The Companies Bill, 2012 The Good and The Better

The Companies Bill, 2012 (the Bill) continues to remain one of the most long-awaited pieces of legislation. Only a few steps remain before it becomes a law. Cynics may argue that the Bill falls short of expectations and could have been better. Nevertheless, the Bill is an important piece of legislation, formalising some key governance issues and introducing a range of fresh and much-needed ideas into an archaic legislation. Through this article, the authors analyse some of the steps and aspects of the Bill, including the concept of one person company, recognition of private contracts between shareholders of public companies, stricter corporate governance standards, expanded definition and role of key managerial personnel, accountability of auditors, role and liability of independent directors, class action suits, etc.

Types or Classes of Companies

While the types and classes of companies largely remain the same, the introduction of the following new categories of companies is a notable change:

1. One Person Company: a company which has only one person as a member, making way for individual entrepreneurs to adopt a corporate structure and organise themselves better.
2. Small Company: a private company with a paid up share capital not exceeding Fifty Lakhs or turnover not exceeding Two Crores and giving such companies certain compliance exemptions.
3. Dormant Company: a company formed for a future project or to hold an asset or intellectual property and having no significant accounting transaction or an inactive company. They enjoy relaxation in reporting financial statements and convening board meetings.

The maximum threshold of members in case of a private company has been enhanced to 200 from 50.

In terms of subsidiaries, a private company that is a subsidiary of a public company will be deemed to be a public company, though it can retain restrictions under its articles and need not convert into a public company. Also, the existing provision whereby subsidiaries of foreign bodies corporate are deemed to be subsidiaries of public companies has been removed.

Kinds of Capital

A noteworthy change is that the provisions in relation to the kinds of share capital and voting rights in respect of the shares are no longer inapplicable to private companies. Accordingly, all companies, public or private, may have only the following kinds of capital:

1. equity share capital with (i) voting rights or (ii) differential rights as to dividend, voting or otherwise in accordance with prescribed rules; and
2. preference share capital.

Holders of preference shares shall have a right to vote only on resolutions which directly affect the rights attached to the preference shares.

Issue and Transfer of Shares

The Bill details the manner in which companies may issue their securities:

(a) Public Offer

Public Offer includes issue of securities or an offer for sale of securities to the public through issue of a prospectus. A private company cannot issue securities through a public offer.

(b) Private Placement

Private Placement, under the Bill, is defined as an offer of securities or invitation to subscribe securities to a select group of persons (other than by way of a public offer) through issue of a private placement offer letter which satisfies the conditions set out in the Bill. To qualify as a private placement, the offer should be made to not more than 50 persons (or higher as may be prescribed), excluding qualified institutional buyers and employees of the company, who are issued securities under a scheme of employee stock option. A filing needs to be made with the jurisdictional Registrar of Companies (RoC) with complete information about the offer within 30 days of circulation of the private placement offer letter.

Other modes in which a company may issue shares are through rights issue (to holders of equity shares of the company in proportion to their existing holding), sweat equity shares (to directors or employees) or under an employee stock option scheme of the company. Further, unlike the earlier position, the Bill has a specific provision on issue of bonus shares and sets out that fully paid up bonus shares may be issued to members out of free reserves, securities premium account or the capital redemption reserve account, subject to certain conditions.

A significant change in transfer provisions is the express mention of contracts or arrangements between two or more persons in respect of transfer of securities of a public company being enforceable as a contract. The Bill settles the legality of the right of the shareholders of a public company to enter into arrangements inter se agreeing to the imposition of restrictions on the sale of their shares by giving recognition to commercial arrangements between shareholders even in public companies. However, the manner and extent of implementation of such a provision (particularly in companies going for an IPO) will need to evolve over time.

Merger with Foreign Company

A direct effect of global economics is reflected in the new merger provisions. Now it will be possible to merge an Indian company into a foreign company and vice versa in accordance with the provisions of the Bill and subject to the approval of the Reserve Bank of India. The Bill also has enabling provisions for settling consideration in M&As in cash or by issuing GDR.

The Bill prescribes a simplified procedure for mergers and amalgamations between two or more small companies or between a holding company and its wholly owned subsidiary or other class or classes of prescribed companies.

Exit Options and Squeeze Out

With a view to help small investors, the Bill provides minority shareholders an opportunity to exit from the company in situations like change in objects or change of prospectus. Further, the Bill also offers the minority shareholders a right to exit by granting them a right to sell their shares to an acquirer of 90% or more of issued equity share capital of a company. Similarly, the Bill also provides for squeeze out of 10% or less minority shareholders, with the Company acting as a transfer agent.

Key Managerial Personnel

Key Managerial Personnel (a new terminology), means the

(i) chief executive officer or the managing director or manager,

(ii) the company secretary,

(iii) the whole time director,

(iv) the chief financial officer and

(v) such other officer as may be prescribed (KMP).

KMP are included within the meaning of “officer in default” thus imputing liability on them in cases of default.

With a view to improving the management structure, the Bill makes it compulsory for the prescribed class of companies to have KMP and regulates their appointment and remuneration. It also sets out the functions of a company secretary, including reporting to the board regarding the company’s compliance with law and ensuring the company’s compliance with applicable secretarial standards.

The Bill also enumerates the various duties of a director. However, courts are likely to interpret that the earlier common law principles on duties of directors will also continue to apply.

Liability of Independent Directors

The Bill expressly restricts the liability of an independent director and non-executive director (not being a promoter or KMP) to acts which are undertaken with his knowledge or consent or for a failure to act diligently. This gives companies greater flexibility in structuring their management and getting independent professionals on board.

Corporate Governance

The Bill introduces a range of corporate governance measures. While it may not be possible to discuss all of them, some are highlighted below:

1. Commencement of Business: A company having a share capital cannot commence business or borrow funds unless (i) a declaration is filed with the RoC stating that subscribers to the memorandum have paid for the shares subscribed to and (ii) a verification of the registered office of the Company is filed with the RoC.
2. Directors: Prescribed classes of companies will be required to have at least 1 woman director and minimum number of independent directors respectively. The Bill provides a code for independent directors, setting out their roles and duties, increasing the level of monitoring of a company.
   

   Further, every company is required to have at least 1 director who has stayed in India for at least 182 days in the previous calendar year.

3. Auditors: An auditor is obligated to inform the Central Government if he believes that a fraud has been committed against the company by its officers or employees. The Bill also prohibits auditors from performing non-audit services. In listed companies and other prescribed classes of companies, individual auditors are required to be rotated every 5 years and audit firms every 10 years.
4. Class Action Suits: The Bill allows small investors with common interests to bring in a class action suit if they believe that the affairs of the company are being conducted in a manner detrimental to the company and its shareholders.
5. Corporate Social Responsibility: For the first time, the Bill has made it obligatory for companies to play a socially active role by including provisions relating to corporate social responsibility (CSR). A company with a minimum (i) net worth of '500,00,00,000 or (ii) turnover of '1000,00,00,000 or (iii) net profit of '5,00,00,000 during a financial year is required to constitute a Corporate Social Responsibility Committee consisting of at least 3 directors with at least 1 independent director. The company shall, in each financial year, be required to spend at least 2% of its net profits of the preceding 3 years in accordance with the corporate social responsibility policy formulated by the committee.The board of the company is responsible to ensure that the activities included in the policy are undertaken.

Conclusion

The Bill demonstrates India’s seriousness in providing a robust law which makes companies an attractive business vehicle, while simultaneously safeguarding investor interests. While the substantive law is adequately captured in the Bill, it contemplates a greater executive role in prescribing rules for procedural matters which ensures an easier and efficient administration. It also has been structured to give executive powers to prescribe regulations on various matters, thereby demonstrating that this legislation can deliver through changing economic scenarios.

Though not fully satisfactory (but would cynical experts and lawyers ever be!!!), the Bill is a welcome overhaul of the existing legislation. Hopefully, the Rajya Sabha will approve it without any significant changes and the spirit of reform and advancement embodied in the Bill will be carried forward by the government into various regulatory and tax measures that are widely anticipated and more importantly required to give a boost to the Indian economy.

Disclaimer – Yogesh Singh is a partner in the corporate practice and R. Sampath Kumar is the head of the secretarial and compliance practice at Trilegal. This article does not constitute legal opinion or advice. Readers should not act upon this information without seeking professional legal advice.