the positives and challenges of the Companies Act, 2013 is one such strategic step.The new Companies Act 2013 was passed by the Parliament after 11 years of deliberations, and was indeed one of the key reforms in the past few years, for India Inc. - one that replaced the 57-year old Companies Act, 1956.
Through its 29 chapters, 470 clauses and 7 schedules, one of the primary objectives of the Act was to provide greater simplicity, shareholder democracy and self-regulation.
Few highlights of the Act:
The Act has several positive recommendations - including on Corporate Governance, one person company concept, National Company Law Tribunal (NCLT) & Appellate Tribunal (NCLAT)
However the corporate sector is experiencing impediments in complying with several sections and rules made under Companies Act, 2013 on account of some lack of clarity, few inconsistencies and some non-pragmatic issues in the implementation of such provisions.
Many proposals of the Act are therefore in need of further clarity and refinement to allay industry concerns.
ASSOCHAM has held over 10 rounds of discussions with its members across industry segments, and has been regularly receiving valuable feedback from members and industry at large on specific sections in the Act that need to be addressed to make this key reform a catalyst for economic growth and maximum governance.
There are several aspects of the Act that require due reconsideration, of which we are identifying a select few currently. A more detailed note dealing with 20-odd sections has been shared with the Hon'ble Secretary and Additional Secretary today.
Key aspects that require clarity:
1) Corporate Social Responsibility (CSR), as envisaged in the Companies Act, 2013 can help forge a new Industry-Government partnership for inclusive growth. However, provisions in the Act and the Companies Rules, 2014 have different definitions for Net Profits and divergent provisions to set up a CSR committee with an independent director on board. The industry expects the Act as well as the Rules to be in harmony while laying down guidelines for CSR activities. Further clarity is required in terms of tax benefit on CSR spends.
2) The Act has empowered the Board of a company on issuance of securities. The Companies Rules, 2014 (addendum to Companies Act 2013), however, have restricted powers of the Board with respect to debentures. Further, charge on specific assets has been stipulated in the Rules, rather than a floating charge to secure debentures. These Rules will end up restricting capital raising opportunities. We recommend an urgent review of these Rules in consonance with the Companies Act to facilitate capital raising for corporates.
3) For the issuance of preferential shares, the Act prescribes a valuation report from a registered valuer for determining share price. The said valuation exercise cannot capture several business aspects that are considered while valuing a preferential share, which therefore needs to be done in-house by the issuer. We recommend that this provision be removed from the Act.
4) Limiting the levels of subsidiaries for investments purposes to 2 may curb the flexibility of corporate entities, particularly in Infrastructure, where subsidiaries or SPVs are a norm. M&A activity can also get hampered.
5) The Act empowers the Board of Directors to monitor the appointment or removal of one level below the Key Management Personnel. The Board's approval is now also required for transactions in excess of a certain threshold in investments made by the company. However, these decisions are of an execution nature and therefore can be well managed within the existing corporate governance structure, thereby enabling the Board to focus on oversight of the management policies, systems and direction. We request that these provisions be repealed from the Act.
6) E-voting is being rightly encouraged. This is the way forward given that investors are globally located and even retail investors are also increasingly networked.
7) The Act requires listed companies to report changes in the shareholding of promoters, and top 10 shareholders to the Registrar of Companies. There is a need for clarity on the threshold that triggers reporting obligation, as also permit accepting similar returns filed with SEBI to avoid duplication in reporting.
8) The Act has elaborate norms for public limited companies to appoint directors to fill up vacancies. However, the same norms are not extended to private limited companies to appoint Directors. The provision on appointment of directors should be in parity for both public and private limited companies.
9) The criminal liabilities on directors of a company should be further defined to include on only serious non-compliance or violations including fraudulent conduct in order to avoid victimization.
10) As per the Act, private placement is allowed to entities whose names are available with the company prior to the issue. It is at times not feasible for the issuer to have the complete list of investors beforehand. Therefore, this pre-requisite should be repealed to facilitate a vibrant and robust capital market.
11) The Act requires that private limited companies, even if not making profits/ adequate profits, need to pay remuneration to its directors & managers as prescribed in the Act. However, since private limited companies tend to be closely held, a cap on the managerial remuneration adds to their cost of compliance. We request a reconsideration of this provision to retain/ attract requisite managerial talent, as well as improve competitiveness.
12) The Concept of Class Action Suit, while prevalent in other developed countries and is important to provide rights to stakeholders, is new to India, and needs to be well explained to the stakeholders.
ASSOCHAM, on behalf of the industry, interacted extensively with the Government and various other stakeholders throughout the deliberations of the Act. We believe that legitimate concerns of the industry should be given due consideration to refine the Act and foster a sound and enabling business regulatory environment and improve investor confidence.
Such initiatives by NFCG will actualize lesser regulation, responsible self-regulation, more compliance, and freedom of the entrepreneur. This springboard from the regime of control to that of liberalization will ensure far more dynamic and evolving business regulations within the framework of greater accountability and responsibility.
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