Analysis of Key Changes Under Companies (Amendment) Act, 2017

Practice Areas

The Companies (Amendment) Act, 2017 (“Act, 2017“) has seen the light of the day with the receipt of President’s assent on January 03, 2018. The Companies (Amendment) Bill, 2017 (“Bill, 2017“) was duly passed in both the Houses of the Parliament on July 27, 2017 and December 19, 2017. The Bill, 2017 as approved by Lok Sabha was mutatis mutandis adopted by Rajya Sabha. The Act, 2017 addresses the difficulties in implementation, facilitates the ease of doing business, helps achieving better harmonisation with other statutes and rectifies inconsistencies in the Companies Act, 2013. An overview of the key changes brought about by the Amendment Act is as under.

Incorporation of company and matters incidental thereto

  • The period for reservation of name is substituted from ‘sixty days from the date of the application’ to ‘twenty days from the date of approval or such other period as may be prescribed’. However, in case of change of company by an existing company, there is no impact as the timelines are same.
  • At the time of incorporation of the company, declaration by each subscriber will be required to be attached instead of an affidavit.
  • The timeline for having a registered office by a new company and reporting of shifting of registered office to the Registrar has been increased from fifteen days to thirty days.

Private Placement

The provisions related to the private placement have been completely revamped. Section 42 now contains an express provision that companies cannot use funds till return of allotment has been filed with RoC within 15 (Fifteen) days from the date of allotment. There is no requirement to file Form GNL-2.

Clarification has been given to the effect that the private placement offer and application shall not carry a right of renunciation. The Companies are also allowed to make offer of multiple security instruments simultaneously.

Issue of shares at discount

Companies may now 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 under the Reserve Bank of India Act, 1934 or the Banking (Regulation) Act, 1949. This provision has been inserted to facilitate restructuring of a distressed company, when the debt of such a company is converted into shares in accordance with any specified regulations or guidelines.

Significant beneficial ownership

The whole of Section 90 has been revamped and the new concept of ‘significant beneficial owner’ and related reporting requirements (by companies and shareholders) has been introduced.

Holders of beneficial interest of not less than 25% of the shares, or the right to exercise, or the actual exercise of significant influence or control are now classified as ‘significant beneficial owners’. Companies are required to maintain a register of members with significant beneficial interest which shall be open to inspection by members. The requirement of maintenance of a register of significant beneficial ownership will certainly bring about complete transparency about holdings of shareholders including individuals, trusts and persons not resident in India, who may have significant influence or control.

Loans and Investments

  • Loans to Directors – Companies are now permitted to give loans to entities in which directors are interested, after passing special resolution at a general meeting, adhering to disclosure requirements, and the borrowing company can utilise the loan for its principal business activities.
  • Loans/security/guarantee provided to WOS or JV Company, or acquisition of securities of WOS exceeding the prescribed limits (60% of paid up share capital, free reserves and securities premium or 100% of free reserves and securities premium) does not require special resolution but will have to be disclosed in the financial statements.

Related Party Transactions (RPTs)

Section 188 of the Companies Act, 2013 requires RPTs to be approved by disinterested shareholders in case the exemption criteria are not met, thereby restricting the related party from voting. Compliance with this requirement will be challenging for companies that are closely held having 2-3 shareholders, since all shareholders will be related parties. To address this issue, a provision clarifying the same has been introduced to exempt the restriction of abstaining the related party to vote on related party transactions, if 90% or more members (in number) are relatives of promoters or are themselves related parties.

Director or officer of the Company may enter into a RPT not exceeding Rs. 1,00,00,000/- (Rupees One Crore only) without the approval of the Audit Committee. However the same is to be ratified by the Audit Committee within 3 (Three) months. If the same is not ratified, RPT shall be voidable at the option of the Audit Committee and the director concerned shall be required to indemnify company against any loss incurred by it.

Deposits

A Company accepting deposit will be required to deposit and keep in a scheduled bank an amount which is not less than 20% of the amount of deposits maturing during the current financial year. There is no need to deposit any amount in a scheduled bank in respect of deposits maturing in the next financial year. The amount should be deposited in a scheduled bank on or before the 30th day of April each year.

The requirement to have deposit insurance is omitted considering the fact that none of the insurance companies are offering insurance products for covering company deposit default risks.

Audit and Auditors

The requirement relating to ratification of auditors by the members of the Company at every AGM has been removed by the Act, 2017. It also clarifies that any person who provides directly or indirectly any service referred under Section 144 of the Companies Act, 2013 to the Company, its holding company or to its subsidiary, is ineligible to be appointed as an auditor of the Company.

The Act, 2017 clarifies on the powers and duties of the auditor to have a right to access the records of all its associates in addition to the subsidiaries for the purpose of consolidation of its financial statements and the auditor would also report on the internal financial control with regard to the financial statements.

Corporate Social Responsibility

A new proviso has been inserted after section 135(1), where a company that is not otherwise required to appoint an independent director under Section 149(4), can constitute a CSR committee with two or more non independent directors.

For the purpose of determining the applicability and constitution of CSR Committee net worth, turnover or net profit of immediately preceding financial year shall be considered.

Filing Fees

The Companies Amendment Act, 2017 has increased the fee in delay in filling forms, returns, documents, information under section 92 (Annual Return), and section 137 (Financial Statements). The additional fees will not be less than hundred rupees per day. Delayed filing fees will vary depending on the number of defaults and nature of form to be filed.

Appointment and Remuneration of Managerial Personnel

The change provides that the company may appoint or continue the appointment of a person as a managing director, whole time director or manager who has attained the age of seventy years in case no special resolution has been passed, but an ordinary resolution has been passed and the Central Government is satisfied on an application that such appointment is beneficial to the company.

The change also replaces the approval of the Central Government for managerial remuneration above the prescribed thresholds with approval by the shareholders in a general meeting by way of a special resolution.

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