Introduction

The Ease of Doing Business [“EoDB”] index, is a ranking system given by World Bank. A higher ranking is indicative of the fact that the environment in the country is more conducive for conducting and operating businesses. The below graph depicts the change in the position of India in the past 10 years.  India ranks 63 in the World Bank’s Doing Business Report 2020, which is a 79-rank jump from 142 in 2014.[1] The improved ranking of India is because of the various amendments that have been introduced to the Companies Act, 2013[“the Act”][2]. These provisions fostered the ease of doing business by bringing in significant compliance and other relaxations to companies and their officers and employees.

Analyzing the role of the Companies Act and the changes that have been made to the Act over the years to improve the Ease of Doing Business--

  1. Modifications made to address the initial and the practical difficulties faced in implementing the act’s provisions to ensure EODB.

The Companies (Amendment) Act, 2015[3] [“2015 Amendment”] introduced key changes in the Act, like, it omitted the requirement for minimum paid-up share capital and consequential changes, replacement of ‘special resolution’ with ‘resolution’[4] for approval of related party transactions by non-related shareholders, related party transactions between holding companies and wholly owned subsidiaries were exempted from the requirement of approval of non-related shareholders, prohibiting the public inspection of Board resolutions filed in the Registrar of Companies[5], etc. The 2015 Amendment, further, under S.462 of the Act[6], exempted government companies and private companies, by issuing a notification[7] this is to remove the practical difficulties in the application of the provisions of the Act.

The following briefly explains some of the provisions that have been relaxed to further the goal of EoDB in India—

  • Government Companies-- The Nomination and Remuneration Committee provisions have been relaxed[8] in terms of their applicability to directors/managers. The provisions relating to directors' loans and investments by companies and related party transactions[9] have been modified to allow Government companies more flexibility in complying with such provisions.[10] Furthermore, the wholly owned Government Company is exempt from the provisions[11] governing the rotation of Directors and the eligibility of individuals to stand for Directorship, etc.
  • Private Companies-- The exemptions introduced for private companies are aimed at easing the difficulties faced by private companies and reducing the cost of compliance. The types of share capital that can be issued by private companies have also been made more flexible. [12] Exemptions have been granted from filing board resolutions with the registry and providing notice of candidacy for directorships. The requirement of mandatory shareholder consent for certain transactions involving the sale of an undertaking, investments, borrowings, and so on has been omitted, etc.
  1. Changes brought to improve the standards of corporate governance and achieve better alignment with the other statutes and address the difficulties in the implementation of the act.

After the 2015 amendments, Company Law Committee [“CLC”] was created as the Rajya Sabha felt that more amendments were required in the Act. The Companies (Amendment) Bill, 2016[13] [“2016 Amendment”] was introduced and incorporated the recommendations of the CLC. Intending to make conducting business in India easier, the Government of India addressed inconsistencies and procedural restrictions in the Act. the modifications introduced in the 2016 Bill will enhance economic growth and increase foreign investment in India. Some modifications introduced in the bill further the EoDB in India are discussed as follows

  • The eligibility criteria for creating the corporate social responsibility committee and incurring CSR expenditure as stated in S.135 of the Act are recommended to be computed based on the immediately preceding fiscal year rather than the previous three fiscal years.
  • The requirement for ratification of auditor appointments under S.139 at each Annual General Meeting is removed.
  • S.185, restricts the companies from giving loans, guarantees or providing securities to Directors or any person the Director is interested in. 2016 Amendment, proposed to impose complete restrictions on providing loans to the entities aforementioned and went on to further specify the people and the entities which cannot be given loans, to avoid any kind of ambiguity that could be involved in the application of the provision of the act and for furthering the aim EoDB.
  • Furthermore, the Bill proposed to remove the restriction under S.186 of making investments through not more than two layers of investment companies.[14]
  1. Achieving Better Harmonization With The Other Statutes Of The Act

Along with the 2016 (amendment) Bill, the Companies Act (amendment), 2017[15] [“2017 amendment”], also introduced changes for corporate governance and for simplifying the procedures and achieving better harmonization with the other statutes of the Act. The following are some key changes that have been introduced in the provisions of the Act by the 2017 amendment –

i)      Modifications Introduced in the Corporate Group

Changes to the definitions of associate company and subsidiary company to assure that “equity share capital” rather than “both equity and preference share capital” is used to determine the holding-subsidiary connection.

n  Associate Company—S.2(6) In relation to the other company, an associate company is a company on which there is a significant influence of the other company but it is not a subsidiary company of the company having such influence. It has a horizontal relationship with the companies that form part of the corporate group. The 2017 amendment, cleared the ambiguity surrounding the definition of associate company and specified that significant influence means mean control of at least 20% of voting power or control or participation in the business decision under an agreement

n  Subsidiary Company—S.2(87) -- The amended provision gives the clarity that the subsidiary company in relation to the holding company exercises or controls more than half of the total share capital. The implication of the amended provision was to check the holding subsidiary relationship, only equity share capital with voting rights shall be considered. Preference Share Capital will not be taken into account.

n  Holding Company—S.2(46) -- The expression “Company” encompasses any “Body Corporate,” according to the meaning of the term “Holding Company.” As a result, LLPs, foreign corporations, and other similar entities are designated “Holding Companies” if they own more than 50% of the voting rights in any company.

ii)    The 2013 Act required every corporation to have at least one resident director, defined as a director who spent at least 182 days in India during the preceding calendar year. The 2017 Amendment proposed to change the residency requirement such that it applies to the current fiscal year rather than the preceding calendar year.[16]

iii)   The 2013 Act identified Key Managerial Persons [“KMP”] as the chief executive officer, managing director, manager, company secretary, full-time director, and chief financial officer. The 2017 Amendment broadens the definition of KMP by granting the board of directors the authority to designate as a KMP an officer of the company who directly reports to a director in full-time employment with the company.[17]

iv)   Under the 2013 Act, every listed company was required to file a return with the RoC within 15 days of any change in the number of shares held by its promoters and top ten shareholders. The 2017 Amendment eliminated this provision in order to ease compliance.

  1. Company law committee on decriminalisation of offences—to make it easier for law-abiding companies to do business.

By order dated 13.07.2018, the Ministry of Corporate Affairs established the Committee, chaired by Mr Injeti Srinivas, to assess compoundable and non-compoundable offences under the Act and recommend any re-categorization of such offences. The Government stated that the Committee’s recommendations will remedy important deficiencies in the Act’s corporate governance structure while also making it easier for law-abiding corporations to do business.

 

Recommendation of the Committee for different Types of Offences Specified in the 2013 Act

In the Companies (Amendment) Act, 2019 [“2019 Amendment”], the government took into cognizance the suggestions by the Committee for decriminalization and re-categorization of offences.  Let us take a quick look at the committee’s recommendation for the decriminalisation of offences. --

i)      Adjudication mechanism involving the offences attracting civil liabilities -- S.454 of the Act specifies that the central govt can appoint officers who are below the rank of the registrar. The adjudicating officers have the right to enforce punishment or ask the officer to rectify the default. The committee suggested that the offences where the public interest is not involved can be brought under this adjudication scheme and following the recommendation there are 16 compoundable offences which have been re-categorised into this adjudication mechanism.

ii)    Compoundable—S.441 provides the framework of compound offences. The NCLT or the Regional Director can compound these offences, depending on the highest fine that can be issued for the default. In order to alleviate the burden on the NCLT, the Regional Director's jurisdiction to compound offences has been expanded from Rs 5,00,000 to Rs 25,00,000.[18] The Committee defined specific categories of compoundable offences that must remain unchanged and are not subject to the in-house adjudication procedure for levying fines. For example, offences stemming from non-compliance with statutory authority directives, offences impacting members’ rights and obligations, etc.

iii)   Non-compoundable—S.447 provides the framework for the punishment for fraud. The Committee has underlined that the cross-cutting liability under S.447 continues regardless of the provision under which an offence is committed or the primary liability it entails.[19]

iv)   Decriminalisation of CSR—Sections 135(6) and 135(7) of the Act[20] criminalised Corporate social responsibility, but the Committee addressing the industry concerns, declared that CSR violations will be considered as civil liabilities rather than criminal offences.[21] As CSR regulations were implemented as a tool to collaborate with corporations to promote social development, any penalisation is incompatible with the spirit of CSR.

The decriminalisation of compoundable offences that are technical or procedural in nature benefits all stakeholders.[22] Penalties imposed by the Adjudicating Officer do not require them to establish the element of mens rea, making the process faster than a criminal case. This action also helps to focus the NCLT’s attention and resources solely on defaults with issues of public concern. Decriminalization of offences makes them more appealing to potential investors and enhances the corporate ease of doing business.

  1. Reduction In The Severity Of Penalties And Other Relaxations

The Companies (Amendment) Act, 2020 [“2020 Amendment”] decriminalised certain offences would help protect investors from criminal punishment for minor violations.[23] This will result in increased foreign investment, which will help India's economy. Various steps, such as the establishment of an Appellate Tribunal,[24] will allow for faster redressal of grievances in India. Now, certain private companies, are allowed to list their securities without being categorised and regulated as public listed companies,[25] reduction in penalties for companies for defaulting on their CSR obligations.[26] Furthermore, Foreign businesses doing business in India may now be completely exempted from the Act’s compliance requirements and penalties, if so instructed by the Central Government under Chapter XXII of the Act.[27] The 2020 Amendment ensures the improvement of corporate governance norms and compliances in the corporate sector.

Conclusion

The modifications to the Companies Act from 2014 to 2020 made major changes to the Act and took into account almost every aspect in order to make conducting business in India easier. All of the changes were made with the intention of making it easier to do business and attracting more foreign investment, with the ultimate goal of growth of the economy in mind. The government brought greater transparency to the corporate structure, provided relaxations and exemptions, and established a tribunal for redressal of grievances, etc. All this to foster better corporate compliance to enhance the efficiency of the processes under the Companies Act, 2013, which resulted in India securing 63rd rank among 190 countries.


[2] The Companies Act, 2013, No.18 of 2013 [hereinafter, “the Act”].

[3] The Companies (Amendment) Act, 2015, No.21 of 2015.

[4]  The Act, Chapter IV, §62(1)(b).

[5] The Act, Chapter XXIX, §439(2).

[6] The Act, §62.

[7] Ministry of Corporate Affairs issued notifications on 05.06.2015 under The Act, §462 of the Companies Act, 2013.

[8] The Act, Chapter XII, §177(4)(i).

[9] The Act, §188.

[10] The Act, Chapter VII, §123(4).

[11] The Act, Chapter XI, §160(b).

[12] The Act, Chapter IV, §67(a) and (b).

[13] The Companies (Amendment) Bill, 2016, No.73 of 2016.

[14] The Act, §186.

[15] The Companies (Amendment) Act, 2017, No.1 of 2018. [“2017 Amendment”]

[16] 2017 amendment to §149(3) of the Act.

[17] 2017 Amendment, §2(51)(vii).

[18] Companies Act (amendment), 2019, No.29 of 2020.

[19] Page 4, Report of the Committee to Review Offences under the Companies Act, 2013, Ministry of Corporate Affairs, August 2018,

[20] The Act, §§135(6), 135(7)

[21] The Companies (Amendment) Act, 2019, §135(5) & §135(6).

[22] Manisha Kumar, Kunal Gopal, Decriminalising Companies Act Offences – Striking A Balance Between Ease Of Doing Business And Corporate Governance (26 Sept 2019) https://www.mondaq.com/india/corporate-governance/848750/decriminalising-companies-act-offences-striking-a-balance-between-ease-of-doing-business-and-corporate-governance.

[23] The Act, §446B.

[24] The Act, §410.

[25] The Act, §2(52).

[26] The Act, §135.

[27] The Act, §393A.


About the Author: This post is prepared by Anshula Sinha, Law student at National Law University, Jodhpur. She can be reached at anshula.sinha10@gmail.com

MyLawman is now on Telegram (t.me/mylawman) Follow us for regular legal updates. Follow us on Google News, Instagram, LinkedIn, Facebook & Twitter, or join our WhatsApp group. You can also subscribe to our Newsletter for Email Updates.

 For More Legal Articles, Click Here