India adopts Company Law amendments

United Kingdom

The Government of India (GoI) has adopted the Companies (Amendment) Act 2015 (the Amendment Act), which amends various provisions of the landmark Companies Act 2013 (the 2013 Act). In adopting the Amendment Act, the GoI has sought to respond to the concerns of stakeholders, including foreign investors, that ambiguities and onerous administrative requirements in the 2013 Act were hampering business activity in India. The adoption of the Amendment Act also follows the Government’s adoption of the 2015-16 budget aimed at facilitating foreign investment in India (see our commentary on the budget here).

We set out below some of the key highlights of the Amendment Act:

  • Rules on related party transactions relaxed

Where an Indian company intends to enter into a transaction with a related party it is required to obtain the approval of the directors and/or the shareholders, depending on the circumstances. Where shareholder approval is required, the 2013 Act prescribed that the approval be given by way of special resolution (approval of 75% of shareholders). The Amendment Act has now relaxed this requirement to an ordinary resolution, meaning the approval of only a simple majority of shareholders will be required for a company to enter into certain related party transactions.

In addition, where the related party transaction is between a holding company and its wholly owned subsidiary, the Amendment Act provides that the resolution requirement can be dispensed with entirely, provided that the accounts of the subsidiary are consolidated with the accounts of the holding company and are placed before the shareholders at a general meeting for approval.

  • Minimum paid-up share capital scrapped

Under the 2013 Act, both private and public companies incorporated in India were required to have a minimum paid-up share capital. This requirement has now been removed, meaning no initial capital will be required to incorporate companies in India.

  • Loans to subsidiaries

The Amendment Act has clarified that holding companies are permitted to lend to, and provide guarantees in respect of loans to, their wholly-owned subsidiaries, provided that the funds will be used by the subsidiary for its principal business activities.

  • Auditors’ fraud reporting obligations

The 2013 Act created an obligation on the company’s auditors to report to the Central Government where they have reason to believe that a fraud has been committed by officers or employees of the company. The Amendment Act has incorporated a threshold into this obligation. All cases of frauds involving less than a certain amount (yet to be specified) shall be reported to the board of directors or the audit committee of the company, rather than the Central Government, and will need to be disclosed in the company’s annual report.

  • Deposits

Under the 2013 Act, it is prohibited for companies to accept, renew or repay deposits from the general public without the approval of the relevant regulatory authorities. This provision, which is designed to protect public investors, has now been strengthened by the introduction of penalties for its contravention. Companies will be liable to pay a minimum fine of INR 10,000,000 (approximately £100,000) and a maximum of INR 100,000,000 (approximately £1,000,000) in addition to the amount of the deposit and interest, and every officer of the company in default could face a prison term of up to 7 years and/or a fine of a minimum of INR 2,500,000 (approximately £25,000) and maximum of INR 20,000,000 (approximately £200,000). Officers may also be subject to an additional penalty where the non-compliance was done knowingly or with the intention to deceive the company, shareholders, depositors, creditors or tax authorities.

  • No requirement for commencement of business certificate

Under the 2013 Act, companies were required to obtain a ‘Commencement of Business Certificate’ after incorporation and prior to commencing business, through the initial subscribers filing a declaration with the Registrar that the minimum paid-up share capital had been paid and that the company had filed a verification of registered office. This requirement has now been removed, reducing the filing requirements for a company setting up in India.

  • Optional company seal

The use of a company seal has been made optional. The Amendment Act provides that any documents which previously required affixing of the company seal may now be signed by two directors or one director and a company secretary.

  • Public access to board resolutions

Prior to the Amendment Act, it was possible for members of the public to download copies of certain resolutions filed with the Ministry of Corporate Affairs (for a fee). The Amendment Act has now restricted public access to resolutions, in a move aimed at protecting company confidentiality in light of the concerns of several companies in India about the public criticism of their business activity.

  • Dividend payments

Companies that have losses or negative reserves in a financial year are now not permitted to pay dividends unless the losses and depreciation carried over from past years have been set-off against the profits of the company for that year.

The changes brought about by the Amendment Act were designed to reduce the administrative and procedural burdens on companies setting up and operating in India. However, the legislation does not address more substantive concerns about the 2013 Act, such as the compliance burden on companies looking to raise funds through private placement and the ambiguity surrounding the application of the insider trading prohibition to private companies. The GoI has recognised that there is more to be done to fully allay stakeholder concerns and has set up a Companies Law Committee to make recommendations on issues arising from the implementation of the 2013 Act. The Committee is receiving comments until 21 July 2015 in order to assist its deliberations, so we can expect further legislative proposals on company law in India in the near future.

We are very grateful to Khaitan & Co, the leading Indian law firm with offices in Mumbai, New Delhi, Kolkata and Bangalore, for allowing us to use their newsletter to prepare this briefing note.
You can contact Khaitan & Co at editors@khaitanco.com for further information or specific advice on the issues covered by this briefing note.