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Home News News and Press Release Month 2 2016 2016 (2) This

MANAGEMENT AND ADMINISTRATION - Proposed Amendments in the Companies Act, 2013

2-2-2016
  • Contents

Beneficial Interest in Shares, Register of Beneficial Owners of a Company

7.1 Misuse of corporate vehicles for the purpose of evading tax or laundering money for corrupt or illegal purposes, including for terrorist activities has been a concern worldwide. Complex structures and chains of corporate vehicles are used to hide the real owner behind the transactions made using these structures. Realizing this, jurisdictions world over have been putting in place mechanisms to identify the natural person controlling a corporate entity. Following recommendations of Financial Action Task Force (FATF), India has also tightened the concepts of beneficial interest and beneficial owner as contained in the Prevention of Money Laundering Act as well as introduced a comprehensive definition through SEBI guidelines. The SEBI guidelines issued in 2010 are aimed at identifying beneficial owners of security accounts held by various intermediaries. However, since then, jurisdictions world over have taken significant steps on beneficial ownership provisions. Changes have been made by many jurisdictions, for example Russian Union and UK in their laws to bring in transparency in company ownership and control. The English Companies Act, 2006 was amended in 2015 to require certain companies and LLPs to create and maintain a ‘Persons with Significant Control’ Register and make it available to public, as well as file the information with the UK Companies House. A publicly accessible central registry of UK company beneficial ownership information has also been established. Regulatory concerns have been raised in India also, drawing on examples set by these jurisdictions. The Ministry of Finance has suggested to introduce a Register of Beneficial Owners by mandating it in the Companies Act.

7.2 Section 89 of the Companies Act, 2013 deals with the concept of beneficial interest in a share which obligates every person acquiring/holding beneficial interest in a share as well as the legal owner to make a declaration to the company in respect of such beneficial interest. In view of the absence of a definition of beneficial interest in a share in a company, absence of any obligation on a company to collect information on beneficial ownership, the absence of the concept of beneficial ownership in a company, no enabling provisions to maintain a separate register on beneficial ownership, in the Act, the existing provisions are considered inadequate for the purpose of mandating a register of beneficial owners of the company. The Committee, therefore, recommended to amend the Act to mandate the following:

a) Provide a definition of beneficial interest in a share, and beneficial ownership in a company. The existing definition under SEBI Circular/Guidelines and the Prevention of Money Laundering Act may be used as a basis for the definition in the Companies Act, 2013. The rules issued under the United States Securities Exchange Act of 1934 define beneficial ownership in a security, which can be used as a basis for the definition of beneficial interest in a share.

b) Companies and individuals may be obligated to obtain information on beneficial ownership. In this regard, companies may be empowered to seek information from members and in case of failure to supply the required information, apply sanctions in the form of suspension of rights against the beneficial interests subject to adequate safeguards.

c) Companies would also be mandated to maintain registers of beneficial owners and provide the information to the registry (MCA21). Periodic updating may also be mandated. Data privacy concerns may be addressed by making only part of the filed information available to the public.

d) Companies not complying with the requirements may be liable to fine and criminal prosecution.

Annual Return

7.3 Section 92 of the Act, read with Rule 11 of the Companies (Management and Administration) Rules, 2014, provides for the filing of annual return of a company in the prescribed form.

7.4 The Ministry of Corporate Affairs, through the Companies (Second) (Removal of Difficulties) Order, 2014, replaced the words “paid up capital and turnover” with the words “paid up capital or turnover” for the purposes of prescribing thresholds for companies other than listed ones that were required to get their annual return certified by a practising company secretary. The Committee took the view that such a change brought about by way of a Removal of Difficulties Order may be included in the Act by way of an amendment. The Committee further recommended that prescriptive powers for separate Annual Return format for small companies and one person companies, with lesser details be included in the Section.

7.5 Section 92(3) mandates the filing of an extract of the annual return as a part of the Board’s report. This requirement is leading to duplication of information being reported to the shareholders under other provisions of the Act or mandated to be made available on the website of the companies. The Committee recommended that this requirement may be omitted, and instead the web address/link of the Annual Return filed by the company and hosted on its website, if any, should be provided in the Board’s Report and information with regard to shareholding pattern be provided as part of section 134 requirements. The matter has been further dealt with in paragraph 9.11 of Part I of this report.

Filings in case promoters’ stake changes

7.6 Section 93 of the Act, as worded presently, requires filing of a return by a listed company with the Registrar, in a prescribed form with respect to changes in the number of shares held by promoters, and top ten shareholders. The Committee noted that as the information was also required to be filed with Stock Exchanges/SEBI, it would lead to duplication of reporting. Moreover, the present prescription required filings on changes in individual holding, and not the changes that are linked to the paid up share capital. This has led to an increase in the amount of filings being made under the Act. The Committee recommended that the requirement be omitted altogether.

Place of keeping and inspection of registers, returns etc.

7.7 Section 94 of the Act pertains to the place of keeping of registers, required to be maintained by a company under Section 88. The register of members contained various personal details of shareholders, like their PAN card details, E-Mail ID, address of members, which ought not to be used for commercial purposes. Accordingly, the Committee suggested that such personal information, as may be prescribed in the Rules, may not be made available publicly.

7.8 The proviso to Section 94(1) deals with the place of keeping and inspection of registers, returns, etc. at any place in India other than the registered office of a company. The Committee noted that greater flexibility had been provided to companies in the Companies Act, 2013, vis-à-vis the Companies Act, 1956, with respect to the changing of the place for keeping the registers. In this regard, the Committee recommended that the requirement of providing the Registrar with an advance copy of a proposed special resolution as required under Section 94(1) be done away with, since it did not serve any purpose, particularly because the special resolution was in any case to be filed as per the requirements of Section 117(3)(a).

Holding of Annual General Meeting

7.9 Section 96(2) requires holding of Annual General Meeting at the registered office of the company or at some other place within the city, town or village in which the registered office of the company is situate. The Committee did not agree with the suggestions to allow AGMs to be convened abroad if 75% or more of members of the company reside abroad on the ground that the companies incorporated in India hold at least the annual general meeting in India to establish territorial nexus. Further, the suggestion to dispense with AGMs of wholly owned subsidiary companies was not agreed to as both i.e. WOS and holding company were separate legal entities. However, the suggestions to allow private limited companies and wholly owned subsidiaries of unlisted companies to convene the AGMs at any place in India provided approval of 100% shareholders is obtained in advance, is recommended by the Committee with a view to ease doing business. This would require amendment to Section 96(2) so that exemption can be provided to such class of companies.

Notice of meeting

7.10 The proviso to Section 101 (1) of the Act allows for the convening of a general meeting of a company by giving a shorter notice than the required twenty-one days, provided that consent is given by not less than ninety-five percent of the members entitled to vote at such a meeting. Private companies have been given flexibility to make suitable provisions through their AOA. The Committee was of the opinion that obtaining the approval of ninety-five percent members entitled to vote at a meeting, especially at a short notice, could be difficult. The Committee also referred to a similar provision under the Companies Act, 1956 and recommended for the requirement of ninety-five percent of the votes exercisable at such a meeting to be applicable in the case of extraordinary general meetings only. The Committee while considering the suggestion to allow acceptance of proxy till the beginning of the general meeting referred to the Standing Committee’s recommendations (2009) on proxies, and did not agree to the suggestions because of apprehensions about their possible misuse.

Calling of extraordinary general meeting

7.11 Section 100 read with Explanation to Rule 18 deals with the provisions relating to calling of extraordinary general meeting within India. The Committee noted that the explanation to Rule 18(3) requires that an EGM shall be held only in India. This is an appropriate prescription. Relaxation can be provided for wholly owned subsidiaries of companies incorporated outside India and certain other cases. For these cases, authority may be given to prescribe exemptions through Rules. Such a mandatory provision may be preferably prescribed in the substantive section (section 100) and not in the Rule. Hence, the Committee recommended that the explanation to Rule 18(3) be deleted and an explanation be incorporated at the end of Section 100 mandating that EGM shall be held only in India, as well as provide for exemptions to wholly owned subsidiaries of companies incorporated outside India.

Postal Ballot

7.12 Section 110(1)(a) prescribes for mandatorily transacting certain items through postal ballot. The mandatory requirement of a postal ballot was no longer relevant for companies which are required to conduct voting using electronic means, as this mode equally provides for that no shareholder is deprived of his right to vote on resolutions in case he cannot attend the AGM/general meeting. The Committee, therefore, decided to amend Section 110 of the Act, such that Rule 22(16) of the Companies (Management and Administration) Rules, 2014 would provide that if a company is required to provide for electronic voting, then the same items could be covered in its General Meetings too.

Filing of resolutions and agreements

7.13 Section 117 of the Act makes it mandatory for companies to file resolutions with the Registrar in respect of several matters. A concern was raised that the filing of Board resolutions as required under Section 117(3)(g), often involved disclosing confidential and commercially sensitive information such as business strategies, financing plans, investments, amalgamation, reconstruction exercises etc. Therefore, this requirement ought to be done away with. However, the Committee was of the opinion that such filings ensured that sensitive documents were not tampered with, and the original version of the documents filed with the Registrar could be used to ensure correctness of the documents. While acknowledging that sensitive information like business strategies, budgets, financing plans etc. if available publicly could hamper the business interest and that an amendment had already been made to ensure that these filings were not available for public inspection, the Committee recommended that while the filing requirement ought to continue, MCA may address the concerns of companies by adequately publicising the provisions in the MCA21 system to ensure confidentiality of such filed information.

7.14 Sub-section (3) of Section 117 lays down the matters in respect of which such filings need to be made. Section 117(3)(a) provides that special resolutions need to be filed by the company, and Section 117 (3)(e) imposes such filing obligations, where resolutions are passed under Section 180 (1) (a) and Section 180 (1) (c). The Committee, during deliberations, held that Section 180 (1) required the passing of a special resolution, and that the filing requirements were triggered under Section 117(3)(a) itself. Since clause (e) of Section 117(3) appeared to be repetitive, it was recommended for deletion.

7.15 The proviso to Section 117(1) requires that every resolution that has an effect of altering the Articles of Association of a company be embodied or annexed to the AOA of a company. The Committee, while holding the view that the manner of inclusion of the amendment of the Articles of Association be left to the discretion of each company, recommended that the resolution altering the Articles need not be embodied in, or annexed to the Articles of Association in cases where the amendment, with references, in the form of a footnote, to the resolutions made, is incorporated in the Articles of Association itself. The Committee recommended that a clarification to this effect be issued.

7.16 In terms of Section 117 (3) (g) read with Section 179 (3)(f), companies are required to file copies of resolutions passed to grant loans or give guarantees or provide security in respect of loans. In this regard, the Committee considered the suggestion that providing such information by banks may violate their confidentiality obligations towards their customers, and recommended that an exemption be considered for banks.

Secretarial Standards

7.17 The Committee had received a number of representations querying the requirement, scope and content of the Secretarial Standards issued by the Institute of Company Secretaries of India (ICSI) in accordance with the requirements laid down in Section 118 (10) of the Act. The Committee recommended that ICSI should re-examine and revise the Secretarial Standards in consultation with all the stakeholders. The issues received from stakeholders by the Committee should also be taken into account during the re-examination. Further, the Committee felt that as it is a new concept, this requirement may be reviewed after 1-2 years.

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