The Companies Act, 2013 has so far been amended twice in the three years since it was implemented. The second amendment bill was approved by the President of India on Jan. 3 and will be notified soon.
The following are top 5 key changes under the latest amendment:
Relief For Creditors Of Distressed Companies
Under the new rules, creditors who are hoping to convert their debt into equity during insolvency or restructuring process will receive some relief.
Creditors of distressed companies will be allowed to convert debt into equity at a discount to face value. Current rules require such conversion has to happen either at par or premium.
According to Nishchal Joshipura, partner at law firm Nishith Desai Associates , Section 53 of the current law which requires shares to be issued at a value not below face value, had raised concerns in the lender community
Joshipura pointed out that for financially distressed companies facing either insolvency proceedings or some other restructuring mechanism, the book value of the company is mostly lower than the face value of the shares of the company as a result of accumulated losses. Converting loans into equity at face value in this situation could lead to a break of the borrowing company’s contractual commitment.
As per Harsh Pais, Partner, Trilegal, the amendment to Section 53 will help bridge the gap between the Companies Act and IBC since the bankruptcy code deals with several scenarios of creditor loans being converted into equity.
Leniency In Loans To Directors And Interested Parties
Another significant change introduced addresses the rules surrounding loans being granted by a company to its directors and others that a director is ‘interested’ in.
The law currently bars a company from providing loans to a director or his/her relatives or to
- any entities where such director or his relative is a partner
- any private company wherein the director is shareholder or director
- a corporate entity where at the director hold 25 percent or more voting rights or management control
However a subsection of this provision allows a company to provide loans to such bodies provided a special resolution with approval of 75 percent of shareholders is passed. Additionally, the rules require that the loan funds be used for its principal business activity alone. Nonetheless, loans to a director directly or his relatives is still prohibited.
The issue with these provisions is that no loans are allowed between a holding company or a subsidiary company where there is a common director, noted Joshipura. Therefore, a holding company is forced to fund the subsidiary company through equity shares or preference shares which may carry adverse tax implications.
Calling the amendments to this section as” very progressive”, Joshipura noted that it would give shareholders the discretion to approve such transactions allowing them to “confirm that the company will not lose money because of directors’ arbitrary decision.”
Related Parties Transaction: A Mixed Bag
The third important amendment concerns related party transactions .
Under existing rules, a related party is prohibited from voting on a related party transaction which involves that party. For all related party transactions a 75 percent approval from non-interested shareholders is mandatory.
The amendment firstly relaxes the applicable voting restriction in cases when a company holds 90 percent or more shareholders in number, or are relatives of promoters, or are “related parties”.
Pais noted that this change was aimed at solving a practical issue. How can shareholder approval be received if the related party owns almost all the shares but cannot vote, he questioned.
The second important change under the amendment is the expansion of the term ‘related party’. It now includes all body corporate, Indian or foreign, in addition to companies. Such body corporate can be a LLP, registered society, trust etc.
With these changes, foreign entities having at least 20 percent of total voting power, or control over a company will also need to follow related party transaction rules.
Relaxation For Independent Directors
Under current rules, any person having a pecuniary relationship with a company cannot act as an independent director of that company.
Experts have remarked that the interpretation of the term ‘pecuniary relationship’ has been causing confusion.
The amendment now makes it clear that a person who has transacted with a company will not be prohibited from acting as independent director, as long as the value of such transaction is less than 10 percent of the said independent director’s total annual income.
Suneeth Katarki, partner at IndusLaw noted that transactions for comparatively small amounts carried out in ordinary course of business had previously led to the barring of independent directors from acting in such capacity.
Easier To Fund Subsidiaries And Joint Ventures
The final major change will make it easier holding companies to provides loans and financial aid to their subsidiaries and joint ventures. Under new rules, no shareholder approval will be needed for such transactions.
With these range of changes, Experts believe that structuring of transactions will become easier and also enhance ease of doing business.