Companies Act provisions need greater clarity

The new Companies Act, 2013 (Act) came into force in September, 2013 but its first full year of implementation was year 2014.

Not surprisingly, the Act drew flak from all stakeholders due to its poor pre-enforcement planning, the needless hurry for its piecemeal enforcement and extremely messy and complicated implementation.

The circulars and notifications all through 2014 did try to bring the situation under control but still that wasn't enough.

The Act and the corresponding rules are still filled with many ambiguous and irrational provisions needing immediate attention and correction. Some of them are discussed in this column.

Life for listed companies can be made much simpler by aligning the Act and the SEBI regulations. Interestingly, some provisions of the Act and the corresponding rules do clarify that in cases of contradiction or conflict between the Act and the SEBI regulations, the latter will prevail. But this clarity has to be ensured throughout the Act, wherever there is any possibility of a conflict with the SEBI regulations.

It is unclear if a foreign holding company of an Indian company is a 'related party' of that Indian company? The definition of related party makes this ambiguous because it uses the expression "any company" which is a holding company. It is a settled principle that unless otherwise provided in the Act, the expression "company" means only an Indian company (and not a foreign company).Therefore, there is a doubt that using the expression "any company" in the definition of related party was intended to exclude foreign holding companies. It doesn't seem that can be the intent. Therefore, clarity is a must.

Another faulty definition is that of a 'holding company'. Here again, in order to define a holding company, the expression "a company" has been used which raises a doubt that foreign holding companies are not treated as holding companies under the Act. Such exclusion could have a far reaching effect and perhaps this was never intended and, therefore, there is an urgent need to address this.

Yet another area of concern is the meaning of "foreign company" read with the corresponding rule which defines "electronic mode". The combined reading of the two leads to a widespread confusion. "Electronic mode" includes carrying out electronically any business to business or business to consumer transactions, web marketing, advisory and transactional services whether by e-mail, mobile devices, social media, voice or data transmission or otherwise, a wide range of activities may amount to a foreign company having a place of business in India. It is common these days for foreign companies to electronically do business in India. This definition may to lead to an unintended consequence of making every foreign company having any electronic transaction with its Indian customers or clients as having established a place of business in India. It will be strange if this was the intent of the legislature. The ambiguous rule needs to be rectified otherwise it will discourage foreign companies from doing business electronically in India.

The nature of an unlisted company whose securities (other than equity shares) are listed is doubtful. In its current avatar, the Act treats such companies as listed companies although only certain securities are listed. The MCA seems to have understood this concern but it hasn't still issued the much needed clarification.

One of the most debatable issues which remains unresolved since its enactment in September, 2013 is the meaning of expression "ordinary course of business" used in Section 185 dealing with loans to directors and person connected to directors and Section 188 dealing with related party transactions. There are divergent views on this issue. One view is that it means in the 'usual course of business' while the other view is that it means the 'principal business' of the company. Both views have convincing arguments. Therefore, it is extremely important for MCA to quickly clarify this very long pending doubt.

Another area which needs clarity is the tussle between Sections 186 (dealing with loans and investments) and Section 185. The ambiguous language used in Section 185 gives an impression that Section 186 could override 185 although that does not seem to be the intention of the Act. It is better that this gets clarified.

MCA should be credited for taking timely actions in 2014 to ease the implementation of the Act but it shouldn't stop and keep the momentum of reform in 2015 by further rectifying the faulty provisions of Act and provide India Inc with a simpler and an easy to implement company law. Adherence to law is directly proportional to its ease of implementation.

(Lalit Kumar is a Partner with J. Sagar Associates. The views expressed by the author are personal)