Will Amend Cos Act To Allow Multi-Layer Investment Entities, Hike Penalty On Auditors
Finance minister Arun Jaitley on Wednesday proposed fresh amendments to the Companies Act to do away with the restriction of routing funds through only two layers of investment companies as well as seeking government approval for managerial remuneration.
The amendments moved in the Lok Sabha have also sought to increase penalty for auditors by linking certain fines to the size of the offence and eased rules for private placement of shares. In general, the tone of the amendments -the second since the law was enacted towards the end of UPA rule in 2013 -is to make life simpler for India Inc -be it in providing loans to directors, calling board meetings or restrictions on appointment of an auditor of a company that has links with its “relatives“.
The corporate sector had cited the new Companies Act, which replaced the 1956 law, as an example of how it was tough to do business in the country , which prompted the Narendra Modi government to order a review. The first set of changes were done through a series of clarifications, which were then followed by one round of amendments.The current set of amendments followed extensive consultations by a committee under corporate affairs secretary Tapan Ray.
Based on the committee's recommendations, for the first time, a test of “materiality“ for determining if pecuniary relationships could impact the independence of an individual as an independent director has been proposed.So, anyone whose relative owns interest up to Rs 50 lakh or less than 2%, has loans above a prescribed limit, or has pecuniary relationship with a company which is over 2% of the turnover, will not be eligible to be appointed independent director.
Similarly , in case of restriction on number of layers on investment companies, the panel had suggested that the ceiling imposed by the law could become “too obtrusive and impractical“ although the provision had been imposed after the Satyam scam and several other instances of companies resorting to multi-layering to hide routing of funds. The bill has proposed to do away with that provision.
In addition, there are several areas where clarity has been provided. For instance in case of an associate company , the bill has proposed to define “significant influence“ to mean control of at least 20% of the voting rights or control of participation in business decisions under an agreement.Similarly , joint ventures have been defined in the bill.
Several provisions related to providing clarity have been introduced and more changes are proposed in the rules in the coming months.
Times of India, New Delhi, 17th March 2016
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