ANALYSIS OF COMPANIES (AMENDMENT) ACT, 2017 PART I – AMENDMENTS TO IMPORTANT DEFINITIONS

The Firm is grateful to its following associates for their contribution in making this Research Update:

  1. Advocate & Solicitor Chirag Sancheti
  2. Advocate Rachita Chatter
  3. CS Nandini Parekh
  4. CS Krishma Shah

Background

After much deliberation, on 19th December 2017, Rajya Sabha passed the Companies (Amendment) Bill, 2017 and on 3rd January 2018, the Companies (Amendment) Act, 2017 (“Amendment Act”) received the assent of the President of India. The amendments proposed under the Amendment Act comes into force on such date as the Central Government may, by notification in the Official Gazette, appoint and different dates may be appointed for different provisions of the 2013 Act. Several amendments have already come into effect.

The Amendment Act makes significant changes to the Companies Act, 2013 which are aimed at ease of doing business, better corporate governance and enforcement of stringent penal provisions for defaulting companies.

What is the Research about?

The team of Bulwark Solicitors is pleased to provide you an analysis of key changes made by the Amendment Act presented in a manner which enables you to easily understand the position which prevailed prior to the Amendment Act, the changes made by the Amendment Act and the impact/relevance of these changes.

Considering the vast changes made by the Amendment Act, we have decided to send the said Analysis in piece meal basis over a period of 2 months with one part delivered every week.

The First Part (pls. see the attachment) contains analysis of the important amendments made to some of the definitions of the Companies Act, 2013, namely,-   Associate Company, Related Party, Debenture, Holding and Subsidiary Company, Key Managerial Personnel and Small Company, Financial year and Turnover.

Definition of ‘Associate Company’ [Section 2(6)] –Not Notified

Position before Amendment Act

An associate company, in relation to another company, was defined as a company in which that other company has a ‘significant influence’ and included a joint venture company.

‘Significant influence’ was defined as control of at least 20% of the total share capital or business decisions under an agreement.

Position after Amendment Act

The Amendment Act widens the definition of ‘significant influence’ to mean control of atleast 20% of the voting power or control or participation in business decision under an agreement.

Further the term ‘Joint Venture’ has also been defined to mean a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement.

Our Comments

The Amendment has brought it in line with the definition given in the Accounting Standards which uses ‘voting power’ as a criteria to determine ‘control’ (as opposed to share capital).

Holding of Preference share capital with no voting rights will not mean control.

Definition is significant in view of consolidation of accounts, related party transactions, disclosures provisions etc involving associate companies.

Definition of ‘Debenture’ [Section 2 (30)] – Notified

Position before Amendment Act

Any instrument evidencing a debt was considered to be a debenture.

Treatment of money market instruments and such other instruments as debentures gave rise to several difficulties in compliances connected with issue of debentures.

Position after Amendment Act

Certain instruments referred to in Chapter III-D of the Reserve Bank of India Act, 1934; and other instrument, as may be prescribed by the Central Government in consultation with Reserve Bank of India are not considered to be debentures.

Our Comments

Commercial papers (which are often used for short-term funding) and other money market instruments such as call or notice money, term money, repo, reverse repo, certificate of deposit, commercial usance bill, will not be considered to be debentures.

Definition of ‘Financial Year’ [Section 2 (41)] – Notified

Position before Amendment Act

Only the subsidiary or the holding company of the company incorporated outside India was allowed by the National Company Law Tribunal to follow a different financial year for consolidation of accounts outside India.

Position after Amendment Act

Associate company of a company incorporated outside India can also apply to the Tribunal for a different financial year.

Definition of ‘Holding Company’ [Section 2 (46)] – Notified

Position before Amendment Act

Bodies corporate incorporate outside India were not covered under the purview of ‘holding companies’.

Position after Amendment Act

For the purpose of definition of the term ‘holding company’, the expression “company” will include any body corporate.

Our Comments

Earlier, the term ‘Company’ used to cover only a company incorporated under the Companies Act, 2013 or under any previous company law. Now, foreign companies can also be the holding company of a company.

Limited Liability Partnerships (LLP) could also be covered as holding company since LLP is a ‘body corporate’ under the LLP Act.

Definition of ‘Interested Director’ (Section 2 (49)) – Notified

Position before Amendment Act

Was defined to mean a director who is in any way, whether by himself or through any of his relatives or firm, body corporate or other association of individuals in which he or any of his relatives is a partner, director or a member, interested in a contract or arrangement, or proposed contract or arrangement, entered into or to be entered into by or on behalf of a company

Position after Amendment Act\

The definition of the term ‘Interested director’ is deleted.

Definition of Key Managerial Personnel – Notified

Position after Amendment Act

The scope of the definition of key managerial personnel (KMP) has been widened to include functional heads not more than one level below the directors who is in whole time employment and if they have been so designated by the Board.

Definition of “net worth” (Section 2 (57) – Notified

Position after Amendment Act

 Both the debit and credit balance of Profit and Loss account have to be included while calculating networth.

 Our  Comments

Assumes significance while identifying eligibility of companies for accepting public deposit, CSR applicability, cost audit applicability, restrictions on board power etc.

Definition of “Related Party” [Section 2 (76)] – Notified

Position before Amendment Act

Based on the literal interpretation of the term ‘related party’, it was inferred that a foreign body corporate (i.e. a foreign subsidiary or a foreign holding company or a foreign associate company of an Indian company was not considered to be a related party).

Position after Amendment Act

Instead of only a company, any body-corporate which is holding, subsidiary or an associate company of such company or a subsidiary of a holding company shall be considered as a related party.

A ‘investing company’ or the ‘venturer’ of a company will also considered to be a related party.

The investing company or the venturer of a company means a body corporate whose investment in the company would result in the company becoming an associate company of the body corporate.

Our  Comments

The amended definition fill the lacuna of the earlier definition. However, in view of the earlier exemption granted to private limited companies, such persons will be not treated as a related party of a private limited company.

Definition of “Small Company” [Section 2 (85)] – Notified

Position before Amendment Act

Defined to mean a private company whose

(i) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than five crore rupees; and

(ii) turnover of which as per its last profit and loss account does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than twenty crore rupees.

Position after Amendment Act

The maximum paid-up share capital amount which can be prescribed for the purpose of determining a company as a small company has been increased from Rs. 5 crores to Rs. 10 crores and prescribed turnover amount from Rs. 20 crores to Rs.100 crores.

Further turnover should be as per profit and loss account for the immediately preceding financial year and not as per its last financial year.

Our Comments

The benefits provided to small companies are now provided to a substantially larger number of companies.

Definition of “Subsidiary” [Section 2 (87)] – Not Notified

Position before Amendment Act

Subsidiary company in relation to any other company, means a company in which the other company exercises or controls more than one-half of the total share capital either at its own or together with one or more of its subsidiary companies.

For this purpose, ‘total share capital’ comprises the aggregate of paid up equity share capital and convertible preference share

Position after Amendment Act

A company will be treated as subsidiary in case the holding company exercises or controls more than one-half of the total voting power either at its own or together with one or more of its subsidiary companies.

Our Comments

Replacement of share capital parameter to “total voting power”.

Under the 2013 Act, a company may be treated as a subsidiary of the other company merely based on ownership of optionally convertible preference shares, which are in substance loan. After the amendment, such a case will not arise.

The new criteria is also consistent with AS 21 Consolidated Financial Statements, notified under the Companies (Accounting Standards) Rules 2006.

Definition of ‘Turnover’ [Section 2 (91)] – Notified

Position before Amendment Act

Defined 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

Position after Amendment Act

In accordance with the new definition, ‘turnover’ means the gross amount of revenue recognised in the P&L account from the sale, supply, or distribution of goods or on account of services rendered, or both, by a company during a financial year.

Our Comments

Value realization of sales etc replaced with revenue recognized in Profit and Loss account. It was uncertain whether indirect taxes will be included in or excluded from ‘turnover’. Now it is clear that it has to be excluded.

The term is significant because it is one of the criteria to determine whether a company is a Small Company, certification of Annual Return, applicability of Secretarial Audit, Cost Audit, CSR, Woman Director etc.

 -TO BE CONTINUED-

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