Amend it, or Rescind it- The Companies Act, 2013

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Have you tried google to find FAQs on the recently introduced corporate law of India, the Companies Act 2013? When I tried the same, I just found one state-sponsored link for the Ministry of Corporate Affairs; however the same displayed error upon clicking. The U.K. has also come up with a new piece of legislation, Companies Act 2006, and the businesses around the world having any interest in the country can easily overcome uncertainties in this law by going through an exhaustive list of FAQs available at the government’s web portal. Same is the case with the Delaware General Corporation Law, the most adopted law in the U.S., which hosts a list of FAQs on its official webpage to assist businesses and professionals steering clear of any blunders. It is very evident that unless the laid down laws of the land are unambiguous and transparent, slipups and litigations will always be at their high. Is the new Companies Act one among these?

The list of clarifications, rules and notifications post the coming of the new legislation on corporate actions is dense. Hence, when drawing any conclusion from the Act, one must search extensively for any amendments made ‘thereafter’; else you may end up in a state of contravention of law. Yes, you can also find some FAQs while hovering over the webpage of the MCA, but in case you are looking for information on which form to be filed with the ROC for a specific corporate action, or are looking for any clarification on what the Act says, you are at the wrong place. The Ministry has a special cell to deal with queries and complaints; however for reaching the apt person you need a re-birth. I am hopeful that this milieu will change with the coming in of the new minister and his squad; however challenges are still many. The prime of all is the law itself, which lacks generality and is vague at numerous matters.

Foremost slip by the previous government was making most of the Sections of the new Act effective from the 1st of April even when they were made public in the last week of March. Furthermore, the final rules were not in line with the draft ones, and at many places are even strict than the draft, hence creating an anarchy in the entire corporate and professional domain. While we have always been aiming towards bringing in global funds to India, was the globally accepted practice of according a year time to familiarize with the new law adhered to? Now, you have two pieces of legislation to adhere to for the time being, both the Acts of 1956 and 2013. Let me also include the hefty fines that are levied on LLPs in case they delay the filing of annual accounts with the ROC in this. Ranging from related party transactions and CSR to fraud reporting and whistleblowing, there are distinct areas of slip-ups in the Companies Act 2013, which I have endeavored to enumerate hereunder.

The definition of ‘Related Party Transactions’ has been widened, which now reads as ‘a private company in which a director or manager or his relative is a director or manager’. This now means that any company which seeks to enter into a transaction with private limited company may fall into the category of related party even owing to relatives. So, formalities ranging from approval of Audit Committee, Board, and /or the shareholders, wherever applicable, have to be adhered to. In this context, The Companies (Removal of Difficulties) Sixth Order, 2014, has even deepened the concerns. The notion of IDs was vague from the very beginning. Appointed by the promoters, would they really be independent, also when they can take directorship of 20 companies without any apt criterion necessities. The duty of unbiasedly monitoring directors’ actions, to make them in line with the interests of the shareholders, will be hardly served.

It becomes so perplexing in the case of closely-held companies wherein all shareholders can be a related party that the obligatory consent of shareholders, wherever required, will be unmanageable to attain. Another area of pain is restrictions placed on setting up multiple layers of subsidiaries, wherein the law now permits only two layers, hence the corporate players will need to re-think their restructuring strategies. Restrictions placed on inter-personal loans, loans to directors, subsidiaries and associates, along with the uncertainties over the applicability of relevant sections have multiplied the chaos. Then are the CSR norms and the strings attached to it. Though parking of certain percentage of profits for CSR activities has been mandated, there are no clear instructions on how the money should be expended. Herein, aren’t the corporates given autonomy to spend the fund on any of the specified activities that may even be aimed at profiting business?

Countless is the list when I add compulsion of appointment of a woman director on the Board, enhanced role of bureaucracy, alike rules for preferential and private placement, and issue of NCDs for a term of 5 years to the tailbacks of the new piece of legislation. A lot has been delivered by the new government in the initial 100 days of governance, of which, calling foreign funds for the betterment of Indian industrial sector is the most phenomenon. However, the most crucial legislation that shall aim at easing, and rather, paving the way for businesses, is proving to be the principal limitation. Vodafone India has recently spoken about the delayed clearances in India which make doing business a challenging task. Leave apart the taxation and labor laws, even our basic corporate law, the Companies Act is highly unfavorable for the functioning of corporates. The former rulers have done their part by bringing an ambiguous corporate legislation; it is now for the new squad to clear all clouds and pave a smooth way for business houses.

Intellectuals are not just within the government departments or ministries. The new PM has accepted this notion and the outcome is the mygov.in web portal. On similar lines, the MCA needs to invite concerns from valid stakeholders, viz. ICAI, ICSI, ASSOCHAM, FICCI, CII, and the business houses with respect to all uncertainties in the Companies Act 2013. Thereafter, a committee with members representing all the stakeholders should be delegated the task to formulate a master circular, which must be capable to answer all the subsequent doubts. The basic aim should be to swap all the rules, clarifications, and notifications with a comprehensive and unambiguous literature that is capable to complement the new Companies Act. Along with, corporate houses must be consulted with a view to eliminating obstacles that hamper the day-to-day corporate actions and make businesses vulnerable to penalties and litigations. To lift the corporate sector, it has become imperative to undertake reinstating actions sooner than later.

Lastly, though this may need a lot more labors and time, would it not be favorable for the stakeholders if the Companies Act 2013, which stands out of the line on numerous subject matters and somewhere even contradicts with the SEBI and RBI guidelines, be substituted by an altogether new corporate law that must be capable to balance all the current norms of Acts and Rules governing the corporate world? For instance, how can it be tolerable that the concept of IDs is dissimilar in the new Companies Act and the SEBI Listing standards? Also, it has been a long tradition now to exempt PSUs from many of the clauses of the corporate law on yearly basis. In this context, the ministry of finance is even considering exempting PSU banks from CSR spend. A new law would need extended brain storming; the result, a new and apt corporate law will be a reward for hard labors. The new squad must take the charge devotedly and expeditiously.

104 thoughts on “Amend it, or Rescind it- The Companies Act, 2013”

  1. A R MUNDRA

    It was an exercise initiated with good intentions but messed up completely . There was no need to put it on implementation unless all rules are properly
    framed & things are completely vetted by stakeholders.

    Reply ↓
  2. Jatin Popat

    Dr. Gupta,

    I am in agreement with your views. I am a practicing Company Secretary. The law which should be revolution and evolution should at first place be ‘made properly’ instead of hush-up manner with lots of confusions and far away from business practicalities. Law is a compliance tool for country and business, it can not be rule maker for business suddenly – for example refund of deposits / loans in one year. I am not sure what will happen to business into capital goods, real estate, hospital, hotel etc. which has taken loans for long term period as per business plans. I think henceforth all business plan makers will have to first see Companies act first.

    Reply ↓
  4. C.N.SUBRAMANIAN

    It was exercise started with good intention. The announcements given in March and asked companies to follow from March. With a lot of clarifications i( in peace meal basis) made it very difficult to update and even professionals find it difficult follow leave alone stake holders.

    Reply ↓
  6. Atul Bohra

    ICAI, FICCI will be very happy to help the government frame good corporate law for the country.
    Government should consult them.

    Reply ↓
  7. Anuj Tripathi

    PM Modi is continuously branding India but with such restrictive company law I don’t think much can be achieved.

    Reply ↓
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  77. Carol Baig

    Targeting easy law, they even messed the Companies Act 1956.
    This is blunder. So many confusions.
    And you are right there is no office where we can go for clarifications.

    Reply ↓
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    They have different corporate culture and we have different.

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