Associate Company

1.1 Section 2 (6) of the Companies Act, 2013 defines the term “associate company”, in relation to another company, to mean a company in which the other company has a significant influence, but is not a subsidiary company of the company having such influence, and also includes a joint venture company. The Explanation to Section 2(6) defines the phrase “significant influence” to mean control of at least twenty per cent of the total share capital, or of business decisions under an agreement. The term “total share capital” has been defined in Rule 2(1) (r) of the Companies (Specification of Definitions Details) Rules, 2014, to mean the aggregate of (a) paid-up equity share capital; and (b) convertible preference share capital.

1.2 It was stated to the Committee that this definition and the definition in the Accounting Standards (and the Listing Regulations, which also refers to the Accounting Standards definition), which excludes joint ventures, etc. were not consistent. It was also noted that the Accounting Standards defined joint ventures separately, and that the treatment for consolidation, related party disclosures, etc. for associates and joint ventures made the usage of the term in the Act at odds with the usage in the Accounting Standards. The Committee felt that to the extent that the term ‘associate company’ has been linked to corporate governance requirements prescribed in the Act, such as for determining interests in transactions, for ensuring independence in the appointments of independent directors, auditors, etc., it may not require any change other than those recommended in the following two paragraphs. Clarity would also be required in its usage for the purpose of consolidation of accounts, which has been addressed in paragraph 9.5 of Part I of this report.

1.3 The Committee further noted that the term “significant influence”, in the Explanation to Section 2(6), refers to ‘total share capital’ which includes preference share capital. Replacing ‘total share capital’ with ‘total voting power’ would be consistent with accepted principles. The Committee, therefore, further recommended that the Explanation to Section 2(6) should read as “For the purposes of this clause, ‘significant influence’ means control of at least twenty per cent of the total voting power, or control of or participation in taking business decisions under an agreement.”

1.4 Further, even though the Act makes references to the term “joint venture” as an inclusive part in the definition of the term “associate company”, it would be appropriate to define the term. Definition of ‘joint venture’ as contained in the Indian Accounting Standard (IndAS) 28 was considered as a comprehensive definition for the purpose. The Committee, therefore, recommended that the term “joint venture” may be assigned the same meaning as under Indian Accounting Standard (IndAS) 28 as part of the Explanation to Section 2(6) itself.

Charge

1.5 Section 2(16) defines “charge” to mean an interest or lien created on the property or assets of a company or any of its undertakings or both as security and includes a mortgage. Chapter VI of the Companies Act, 2013 ( Sections 77 to 87) contains provisions dealing with registration of charges with Registrar, registration of satisfaction of charges, intimation of appointment of receiver of property subject to a charge, punishment for contraventions etc. It was suggested that in view of the inclusive definition, difficulties are faced in complying with the requirement of registration of pledges, etc. It was noted that the expression “charge” is used in various provisions of Companies Act, 2013. Judicial precedents have also specified a more inclusive definition of charge. The Committee, therefore, felt that amending the definition of “charge” would not be desirable. Instead, an amendment to exclude the registration/filing requirement for banker’s lien, etc. under Chapter VI is suggested (paragraph 6.2 of the Part I of the report).

Control

1.6 Section 2(27) of the Act defines the term “control” in inclusive terms and provides for it to include “the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.” During the process of public consultation it was pointed out that the phrase “in any other manner” appearing in the definition is ambiguous, and open to more than one interpretation, and thus, an exception ought to be made for customary minority rights. It was suggested that this phrase, could by implication include veto rights given to any financial investors and therefore, a recommendation for creating an exception for customary minority rights was put forward. A demand was also made to bring the definition in consonance with the definition of control as per Accounting Standard 110. The Committee noted that a similar definition of control had been included by SEBI in its Securities Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. The Committee also took note of the case of Subhkam Ventures Private Limited v. SEBI. The Committee felt that such an inclusive definition of ‘control’ would be required in view of the myriad of instruments and corporate structuring that are constantly evolving and, therefore, the Committee by a majority view, did not recommend any change in the definition of control.

Debenture

1.7 Section 2(30) defines the term “debenture” to include debenture stock, bonds “or any other instrument of a company evidencing a debt”, whether constituting a charge on the assets of the company or not. It had been pointed out that the phrase “any other instrument of a company evidencing a debt” appearing in the definition made it very broad and included, by implication, instruments like commercial papers and other money market instruments, which were often used as an important short-term fund raising source by eligible companies; and were well regulated under RBI regulations. It was put to the Committee, that treatment of money market instruments and such other instruments as debentures would give rise to difficulties. In this regard, it was also noted that through an amendment to Rule 18 of the Companies (Share Capital and Debenture) Rules, 2014 in March 2015, it was clarified that the raising of monies through commercial papers would not be governed by the Rules pertaining to the issue of debentures. The Committee, however, felt that an exception be made for instruments covered under Chapter III D of the RBI Act, 1934 in the term ‘debenture’ as defined in Section 2 (30) of the Companies Act, 2013. In addition, an exception may also be made for deposits accepted by banking companies, and flexibility be given to the Central Government, in consultation with RBI and SEBI, as applicable, to carve out other instruments from the definition, as may be required.

Deposit

1.8 The Committee considered the suggestion for making the definition of deposit less restrictive, but felt that adequate prescriptive powers for excluding amounts received by a company from the term ‘deposit’ have been provided in the definition and no change is, therefore, required.

Financial Year

1.9 Section 2 (41) of the Act provides that the financial year in relation to a company or a body corporate shall mean the period ending on the 31st of March every year. It gives the ‘National Company Law Tribunal’ (NCLT) the authority to allow a company or a body corporate, which is a subsidiary or a holding company of a company incorporated outside India, to follow a different financial year, if it is required to do so, for the consolidation of its accounts outside India. One of the suggestions received during the public consultation process was that the NCLT should have similar powers (to allow a different financial year) for associates and joint ventures of a company incorporated outside India, since the financial statements of associates and joint ventures were also taken into consideration in the preparation of ‘consolidated financial statements’ (CFS), if required. The Committee, therefore, recommended that the first proviso to Section 2(41) be expanded to also allow associates and joint ventures of a company incorporated outside India to apply for a different financial year to the NCLT.

Foreign Company

1.10 Section 2(42) of the Act defines the term “foreign company”. This is wider than the definition provided in the Companies Act, 1956, and includes companies conducting business in India through electronic and other manner, and through an agent. Rule 2(1) (c) of the Companies (Registration of Foreign Companies) Rules, 2014, further expands on the term “electronic mode”. The Committee noted that in view of the expansion in the scope of coverage of a foreign company and the location of the server being immaterial, even insignificant web/internet-based electronic transactions of a company incorporated outside India, with no establishment in India, with Indian customers could result in such a company falling within the ambit of Section 2(42). The Committee observed that it would be impractical to cover companies incorporated outside India that had a mere incidental presence through an electronic mode, and had never intended to setup a place of business in India. The Committee felt that even though no amendment needs to be carried out in the definition of ‘foreign company’, those foreign companies with incidental, insignificant transactions may be exempted from the requirement for registration and other requirements under Chapter XXII by providing for prescriptive powers under section 379 (Paragraph 20.2 of the report may be referred to).

Holding company

1.11 Section 2 (46) of the Act defines a “holding company” in relation to other companies, as a company of which such other companies are subsidiary companies. Section 2 (87) of the Act defines a “subsidiary company”, and Explanation (c) to Section 2(87) clarifies that the expression “company” includes a ‘body corporate’. It was suggested that an Explanation similar to Explanation (c) to Section 2(87) be included in Section 2(46), so that a company incorporated outside India could be considered to be the holding company of another company, for the purposes of the Act. The Committee felt that this was a minor anomaly, but which could lead to uncertainties in ascertaining the status of a company, in case of a foreign holding company; and also in determining the applicability of the Act to such a company. The Committee, therefore, recommended that an Explanation (on the lines of Explanation (c) to Section 2(87)) be included in Section 2 (46).

Interested Director

1.12 Section 2 (49) of the Act defines an “interested director”. Section 184 (2) provides nature of interests to be disclosed by directors, but does not use the phrase ‘interested director’. The provision in essence, defined an interested director. Further, the only reference to the term ‘interested director’ in the Act was in Section 174 (3), and an Explanation to that provision clarified that the meaning of the term ‘interested director’ would be the same as for the purposes of Section 184 (2). The definition provided in Section 2(49), though much wider, has not been used in the Act and is redundant. The Committee felt that in view of the redundancy, the definition of ‘interested director’ may be omitted.

Listed Company

1.13 Section 2(52) of the Act defines a “listed company” as “a company which has any of its securities listed on any recognised stock exchange”. It was suggested by the stakeholders that this definition be amended to exclude companies which were private/closely held, but had listed their privately placed non-convertible debentures/ preference shares in accordance with the SEBI Regulations. It was noted by the Committee that the Companies Act, 1956 had defined a “listed public company”, as opposed to the Companies Act, 2013, which defines a “listed company”. In view of this definition, private companies, which listed their privately placed debentures/preference shares, had to comply with some of the corporate governance requirements made applicable to listed companies under the new Act. In other cases, these requirements are applicable to private companies owing to the thresholds prescribed in the Rules under Companies Act, 2013. The Committee also noted that the SEBI Regulations while having a similar definition, addressed the issue of applicability of corporate governance requirements through differential treatments to the companies which only had their debt instruments listed. The Committee felt that while the definition of the term ‘listed company’ need not be modified, the thresholds prescribed for private companies for corporate governance requirements may be reviewed. In addition, specific exemptions under section 462 of the Act could also be given to listed companies, other than the equity listed companies, from certain corporate governance requirements prescribed in the Act (paragraph 12.9 of Part I and 12.3 of Part II of the report may also be referred to).

Managing Director

1.14 Section 2(54) of the Act defines the term “managing director” to mean a director who, by virtue of the ‘Articles of Association’ (AOA) of a company, or an agreement with the company, or a resolution passed in its general meeting, or by its Board of Directors, is entrusted with substantial powers of management of the affairs of the company, and includes a director occupying the position of a managing director, by whatever name called. In this regard, a suggestion was made to insert a proviso, clarifying that the managing director should be allowed to exercise his powers, subject to the superintendence, control and direction of the Board of Directors, as was provided in the second proviso to Section 2(26) of the Companies Act, 1956. The Committee was of the opinion that it was implicit in the provision itself and therefore, an amendment was not required in the Act.

Net worth

1.15 Section 2(57) of the Act defines the term “net worth”, and specifies various amounts that are to be taken into consideration while calculating it. The net worth of a company reflects its intrinsic value. The definition does not include the phrase ‘debit or credit balance of the profit and loss account’. In this regard, the Committee recommended for the phrase ‘debit or credit balance of the profit and loss account’ to be included in the definition.

Officer who is in default

1.16 Section 2(60) of the Act defines the term “officer who is in default”. This definition is relevant for ascertaining the liability of the officers of the company, in relation to several offences described in the Act. Sub-clause (vi) of the definition covers a director who is aware of a contravention by virtue of the receipt by him of any proceedings of the Board, or participation in such proceedings without objecting to the same, or where such contravention had taken place with his consent or connivance. The Committee deliberated on the concern raised that the mere receipt of the proceedings of a Board, unless he had also attended the Board meeting, ought not to make a Director liable for any contravention, and that imposing such responsibility would deter individuals from taking up positions of directorships. However, it was felt that diluting the requirement would not be appropriate, as a Director should raise an issue of concern based on the agenda or proceedings received by him, irrespective of whether he attends the meeting; and that it might make it convenient for directors to skip inconvenient meetings and raise the defence of not having attended the meeting to escape liability. The Committee felt that sufficient defences were already provided for Independent and Non-Executive Directors under Section 149(12) of the Act and as such no amendment was required in Section 2(60).

1.17 A reference was also made to some of the suggestions received in response to the MCA circular dated 29th July, 2011, issued under the Companies Act, 1956. It was clarified therein that the prosecutions against ‘officers in default’ had to be initiated primarily against the managing directors, whole time directors and the company secretary, if any; and arraying of all the directors, regardless of their personal involvement was discouraged. The Committee recommended that the circular dated 29th July, 2011, issued under the Companies Act, 1956, conveyed important guidelines to field offices and may be reissued, taking into account the changes in Companies Act, 2013.

Public Company

1.18 Section 2(71) of the Act defines a “public company”. The proviso to this definition states that “a company which is a subsidiary of a company, not being a private company, shall be deemed to be public company for the purposes of this Act even where such subsidiary company continues to be a private company in its Articles.” During the process of public consultations, it was suggested that the said proviso may be deleted to enable public companies to incorporate subsidiaries as private limited companies, to take advantage of the benefits available to a private company. The Committee noted that despite the restrictions on the number of members and transferability of shares (which are the inherent features of a private company) in a private company, the legislative intent was clear that such private companies should also be subject to the additional obligations and restrictions which apply to public companies under the Act. The Committee, therefore, felt that a subsidiary of a public company needed to be regulated in the same manner as a public company.

Public Financial Institution

1.19 Section 2(72) of the Act defines a “public financial institution”, and covers institutions like LIC, IDFC, SUUTI etc. It was suggested to the Committee that this definition be amended to include the State Bank of India, its subsidiary banks, as well as other nationalized banks, in order to extend the protection and facility available under other provisions like Section 186(5) of the Act, to them. The Committee noted that banks were not covered under the corresponding Section 4A of the Companies Act, 1956, and felt that there is inadequate justification to classify banks as PFIs. The Committee, therefore, recommended that there was no need for an amendment.

Related Party

1.20 Suggestions were received by the Committee, pointing out that the term “related party”, as currently defined, used the word ‘company’ in Section 2(76)(viii), meaning thereby that those entities that were incorporated in India would come in the purview of the definition. This resulted in the impression that companies incorporated outside India (such as holding/ subsidiary/ associate / fellow subsidiary of an Indian company) were excluded from the purview of related party of an Indian company. It noted that this would be unintentional and would seriously affect the compliance requirements of related parties under the Act. The Committee, therefore, recommended that Section 2 (76) (viii) be amended to substitute ‘company’ with ‘body corporate’ and should also include investing company or the venturer of a company in sub-clause (viii)(A) thereof. In addition, the Committee also felt that the fifth and sixth Removal of Difficulty Orders of 2014, issued to plug unintentional loopholes be brought into the Act through an amendment.

Small Company

1.21 In Section 2(85) of the Act, the Committee recommended the replacement of the words “last profit and loss account” with the words “last audited profit and loss account”, to take care of what seemed to be an inadvertent drafting error. It also recommended the Removal of Difficulty Order to be given effect to through an amendment to the Act itself. Further, it was noted that a review of the thresholds for small companies would be done by MCA, at an appropriate time.

Subsidiary Company

1.22 Section 2(87) of the Act defines a “subsidiary company”, in relation to another company (that is to say a holding company), as a company in which the holding company controls the composition of the Board of Directors, or exercises or controls more than one-half of the total share capital. Further, Rule 2(1) (r) of the Companies (Specification of Definitions Details) Rules, 2014, specifies that the ‘total share capital’ shall be the aggregate of the paid up equity share capital and the convertible preference share capital.

1.23 During the deliberations, it was noted that by virtue of the present definition, a company in which the preference share capital was greater than its equity share capital, could become a subsidiary of an entity that holds the preference shares, even though it might not have control, or any voting rights in such a company. Further, inclusion of the preference share capital in the total share capital could create confusion about ownership of the company. Further, such companies could be shown as subsidiaries, but would not be considered for consolidation purposes, as per the applicable Accounting Standards. It was pointed out that it was problematic to treat preference shares on par with equity shares, and this could also affect raising of funds for several industries, especially infrastructure and allied sectors. The Committee also felt that there were sufficient checks in the Act to address matters relating to control over a company. In order to address the practical problems, the Committee recommended that the term “total share capital” be replaced with the term ‘total voting power’, as equity share capital should be the basis for determining holding/subsidiary status. Consequential changes in the Rules may also be required.

Layers of subsidiaries other than investment subsidiaries

1.24 Section 2 (87) of the Act also contains a proviso that prescribes the class/classes of subsidiary companies that shall not have layers of subsidiaries beyond a prescribed number. This provision has not been notified so far. Further, Section 186 (1) lays down that a company, unless otherwise prescribed, shall not make any investment through more than two layers of investment companies. The Committee noted that this provision was included to address practices of creating subsidiaries aimed at making it difficult to trace the source of funds and their ultimate use, and reduce the usage of multiple layers of structuring for siphoning off of funds, and that the same was incorporated in the Act in the wake of various scams in the country. However, this could hit legitimate business structuring. In this regard, the Committee also noted that the J. J. Irani Committee Report on Company Law recommended that the new Companies Act should not impose severe restrictions on corporate structuring, as these prescriptions would put Indian companies at a disadvantage vis-à-vis their international counterparts. The report stated, “therefore, we are of the view that there may not be any restriction to a company having any number of subsidiaries, or to such subsidiaries having further subsidiaries.” The J. J. Irani Report also noted that proper disclosures accompanied by mandatory consolidation of financial statements should address the concern attendant to the lack of transparency in holding-subsidiary structure. The report had also recognized that siphoning off of funds could take place through other routes, and therefore, imposing a blanket restriction on the number of layers of subsidiaries may not be the best way to deal with the concern. A perusal of the Parliamentary Standing Committee Report on the Companies Bill 2012 (Standing Committee Report) also reveals that stakeholders had represented before the Committee that imposing restrictions on layers could be construed as restrictive for conduct of businesses. In addition, at another place in the report, it is proposed to introduce a register of beneficial owners of a company, which would address the need to know the ultimate beneficial owners in complex corporate structures. The Committee, therefore, felt that while the proviso to Section 2(87) has not yet been notified, it was likely to have a substantial bearing on the functioning, structuring and the ability of companies to raise funds when so notified and hence recommended that the proviso be omitted.

Turnover

1.25 Section 2(91) of the Act defines the term “turnover” to mean the aggregate value of the realisation from the sale, supply or distribution of goods, or on account of services rendered, or both, by the company, during a financial year. It was suggested that excise duty and other taxes might be specifically excluded from the purview of this term. The Committee noted that the term has been used in the Act, mainly in the provisions giving prescriptive power on the basis of the criteria of a company’s turnover. Accounting Standard 9 specifies gross turnover to be the amount of revenue from sales transactions. It was suggested by the Institute of Chartered Accountants of India (ICAI) that the definition of turnover should mean the amount of revenue recognised as per the applicable Accounting Standards followed by the company. The Committee, therefore, recommended that the definition of the term ‘turnover’ be revised to read ‘“turnover” means the gross amount of revenue recognized in the profit and loss account from the sale, supply or distribution of goods or on account of services rendered, or both, by the company during a financial year’.