Francisco A. Laguna & Annapurna Nandyal
This week, we begin a 2-part series on India’s “Companies Act, 2013”, enacted in August 2013 (the “Act”). The Act replaces the six-decade old Companies Act, 1956. Over the past 57 years, India’s corporate and business environment has evolved significantly; hence, the need to amend and modernize the law. The legislation is aimed at improving accountability and transparency in the corporate sector and increasing foreign investor confidence in the country.
Compared to Companies Act, 1956, the Act has brought about drastic changes in several areas of company administration and management to facilitate the ease of doing business in India. One major objective of the Act is to decrease the need for government approvals, enhance self-regulation, increase shareholder rights and implement stricter corporate governance rules to meet global standards. The Act implements key changes in the following areas:
- Loans, Compromise, Arrangements, Amalgamations/Mergers and Demergers
- Corporate governance
- Related-party transactions
Importantly, the Act specifies that foreign companies conducting business activities in India in any manner are deemed to be Indian companies and must comply with Indian regulatory requirements. It is unclear how this provision will be interpreted or applied.
Under the Amalgamations/Mergers section, the Act allows domestic companies, subject to Reserve Bank of India (RBI) approval, to set up cross-border mergers and amalgamations with foreign companies. This provides Indian companies the platform required to launch internationally. The Act also eases procedures for mergers and acquisitions within India between a holding company and its wholly owned subsidiary. A holding company and a wholly owned subsidiary can now merge just with permission of the Union Government, instead of requiring the approval of a court or tribunal. To deal with matters related to mergers, acquisitions, amalgamations and demergers, a separate tribunal known as National Company Law Tribunal (NCLT) will be established.
All companies required to constitute an audit committee must appoint an auditor after taking into account the recommendations of the audit committee. Auditors are to be strictly monitored which will hopefully result in more reliable audit results.
In terms of corporate governance, the Act requires companies with a net worth of 5 billion rupees (~ US$82 million) or more during any fiscal year to spend at least 2% of its profit on Corporate Social Responsibility (CSR) activities, such as social welfare programs – a global first. In addition, it prescribes that every publicly-traded company must have a board comprised of one-third directors who are independent with no financial interest in the entity. The law provides a detailed “Code for Independent Directors”, containing guidelines for professional conduct, roles and responsibilities. Similarly, the Act requires that certain companies, including those publicly-listed, have one female director to increase the representation of women in corporate management.
The law seeks to address the problems of minority shareholders by making management and promoters more accountable. Shareholders can use class action law suits for the first time in India to seek justice. More statutory powers are given to the government’s investigative arm, the Serious Fraud Investigation Office (SFIO), to curb corporate fraud.
The Act does not prescribe government approval for related-party transactions; however, these operations must be approved by a special resolution at a general shareholders’ meeting that requires three-fourths majority approval.
More importance is given to employee rights. For example, if a winds down operates, it has to pay two years’ salary to the employees. New concepts like “One Person Companies” and “Small Companies” are given more prominence, and the requirements to form these entities have been simplified.
Next week, we will discuss other aspects of the Companies Act, 2013. TransLegal has assisted clients in India on issues involving corporate law, genetically modified organisms, franchises, food labeling and importation requirements. Call us with your questions on doing business in India.