Companes Amendment Act facilitates lending between group firms

The Companies (Amendment) Act, 2017 (the Amendment Act) received the President's assent in the first week of January 2018. The amendments cover significant areas of Companies Act, 2013 (the Cos Act) including definitions for identifying associate companies, holding and subsidiary companies, simplification of the private placement process, rationalisation of provisions relating to loans to directors, corporate social responsibility, managerial remuneration, etc.

Related party transactions

The Amendment Act has brought out a clarificatory proviso to exempt the member who is a related party, to vote on related party transactions if 90% or more members (in number) are relatives of promoters or are themselves related parties. This carve-out is pragmatic as the majority of the entities in India are driven by promoters and their family members.

Definition of subsidiaries, associates and small company

Definition of 'subsidiary' and 'associate' has been amended to bring them in line with Ind AS provisions. The test for a subsidiary now includes, "exercise or control of more than half of the total voting power", instead of "total share capital". This change was required in order to resolve practical problems faced by companies with substantial preference share capital. The restriction on a holding company having two layers of subsidiaries has been retained, subject to the provisions of Companies (Restrictions on the number of layers) Rules, 2017.

In case of 'associate', the term 'significant influence' has been amended to mean "control of at least 20% of the total voting power, or control of or participation in taking business decisions under an agreement" instead of "total share capital" in order to be in line with Ind AS 28. This may lead to increase in the number of associate companies, thereby enhancing compliance and necessitating consolidation of accounts. Further, the term 'joint venture' has also now been defined, to make it more consistent across all companies.

Definition of small company has been amended to increase the maximum paid-up share capital amount from Rs 5 crore to Rs 10 crore and prescribed turnover amount from Rs 20 crore to Rs 100 crore. Such increase in limits for small companies shall enable fast track mergers covering more companies.

Issue of shares at discount

Earlier there was prohibition on issuance of shares at a discount. Now, the Amendment Act has inserted a new sub-section 2A in Section 53, to allow companies to issue shares at a discount to its creditors when their 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. This is expected to make a significant impact on the restructuring plans allowing bankers to convert loans into shares of the company at a discount against earlier mandatory conversion of such loans into shares at the minimum of face value.

Private placement

Section 42 of the Cos Act which deals with the private placement of shares has been revamped to expressly provide that money received under private placement shall not be utilised unless the return of allotment is filed with the Registrar of Companies. This restriction seems to be imposed to safeguard against round-tripping of share application money without there being actual allotment of shares.

Granting of loans

The Amendment Act has abolished the restriction on grant of loans, security, etc. to entities in which directors are interested subject to fulfilment of certain conditions. This is a very welcome change and will facilitate lending between group companies with common directors across the group. Further, in order to prevent the misuse of aforesaid amendment, it has now been specifically provided that a loan has to be utilised by the borrowing company for its principal business activity.

Omission of Section 194 and 195 of Cos Act

The Amendment Act has omitted Sections 194 and 195 of the Cos Act which deals with the prohibition on dealing in securities by directors or key managerial personnel/prohibition of insider trading. These deletions are welcome as the listed public companies were having dual regulatory compliance. In order to reduce the regulatory overlap, prohibition on forward dealing and insider trading will be governed solely by the Securities and Exchange Board of India.

Insertion of new Section 3A of Cos Act

Earlier there was no such provision in the Cos Act which provided for consequences in case of the reduction in the number of members below minimum number (seven or two in case of public or private company respectively). Therefore, a new Section 3A has been introduced to expressly provide for liability of the members when the number of members falls below the minimum and the business is carried out for a period exceeding six months post such reduction.

The Amendment Act has carried out amendments to over 70 sections of the Act, to ensure that the practical challenges faced by the companies in India while implementing the provisions of the Cos Act are reduced and to become more transparent. The legislative intent of the amendment exercise appears to have been to liberalise where possible, and harmonise the compliance requirements with other laws. A welcome move indeed.

The writer is partner, tax, KPMG in India. Surbhi Maheshwari, senior executive of KPMG India, contributed to the article.