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BW Businessworld

Cos' Act: Removing An Irritant

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Answering the concerns of India Inc, the Ministry of Corporate Affairs has come out with a draft notification, floating possible changes regarding the applicability of the Companies Act to private companies. The June 24 notification proposes that several of the provisions in the act would not apply to a private company, that is, companies where membership is not open to the public.
Since its introduction in October last year, the Companies Act, 2013 has seen 14 separate sets of clarifications. Yesterday’s notification is significant in that it removes many of the bottlenecks that were severe irritants for companies without public interest and without any corresponding benefit for anybody.
Corporates, and their lawyers, are definitely elated. The Act, as it was drafted last year, did not differentiate between public companies and private companies. This meant that the vexatious provisions, such as what kind of transactions it could undertake and at what price, or rules regarding rights each shareholder had, would apply to all companies equally.
Private companies often consist of two or three shareholder entities, often a husband, wife and son. They would not have been companies in the first place if it was not for the benefits associated with incorporation (mainly the fact that the promoter’s liability is limited). For them to invest in superior corporate governance principles is just not going to happen. And then there were the Indian arms of multinationals, like Coca-Cola, which is not listed in India. They are incorporated in India only because the laws demand it. With their entire shareholding held by the parent, they could not see why they would be subject to the government’s accountability drive, considering the additional compliance cost it would impose on these entities.
Some of their concerns will ease if the suggestions in the draft are notified. For example, the provisions relating to Related Party transactions will not apply. RPTs were intended to protect the company, and it’s minority shareholders from its promoters, if the promoter would siphon out money by making fictitious transactions with entities owned by him in a private capacity. For example, if the company procures materials from a promoter owned entity, paying an abnormally high price, or if goods are sold at a lower margin to such an entity, who will then resell it to the market, the company would stand to lose. So the Act as it stands now decrees that such transactions would have to be approved at several layers, including the non-promoter shareholders, effectively disincentivising such transactions. But would that be necessary if the entire company is owned by the same promoter?
Other restrictions include Differential Voting rights (where some shareholders would not have the same voting rights as others) and loans to directors and management personnel. Under the old Act, these would have been severe restrictions on companies, without achieving anything significant, whereas now, such an irritant has been removed.