The half-baked Companies Act, 2013, has come to haunt industry yet again. It has been just one-and-a-half year since the new Companies Act came into force. Already, around 100 amendments have been either made or proposed. The latest changes, 78 in all, have been recommended by the Companies Law Committee, constituted in May 2015. And this, when the full law is not in force yet.
Alhough most experts have welcomed the recommendations, they complain that the changes are too much in too little time (the law came into force on 1 April 2014). This shows the law was hurriedly drafted, they say.
Darshan Upadhyay, Partner, Economic Laws Practice, says even when the law was being drafted, a lot of things were not thought through. "The bankruptcy law was being separately discussed. It will have repercussions for companies. Besides, when Sebi was coming out with initial public offer and insider trading rules, there was no involvement of people drafting the companies law," he says. According to him, a number of sections are not clear. "The way some definitions were worded, companies were finding it difficult to figure out if they were compliant or not. All this necessitated changes," says Upadhyay.
Lalit Kumar, Partner, J. Sagar Associates, says more public consultations would have eliminated the need for so many amendments. Preeti Malhotra, former president of the Institute of Company Secretaries of India and a member of the J.J. Irani Committee set up in 2005 to advise the government on the law, says, "When such an extensive overhaul happens, it is only when you implement the changes that you realise the shortcomings and problems."
For Better Or Worse?
While some changes are just clarifications, some involve relaxation of rules. In many cases, the committee has found some provisions irrelevant or redundant and, therefore, recommended their omission.
The biggest recommendations involve making fund-raising and incorporation easier, besides easing of rules for start-ups, raising of deposits and employee stock options or ESOPs.
On fund raising, the committee has recommended easier rules for private placement of shares. Based on feedback from companies, it has suggested that there is no need for a separate offer letter requiring extensive disclosures. On deposits, the committee has done away with the need to provide deposit insurance, as no insurer provides such a product. It has also suggested change in the rule for lifetime ban on raising deposits in case of a default. The panel says if a company has "made good the earlier default, it should be allowed to accept further deposits after a period of five years from the date it repays the earlier amount, with full disclosures."
Also, the rule that private companies cannot accept deposits beyond their net worth and free reserves should not apply to start-ups for the first five years, the panel has suggested. It also wants relaxation of the rule for issuance of sweat equity in case of start-ups. For start-ups, the panel has recommended that the limit be raised from 25 per cent to 50 per cent of the paid-up equity share capital. It wants permission to companies to offer ESOPs to promoters working as employees/directors.
The panel has also recommended keeping smaller frauds, of up to `10 lakh or 1 per cent turnover of the company, out of the ambit of severe punishments laid down by the law. Also, to make corporate structuring easier, it has recommended removing the limit of two layers of subsidiaries.
Will these recommendations lead to dilution of the law? Lalit Kumar of J. Sagar Associates disagrees. He says the essence of the law has not been diluted and only some practical problems have been removed. Preeti Malhotra says that the intent, even when the J.J. Irani Committee was formed, was to make the law pragmatic and easier.
Too Many Changes
While most recommendations have been welcomed, experts still believe that too many changes in too short a time are not allowing the companies to settle down. Even the latest recommendations are subject to changes and approvals.
Worse, only around half the provisions of the law, 283 out of 470, have been implemented. The rest, related to functioning of the National Companies Law Tribunal and the National Company Law Appellate Tribunal, are yet to be notified. The remaining are likely to be notified by July this year. Upadhyay of Economic Law Practice believes modifications and clarifications continue as the Act is not fully in force.
