New kid on the block: The latest version of the Companies Act

It's not the new kid on the block - it has been around for a long time and this may not be the best of times for rejoicing over the passage of the Companies Bill. The current climate with poor governance, weak leadership and the declining currency rates is not the best for cheer, particularly as the Bill has been on the anvil for a long time.

The year 2002 was the starting point against the backdrop of the Eradi Committee recommendations followed by the concept paper of 2004, which was based on the Foreign Exchange Management Act (Fema) format and possibly the best effort till date to govern corporate entities. There is not much novelty in the changes, especially as most of them had been proposed in 2002 and when the then pending amendment Bill in the Rajya Sabha was withdrawn and the J J Irani Committee was constituted to "simplify" the compliance regime. Government had approved the introduction of a new precise piece of legislation. The 2008 Bill which sought to implement several of the Irani Committee proposals, such as, the definition of key managerial personnel, most of which are in the 2012 Bill, which was passed by the Rajya Sabha recently after much delay due to litigation, rounds before the Standing Committee. At this point of time there is not much basis for cheer and excitement generated. It does not mean that the new Act becomes applicable overnight. That formality will require the process of obtaining the Presidential assent and being gazetted, which takes its time - remember the fate of the Competition Act? It would indeed be unfortunate if there are further road blocks.

With the emphasis on social dimensions, such as governance and corporate social responsibility (CSR), the attention has been deflected from the other major changes that the Bill seeks to make, notably, in the law relating to mergers and acquisitions, and how the impediments have been removed to facilitate cross border transactions. This is the aspect which should be showcased and leveraged to garner the return of foreign investment. Under the present law, such mergers are restricted, particularly that of Indian companies with foreign entities. The existing law of amalgamation under Sections 393 and 394A permits cross-border mergers only if the transferee is an Indian company and with the permission of Reserve Bank of India (RBI). This requirement is currently routed through the authorised dealers, in most cases. It is not clear whether the same procedure will continue.

Definition of 'subsidiary company' has been sought to be modified. A company will qualify as a subsidiary of another company if the latter, inter alia, exercises or controls more than one half of the total share capital of the former company. This is a significant deviation from the current definition in Companies Act, which takes into consideration holding of equity shares only and could have significant implications on several issues like inter-company transactions, financial reporting, etc.

The Bill does not prohibit a company from making investments through more than two layers of investment companies except in cases where in an Indian company acquires a foreign company, which in turn has more than two layers of investment subsidiaries under laws of that foreign country.

What happens if that foreign company has more than two layers of investment companies? Take your guess. A shareholder/investor holding 90 per cent of the entire share capital can be vested with a pre-emptive right. The company requires to file an auditor's certificate with the National Company Law Tribunal (NCLT), which replaces the high court, that the accounting practices are compliant with the standards. The scheme has to be approved by the RBI, instead of the NCLT. The system of voting is also subject to certain changes, such as voting can now be done by posting ballot, other than physical and proxy. This is an addition to the existing practice of physical and proxy voting. All reductions of capital and schemes of corporate debt restructuring will require consent of at least 75 per cent of secured creditors in value in a specific responsibility statement to provide safeguards for smaller classes of creditors - which is not really different from the no-objection certificates.

The threshold for objections has not been changed. It's been clarified that listed companies will be subjected to special laws, under the Takeover Code and Regulator will remain the Securities & Exchange Board of India. It's a matter of wait and watch.

Kumkum Sen is a partner at Bharucha & Partners Delhi Office kumkum.sen@bharucha.in