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DEFINITIONS - Proposed Amendments in the Companies Act 2013

News and Press Release - Dated:- 2-2-2016 - 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 c .....

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nt 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 .....

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ludes 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 join .....

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es 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, diffi .....

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t 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 i .....

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ion 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 .....

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nts 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 .....

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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 bod .....

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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 t .....

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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. .....

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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 .....

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tors, 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 vi .....

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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 Rule .....

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ic 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 pas .....

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tion 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 .....

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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 .....

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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 .....

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t 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 .....

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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 .....

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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 .....

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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 c .....

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otal 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 i .....

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lasses 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 redu .....

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-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 f .....

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