The Government of India has woken up to India’s poor ranking on the Doing Business Report and is taking active steps to get into the roots of the problem. A few more measures were announced in this regard, the most significant of them, being the long overdue amendments to the Companies Act, 2013.
Companies Act 2013 – The Companies Act 2013 was enacted to overhaul the outdated regulatory framework which had been present for the last 57 years. However, even before it could be implemented, various issues cropped up and loopholes discovered. Some of these were plugged in just before the enforcement of the statute. However, teething problems remained and the industry in general was skeptical about the stricter provisions, especially those applicable to private companies. The Government has now notified a host of amendments to the Act, majority of which have been done keeping in mind the need for improving the ease of doing business:
- The requirement of mandatorily having minimum paid up capital amounting to INR 0.1 million for private companies and INR 0.5 million for public companies has been removed.
- The requirement for a company to have a common seal has been deleted. Hence the mandatory requirement for using the common seal for certain operational procedures and obligations for its safe keeping are only optional now.
- Declaration for commencement of business or exercise borrowing powers – Under the existing provision, a declaration was required to be filed by a director confirming that subscribers to the memorandum have paid the consideration for shares declared therein and that the company has met the minimum paid up capital requirement. This provision has been deleted and hence there is no declaration required from a director as a pre-condition to commencement of business or borrowing.
- The open clause regarding filing of ‘any other resolution or agreement as may be prescribed and placed in the public domain’ with the Registrar of Companies has been removed. This removed ambiguity regarding the resolutions to be filed and difficulty in checking which resolution has now been prescribed
- Loans or advances given or security provided by a holding company to its wholly owned subsidiary will not be covered under the provisions which impose restrictions on companies to give loans, advances or security in favour of interested directors. The underlying condition for applicability of this exemption is that the loans should be utilized by the subsidiary company for its principal business activities.
- With respect to related party transaction above the threshold of INR 10 million, approval of the shareholders vide a special resolution was required. The same now requires only an ordinary resolution. Further, the requirement of passing such resolution shall not be applicable for transactions entered into between a holding company and its wholly owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval.
The government has constituted a Companies Law Committee to inter alia make recommendations to the Government on issues arising from the implementation of the Act. The committee is required to submit its recommendations within 6 months of its first meeting.
State Level Assessment for Enabling Ease of Doing Business – In order to enhance the ease of doing business in various States in India, the Department of Industrial Policy and Promotion (DIPP), has initiated a study to assess States on reform parameters that are germane to ease of doing business. DIPP has also circulated a document with recommendations for States on aspects critical to enabling ease of doing business. The comprehensive assessment contains about 300 questions to assess the implementation of the recommendations by the States.
FDI in Government Route – The limits for cases requiring prior approval of the Foreign Investment Promotion Board (FIPB)/Cabinet Committee on Economic Affairs (CCEA) in relation FDI through the Government route have been revised. The minister of finance in charge of FIPB would consider proposals with total foreign inflow up to INR 3000 crores (30 billion) increased from INR 2000 crores (20 billion) ear and beyond that the proposals would be considered by CCEA.
Transfer of shares between non-residents – The Consolidated FDI Policy of India notified last month provides in clause 3.4.49(i)(a) that Government approval is not required for transfer of shares in the investee company from one non-resident to another non-resident in sectors which are under automatic route. In addition, approval of Government will be required for transfer of stake from one non-resident to another non-resident in sectors which are under Government approval route. This provision has been inserted to clarify non-interference from Government in share transfers outside India under the automatic route.