Recent Amendments to the Companies Act – We expect more and better from the Ministry
With the change of Guard at the Ministry of Corporate Affairs – Mr Murali Deora taking over as the Minister of MCA in January 2011, the various stakeholders –particularly corporates are regularly in for surprises – at the incredible flow - influx- of a plethora -of notifications /circulars etc relaxing the provisions of the Companies Act - which the corporates have been longing for , for long. The recent announcements by the MCA include –
doing away with the need to move the GoI for approval for payment of managerial remuneration in respect of unlisted public companies ( 309 and Schedule XIII),
granting general permission for not attaching the audited accounts of the subsidiaries subject to compliance with the prescribed disclosures, (S 212)
increasing the limit for disclosure on employees drawing remuneration – to Rs 5 lacs p m ( S217 -2A) ,
permitting the notice to shareholders under electronic mode (171) ,
permitting the participation at board meetings/ shareholders meetings through video conference calls
These amendments reflect the progressive outlook of the Government and the willingness to listen to the stake holders and sincerity in considering the pleas of the corporates to MCA to become pragmatic. That instead of waiting for the Companies Bill 2010 incorporating these changes to be placed at the both the Houses and then become legislation , the MCA has swift action realizing the need for the changes to be made in time .( That the Companies Bill 2010 in view of the lot of changes to be made to it , may take a long time to become a legislation is a different story) . The amendments so far made since Feb2011,have brought to corporates a great deal of relief –as these are made available to the companies without the need to approach the Ministry for the approvals .
However, these amendments are not free from lacuna – result of inept drafting and lack of vision on the part of the authors who are known for hawken-eyed approach .
Take the case of the holding of board meeting through video conference . The rules prescribed require every director to attend physically at least one meeting in every financial year. The rationale for this requirement is not known. Let us take the case of a meeting through video conference in the first quarter of a financial year, where a director takes part thro’ video conferencing. Subsequently, this particular director is unable to attend in person any of the meetings in that financial year . What happens to the meeting already held with his participation through video conferencing? This condition may be a deterrent in holding meetings through video conferencing since a company cannot be sure of the presence of every director attending one meeting in person in a financial year. That the inability of even one director to attend at least one meeting in person in a financial year for unavoidable genuine reasons may come in the way of adopting this mode of holding the board meetings in this mode. The rules are silent on the effect of non-compliance with this requirement , which adds to chaos. MCA may review the provisions and make suitable amendments to the Rules so as to make them effective and pragmatic
Another archaic provision is the draft Rules on the issue of securities on private placement basis by unlisted companies released by the MCA for comments from the various authorities in its ministry and other stakeholders. The issue of shares on private placement basis is adequately regulated by the extant Rules introduced in 2003. In the draft Rules now proposed by MCA , it is required that 1) the issue price of the equity shares which are allotted out of the convertible instruments has to be determined upfront – at the time of issue 2) Where the value of the securities are issued under private placement basis – which give a right to the holder to apply for shares – in excess of a value of Rs 5 crores has to be prior approved by the MCA!!!!! Does this mean that MCA is taking the role of the erstwhile CCI ? Also, one does not know what are the parameters that the MCA would apply for determination of the issue price for the shares to be issued in terms of the convertible instrument already issued
It is ludicrous to come out with a new set of Rules just because there a couple of cases of breach of the extant regulations . The MCA has not understood the concept of issue of securities by unlisted public companies. In most cases, a) to raise the resources to meet the funds requirements of a company for the projects which involve heavy capital outlay , b) to pool the resources (in the form of cash / technology/infrastructure) of two or more parties, such parties invest in a company with agreed proportion of shareholding and the rights and obligation of each in relation to the shareholding and the management of the company. This helps all the parties concerned viz. the company, the existing shareholders and the new investor taking up stake in the company . it is also common that venture capital companies and Private Equity Investors take up equity stake . Companies which are engaged in certain industries which are highly capital intensive, like- Telecom, Infrastructure, Construction etc –resort to issue of capital on private placement basis to raise the required resources from entities , which are on the look out for deployment of the funds with attractive terms of investment
In all these cases, shares are issued to new parties with the prior consent of the existing shareholders in the form of a special resolution and after complying with the requirements under the extant Rules for the issue of shares under preferential allotment. Given the current safeguards prescribed under the extant Rules , there is no need to introduce a new set of regulations that too having serious adverse effect on the industry as a whole . As such MCA may withdraw the draft rules on the issue of share on private placement basis forthwith.
Having experienced a spate of favours by the Minister in less than 5 months, The corporates expect more announcements from the MCA for further liberalization and simplification of the provisions of the Act but without any deterrents!!!
With the recent change in the helm of the Ministry, it remains to be seen if the liberalisation thoughts would continue with the same level of invlovement
Raghunath Ravi
Company Secretary
raghunath.ravi@tvs.in
+919843299128
