The much awaited report of the Companies Law Committee (“Committee”) which proposes a number of changes to the Companies Act, 2013 (“Act”) and rules laid down thereunder (“Rules”) was released in the first week of February (“Report”). The Report in itself is extensive and has covered various chapters and sections of the Act in detail, having received more than 10,000 suggestions from various stakeholders. This blog post seeks to discuss a few recommendations made by the Committee which could have a positive effect on transactions as well as future compliance requirements of companies if they are accepted.

Secretarial Standards

The Report states that the Committee had received a number of questions on the requirement, scope and content of the Secretarial Standards (“SS”) issued by the Institute of Company Secretaries of India (“ICSI”). In an earlier blog on this topic, Codhai had also pointed out that the requirements under the SS seemed to be more stringent and burdensome than the Act itself. The Committee has now recommended that the ICSI re-examine and revise the SS in consultation with all stakeholders and the suggestions received by the Committee on this issue should be taken into account during such re-examination by the ICSI.

Meetings via video-conference

While the Act permits meetings of the board of directors to be held through video-conferencing, the Rules prescribe specific matters which cannot be dealt with in a meeting held through a video conference or using other audio-visual means. Such matters include inter alia, the approval of annual financial statements, the approval of the board’s report, and the approval of matters pertaining to amalgamations, mergers, and takeovers. The Committee was of the view that this requirement completely prohibits the participation of directors through a video conference at board meetings where any of these specified matters are part of the agenda. This prohibition unnecessarily restricts wider participation even if the necessary quorum as specified under the Act is physically present at such a meeting. The Committee, therefore, has now recommended that flexibility be provided to allow participation of directors through video conferencing at meetings were such items are discussed, subject to such participation not being counted for the purpose of calculation of the quorum. The Committee has further recommended that while such directors would be permitted vote, they may also be entitled to sitting fees. If the above recommendation is accepted, a number of Indian companies with a majority of Indian directors but with 1 or 2 foreign directors may have a board meeting to discuss the above matters in India and such foreign directors will also be able to attend and participate in the same through video conferencing.

Resident Director

The Act currently requires all companies to compulsorily have at least 1 director on board who has stayed in India for a total period of not less than 182 days in the previous calendar year. Upon receipt of various concerns pertaining to this requirement, the Committee felt that it would be more appropriate to amend the above requirement and make it in relation to the director’s stay in India during the financial year and not the calendar year. Further, it was felt that this requirement should become effective after a period of 6 months from the date of incorporation of the company. The primary reason for this recommendation, as pointed out by the Committee was that the requirements for residency in the previous year compels a new subsidiary of a foreign company to appoint an individual or a professional that may be unconnected with the company, as its director, which does not in any way help the board’s decision making and could lead to unnecessary disputes. The Committee has therefore, now recommended that it would be more appropriate to amend the residence requirement to the current financial year instead of the previous calendar year. This recommendation seems to be in line with the Government’s ‘Make in India’ initiatives, and its plans to ease the compliances pertaining to the setting up of a business in India by a foreign company.

Definition of Related Party

Presently, as per the definition under the Act, a “related party” with reference to a company would include any company which is a holding, a subsidiary, an associate company, or a fellow subsidiary of such a company. The use of the word ‘company’ in this definition signifies that only those entities that are incorporated in India would come under the purview of the definition. This has resulted in the understanding that companies incorporated outside India (such as a holding company, a subsidiary, an associate, or a fellow subsidiary of an Indian company) are excluded from the purview of ‘related party’ of an Indian company. The Committee has noted that this carve out was unintentional and seriously affects the compliance requirements of related parties under the Act. The Committee, therefore, has now recommended that the definition of the term ‘related party’ be amended to substitute the word ‘company’ with ‘body corporate’, thus including companies incorporated outside India. Further, the Committee has also recommended that an ‘investing company’ or the ‘venturer of a company’ be included as related parties under the Act.

Related Party Transactions

The Ministry of Corporate Affairs (“MCA”) had in July 2014, issued a circular clarifying that only members of a company that were related parties to a contract or an arrangement that was the subject matter of a resolution could not vote on such resolution. However, the Committee has noted that this circular had been misinterpreted, and hence, should be withdrawn. Thus, all related parties would be prohibited from voting on any related party transactions irrespective of whether or not they are parties to the transaction in question. The Committee further noted that as all parties in case of joint ventures and closely held public companies may be related parties, not allowing them to vote on resolutions may be impractical and therefore such cases may be specifically excluded from the requirements of the provision. It is pertinent to note that private companies are not bound by this restriction as of July 05, 2015 and only public companies are required to comply with this provision.

While some of the above recommendations if approved by both houses of the parliament, would be welcome changes that would facilitate the ease of doing business in India (for example the recommendations pertaining to resident directors), others would iron out certain ambiguities in the Act and the Rules and companies would have to ensure that additional compliances, if any, are adhered to (for example, the change in the definition of related parties). While the MCA has been pro-active and has taken on record most of the the suggestions received by stakeholders, it has invited further comments from the public based on the recommendations provided in the Report. Let us hope that the parliament too follows suit shortly and implements these recommendations, which would provide much needed clarity and relief to corporates in India.