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The amendments to Companies Act are a great relief to India Inc

In just over a year after operationalizing most provisions of the Companies Act 2013, the first amendment to this Act has received the assent of the President on May 25, 2015 and was notified yesterday.  

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In just over a year after operationalizing most provisions of the Companies Act 2013, the first amendment to this Act has received the assent of the President on May 25, 2015 and was notified yesterday.  

The Companies (Amendment) Act, 2015, primarily aimed at improving the ease of doing business in India, has taken into account the pressing issues and key challenges and that have been raised by corporates as well as professionals from their experience in implementing the Act.  These amendments, which came into effect from 26 May 2015,  are a great relief to corporates as they go about implementing the new law.  

However, there are still some areas where corporates continue to have concerns, and the post implementation review of the Act should address these other issues. 
 
Areas such as related party transactions, inter-corporate loans, and fraud reporting have had corporates struggling for a while now, trying to balance compliance with the new requirements without hampering the day to day business requirements.  Some of these amendments will provide the necessary relief to corporates, and also bring certainty to certain other relaxations that were earlier provided through the rules accompanying the Act.  

In particular requiring only a simple majority to pass resolutions on related party transactions would come as a great relief to corporates, apart from other relief through exemption of transactions with wholly owned subsidiaries from shareholder approval process and also permitting the Audit Committee to provide omnibus approvals for the year on recurring transactions with related parties.  

However, there still is divergence between some of the provisions of the Act and that of Clause 49 of the Listing Agreement; corporates continue to hope that these matters will get aligned at some point to ease implementation challenges.  

Similarly, the amendment which will require reporting of only material frauds to the central government would provide great relief to both corporates as well as auditors; however, it now comes with a requirement for the frauds below the threshold to be disclosed in the annual report. 
 
On the whole, it is a step in the right direction, and would certainly bring some ease to doing business in India.   
 
Analysis of key amendments
During the course of implementation of the Act, there were several requirements prescribed and certain clarifications provided through the Rules accompanying the Act.  Some of these were seen to be having an effect of overreaching the requirements of the Act, and therefore, vide the Amendment Act, these requirements have been included within the Act itself.  

This is a welcome move and will reduce any potential for litigation resulting from a legal challenge of the requirements in the Rules.  

Matters that have been addressed in this area include the requirements for declaration of dividend, and granting of loans to wholly owned subsidiaries in which directors are interested.  
 
The changes made on related party transactions are largely to address concerns from corporates on implementation of the new requirements.  

In doing so, it seeks to partly align the requirements of the Act with the SEBI requirements whereas in some other aspects, it has sought to provide greater relaxation as compared to the SEBI requirements.  

The amendment exempting transactions with wholly owned subsidiaries and allowing companies to obtain omnibus approvals from the Audit Committee for related party transactions have aligned the Act with similar changes that have been introduced by SEBI.  

However, on transactions that require shareholders’ approval, the SEBI requirements and those under the Act have diverged further.  

SEBI requires a special resolution for material transactions and only non-related party shareholders are permitted to vote on such transactions, whereas as per the amendments in the Act, only an ordinary resolution is required, and all related parties who are not interested in the specific transaction are permitted to vote.  

However, this move seems to have emanated from the hardship being faced by corporates who may not have been able to get minority shareholders’ approval on proposed transactions.  However, in the case of listed companies, the stricter of the two norms would apply. 
 
On reporting of fraud by the Auditor to the Central Government, both the Act as well as the related Rules did not include any reference to materiality of the fraud involved.  

While this concept was considered in the draft rules, the final rules chose to remain silent, making it onerous for the auditor by requiring him to report all frauds to the Central Government.  

The amendment now restricts this reporting requirement to only material frauds, for which the thresholds would be prescribed.  

This would bring great relief to both corporates as well as auditors.  However, for those frauds that fall below the materiality threshold and are now exempt from being reported to the Central Government, would need to be disclosed in the annual report. 
 
The amendment also seeks to address the confidentiality and privacy concerns of businesses due to the requirement to file certain board resolutions with the Registrar of Companies, by prohibiting public inspection of such documents; however, industry might still have concerns over the requirement for filing such documents.  

Further, with a focus on investor protection, the amendment seeks to bring in specific punishment for acceptance of deposits in violation of the more stringent requirements that have been prescribed under the new Act. 

Sai Venkateshwaran is Partner and Head  of Accounting Advisory Services, KPMG in India.

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