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Anomalies, Drafting Aberrations and imponDerables in the Companies Act, 2013 and Rules

Anomalies, Drafting Aberrations and imponDerables in the Companies Act, 2013 and Rules. Ramaswami Kalidas VP & Company Secretary Reliance Power Ltd. Introduction. New Act after prolonged period of incubation.

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Anomalies, Drafting Aberrations and imponDerables in the Companies Act, 2013 and Rules

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  1. Anomalies, Drafting Aberrations and imponDerables in the Companies Act, 2013 and Rules RamaswamiKalidas VP & Company Secretary Reliance Power Ltd

  2. Introduction • New Act after prolonged period of incubation. • Shift in emphasis in legislation to subordinate law. Very unusual in a Non-Revenue Statute. • Possibility of adhocism due to convenience of tweaking Rules without parliamentary sanction

  3. Glaring Errors • Section 2(47) – Definition of Independent Director- To be read with Section 149(5) No definition in Section 149(5), to be found in Section 149(6) !. • Section 135 – Non –Existent Definition of CSR- Draft Rules on CSR- CSR -- As defined in Section 135. Anomaly since corrected –Rule 2 now defines CSR inclusively

  4. Section 165- Number of Directorships- Sub section (2) to Section 165 :- “Subject to provisions of Sub-section (1), the members of a company, may by special resolution, specify any lesser number of Companies in which a director of a company may act as Directors” “S” after director should go .Queen’s Language !!

  5. Definition of “courier’-Rule 35(5) in Chapter II Means”a document sent through a courier which provides proof of delivery”- Hilarious and Incredible!!!

  6. Section 181 – Contribution to bona fide and charitable funds Members’ prior approval needed for contributing to such funds, amounts in excess of 5% of average net profits of last three years. Proviso silent on whether prior approval shall be ordinary resolution or special resolution. View can be taken that ordinary Resolution shall suffice.

  7. Construction Aberrations • Section 194 – Prohibition of forward dealings in securities of Company Sub – section (1)- Directors or Key Managerial Personnel restricted from forward dealing in securities of Company, its Holding Company, Subsidiary or Associate Company

  8. Explanation in Section speaks differently- Applicability to whole time Directors or KMPs only. Non-Executive Directors not covered. “Relevant Securities” refers to shares/ debentures of Company, it’s Holding Company and Subsidiary Company. No reference to “Associate Companies”

  9. Section 195- Prohibition on insider trading • Applicability to every company leading to inference that it covers unlisted public/private companies as well. • How can Section apply to unlisted Entities? • Section applies to persons includingDirectors or KMPs of Company Applicability not restricted only to above persons. Inference- Applies to all. Other types of persons covered to be specified.

  10. Definition of Price Sensitive Information- Partial lift off from Insider Trading Regulations Explanation in SEBI Regulations omitted from definition. Inexplicable Exclusion as Explanation identifies various events which are price sensitive !

  11. Section 177 and 188- Related Party Transactions • Redundancy in procedure • Apparent disconnect between Section 177 and 188 • Section 177 (4)(iv) Audit Committee to approve every related party transaction and subsequent modifications in terms . SEBI circular clarifies that approval represents prior approval

  12. Section 188- Board authorisation for types of contracts/arrangements specified Specified under (a) to (g) of 188(1) Non- Applicability if : Transaction in the ordinary course of business. Is on arms’ length basis.

  13. Shareholders’ approval when • Where paid up capital exceeds Rs. 10 crore or • Value of transaction exceeds individually or • collectively 25% of turnover or 10% of Net Worth. • For sale of property where value exceeds 10% of Net worth • For provision of services –where value exceeds 10% of Net worth. • For leasing where value exceeds 10% of turnover/Net worth.

  14. Approval also for : (a) For appointment of RP to any place of profit in Company, Subsidiary or Associate- Remuneration exceeds Rs2.5 lacs per month. (b) For underwriting Agreements – where Remuneration exceeds 1% of net worth. • Special Resolution not to involve Member who is RP. • will lead to procedural issues during voting.

  15. Divergence between Section 164 and Section 167 Disqualification of Directors and vacation of office Section 164- Disqualification for holding office upon conviction for any offence involving punishment by imprisonment- six months or more and period of five years has not elapsed from conviction. Disqualification to be held in abeyance during pendency of appeal and even seven days after adjudication of Appeal.

  16. Section 167- Vacation of office once there is conviction. Will apply even if there is appeal in pendency. Above contradiction also exists in 1956 Act in Sections 267, 274 and 283.

  17. Section 184- Disclosure of Interest by Director Disclosure applies:- Per sub-section(1)-Against interest in any company bodies corporate ,firms and AO Individuals. Per Sub-Section(2)- (a) Where contract is with body corporate in which Director by himself or with another holds directly or indirectly 2% or more of shareholding in other company or (b) If he is promoter, manager, CEO of other body corporatey or

  18. (c) Where contract is with firm or other entity of which Director is partner, owner or member as the case may be • Director to disclose interest and not participate in meeting.

  19. Section 184(5) Nothing in this Section shall apply: Clause (b) Except where interest is by way of shareholding of 2% or more in other company Inference: No disclosure required except in case of shareholding of 2% or more. Illogical conclusion?

  20. Grey Areas galore- CSR Rules • Issued u/s 135 and 469(2) • Section 469(4)ordains that Rules notified be placed in parliament. • Rule 2(f) defines Net profit and has two significant Exclusions. • Section 135 –Explanation directs determination of Net profit per Section 198.Exclusions in Rule 2(f) not covered u/s 135.Can Rules have exclusions not covered under Mother law • Settled principle-Sub-ordinate law cannot Override mother statute

  21. CSR RULES • Rule 5 clarifies that private company need not have ID in Committee. • Section 135 speaks about Requirement of ID for Every Company covered. How Can Rules make an Exclusion. • CSR Rules issued under Section 469. • Power to Exclude any class of companies, in public interest exercisable only u/s 462 .

  22. As per Section 462 notification draft to be • placed in parliament and to be approved • before issue. • For Balance of convenience-Rule issued u/s 469. • Raises doubt on sustainability of Rule

  23. Nomination and Remuneration and Stake holders Committees-Section 178 • No time frame prescribed for setting up the Committees. Need appears immediate . • PS: Anomaly since corrected by Circular dated June 12,14. • No structure suggested for composition of Stake holders Committee. • Chairman to be non-executive and composition to be decided by Board. • Paradox-considering objectives of Committee.

  24. Issue of Securities –Disconnect with Companies(Prospectus and Allotment of Securities)Rules • Section 179 empowers Board to issue Securities including Debentures whether in India or out side. No fetter on Board power apparently. • Rule 14(2) requires previous approval of members by special resolution even for private placement of Debentures. • Rule contains stipulations not contemplated by Section.

  25. Departmental clarification dated 14.2.2014 on Section 185-Is it tenable • Circular indicates incorrectly that Section 185 prohibits: • Issue of guarantee by Holding Company to Subsidiary. • Circular also states that exemption will • apply if loans are exclusively used for the principal business activities

  26. Section 186 nowhere contemplates that • guarantees issued by holding company should • be used by Subsidiary for its principal business • purposes. • Circular travels beyond both Sections 185 and • 186.

  27. Shareholders cannot vote at AGM by show of Hands! • Rule 20 in Chapter VII provides for e-voting platform for listed and unlisted Companies with 1000 members or more. • Evoting requirement since extended to December 31,2014 by clarification dated June 17,2014. • SEBI circular directs that facility of postal ballot be provided to those who do not have access to e-voting.

  28. Section 107 states that where voting is through e-platform or when poll demanded voting by show of hands not possible. What will shareholders do at AGMs- Surely not twiddle their thumbs !!!. PS-Above provision has been held in abeyance due to clarification dated June,17,2014

  29. Extension of definition of “Related Party” • Section 2(76)Provides definition of Related party. • Rule 2 in Chapter XII Restricts Definition of RP. • Folly realized and definition omitted in Gazette Copy. • Are Rules analogous to a household grocery list!

  30. Impractical requirements regarding issue of duplicate certificates • Rule 6 in Chapter IV provides that duplicates after approval by Board shall be issued within 15 days of submission of complete documents. • Power now delegatable to Committee of Directors • Rule also provides for signature on Certificates by CS only where Company has one.

  31. Rule 13 in Chapter VII-Return of changes in shareholding of promoters and top ten holders • Requirement to file MGT.10 for reporting either increase or decrease of 2% or more in promoters/top ten holding. • Redundancy in procedure and steep increase in cost of compliance.

  32. Thank you

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