Thursday, November 20, 2014

Relaxation in Several Provisions of Companies Act,2013

Introduction of New Companies Act, 2013 has brought harsh provisions however it was expected to simplify the provisions. Industry has started calling it non business friendly and there are provisions which are draconian and must be relaxed. It brought lot of restrictions on doing business. Professionals were also not happy for some harsh penal provisions. Now it is proposed by Ministry of Corporate Affairs to provide various Exemptions to Private Limited Companies. If it approve there will be lot of relaxation to private companies and many public companies will convert themselves into Private Companies.
Proposed amendment in Companies Rules to lighten the harsh provisions are :
1.      According to the proposal floated by the MCA
·        the provisions invoking criminality in offences like mis-statement of prospectus or non-disclosure of financial statements will be made less severe.
2.      Further, as per the draft Cabinet note circulated by the ministry
·        the provisions regarding related-party transactions will be relaxed.
·        The Act under Section 188 (1) says that related-party transactions of specified nature require approval by a board resolution or special resolution.
·        It also bars a related-party member of the company from voting on special resolution.
3.   The industry has been saying that this is not business-friendly especially where holding companies and their wholly owned subsidiaries are involved. So for such transactions, the provision will be amended to make it more pro-industry.
4.  For late disclosure, not keeping books of accounts, or financial statements not giving true and fair value, the “punishment of imprisonment is being done away with as the criminality of this kind is already dealt with in the Code of Criminal Procedure”. Currently, u/s 147, for such contraventions, the company is be punishable with fine up to Rs 5 lakh while every officer of the company who is in default is punishable with imprisonment of up to one year along with a fine up to Rs 1 lakh or both.
 5. The MCA has also proposed to do away with the condition of mandatory appointment of independent directors on the board of a private or closely-held company which has no public involvement.
The Cabinet note also provides a breather to auditors regarding their responsibility of reporting frauds to the government.
Materiality of fraud is defined in terms of percentage or absolute value as a threshold above which the auditors would be required to report to the government. Below that threshold, the auditors will need not report to the government,
They will just have to inform the audit committee of the company,” the source added.
The industry sources that this will be a huge reprieve to the auditors who currently have to report all frauds to the secretary,
MCA, adding to the compliance cost. The amendments proposed also address the issue of maintaining confidentiality of information especially those pertaining to board resolution.
According to Section 179(3), several items including pure HR issues, require a board resolution.

Contributed by Tanya Gagneja