One of the recent initiatives of the Indian Government towards ensuring sustainable economic growth and improving investment climate is enactment of Companies Act 2013 (CA2013), which replaces significant provisions of the previous Companies Act, 1956 (CA1956) with effect from April 1st, 2014. CA2013 purports to promote self–regulation, encourage corporate democracy and reduce requirement of Government approvals and intends to enhance accountability of the directors and auditors, broaden the reporting framework, mitigate incidents of fraud, increase transparency and protect interests of investors and other stakeholders.
This article examines some key changes effected by CA2013 that may have a bearing on foreign investors desirous of setting up a company in India.
Subsidiary of a foreign body corporate – While subsidiaries of Indian holding companies which are public companies are deemed to be public companies for the purpose of CA2013, subsidiary of foreign body corporate can be incorporated either as private or public company in India, irrespective of the status of parent company in its jurisdiction.
Financial year – All companies are required to follow a uniform financial year, commencing from April 1st to March 31st of the following year. Exception: Holding or subsidiary companies of foreign companies for the purpose of consolidation with prior approval from the National Company Law Tribunal. Other companies have 2 years to comply with the new norms.
Shareholder’s arrangements – While shares of public companies are freely tradable, shareholder contracts or arrangement on the transfer of shares are now enforceable as contract.
Private placement – Issue and allotment of securities to persons other than existing shareholders would need to follow the process of a private placement offer.
Directors – Companies are required to have atleast 1 resident Indian director. Every director needs to attend at least one board meeting in 12 months, failing which his office shall vacate automatically.
Board of Directors – Board meetings can now be conducted through video conferencing/ other audio visual means. The range of matters which mandatorily are to be decided at a board meeting has been considerably widened. These matters inter alia include, authorising buy-back, issuance of securities, borrowing, investment of funds, granting loans, giving guarantee, providing security, approving financial statements, take-over and acquisitions, appointment and removal of key managerial personnel, appointment of internal and secretarial auditors.
General Meeting – All general meetings of a company shall now be held in India.
Corporate Social Responsibility (CSR) – Companies with net worth of INR 5 billion or more, or turnover of INR 10 billion or more, or net profit of INR 50 million or more during any financial year are required to spend at least 2 percent of the average net profits of the previous 3 years on specified CSR activities, and must constitute a CSR committee of the Board comprising of 3 or more directors (including at least one independent director in the case of public companies). The CSR provisions apply to branch office/project office of foreign companies in India as well.
Loans to directors – Loan, guarantee or security to any director or to any person in whom a director is interested, are prohibited. Exception: Where made to wholly owned subsidiaries, provided the subsidiary uses the loan for its principle business activities only.
Loans and investments by a company – Restriction on from making investment through more than two layers of investment companies. Loans, guarantees and investments exceeding 60 percent of its paid-up capital, free reserves and securities premium account or 100 percent of its free reserves and securities premium account, whichever is more; require prior approval of shareholders through special resolution. Exception: Loans, guarantee, security made to wholly owned subsidiary company or joint venture company, or acquisition by holding company of the securities of its wholly owned subsidiary under rights offer.
Related party transactions – Related party transactions require approval of the board and in certain events approval of the shareholders. Directors and shareholders cannot participate or vote on matters where they are interested.
Since CA2013 is in its initial stage of implementation, a number of provisions, especially in relation to the new concepts introduced by the enactment may require further clarifications and therefore may result in implementation challenges in the initial months.