Extracts relevant to new terms/definition  of Companies Act,2013

The JJ Irani committee was an Expert Committee  set up by the Ministry of Company Affairs which mentioned in Order dated 2nd December ,2004,to advise the Government to the new Company Registration  Law.The committee had the benefit of participation by several experts in various disciplines .It took a comprehensive view in developing a perspective on changes necessary in the companies Act,1956 in context of the economic and business registration environment.One of the objectives of the committee was aimed at making India globally competitive in attracting investments from abroad,from suggesting systems in the Indian Corporate environment which are transparent,simple and globally acceptable.

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The government had taken up an exercise for a comprehensive revisions of the companies Act,1956 on the basics of a board based consultative exercise .As a first step in the Consultative process ,the definitions paper on Company Law drawn up in the legislative format was exposed for viewing on the electronic media so that all interested may not only express their opinions of the definitions involved but may also suggest formulations of various aspects of company Law.this was a laudable step and evoked considerable response.According to the definition  of Comments and suggestions from a large number of organizations ,professional bodies and individuals were received.The Expert committee considered of 13 members and 6 special invites drawn from various disciplines and field including trade and industry ,cambers of commerce,professional institutes ,representatives of Banks and financial institutions,Senior Advocates etc., Government Ministries as well as regulatory bodies concerned with the subject were represented through special invitees.Views of the Committee on few of the issues relevant to understanding the definitions and the context in which they are defined in Chapter 1 are enumerated below;

Definition of Framework for small enterprises

Provisions relating to Small companies,One Person company and associate companies recommended.A special regime for small companies through a system of exemptions,reduced financial reporting and audit requirements and simplified capital maintenance regimes to enable small companies to achieve transparency at a low cost through simplified requirements was recommended.Since the definition of small business may change over time,the committee felt this may be done through rules.

Definition of Government Companies  

The committee was of the view that there is no rationale for the definition of Government company being extended to business or companies set up by Government companies in course of their commercial activities.

Definition of Holding and subsidiary Companies 

The Committee was of the view that there may not be any restriction to a company or a business  having any number of subsidiaries,or to such subsidiaries having further subsidiaries.However,the Act should provide clear definition of the both the holding as well as subsidiary body corporate.The committee recommended proper disclosures accompanied by mandatory consolidation of financial statements.In its examination of this issue,the committee also considered the recommendations made by the JPC on Stock Market Scam on restricting the layers of subsidiary investment companies.The committee noted that these recommendations were in investment companies.The community noted that these recommendations were in context of stock market/banking scams witnessed in India over the past decade.

At the same time,it was maintained that the creation of subordinate for separate manufacturing entities.Even the banks may have to set up subsidiaries for their Non-Banking /Joint Venture companies engaged in insurance ,as set management etc., In the present situation,when Indian Companies were seeking to make investment abroad.  ,such restrictions would adversely affect their opportunities in face of international competition.While deliberations ,it was held that preventing legitimate business registration activity  for setting up subsidiary companies would result in special carve outs and monitoring the activities of such companies .For these reasons ,the committee took the view that limiting the layers of subsidiary investment companies was not feasible .Instead,the regime for preventing misuse of this mechanism should be devised based on transparent board processes and disclosures under close supervision of the regulator for listed companies.

Definition for Public Financial Institutions 

The report notes that  “in view of changing competitive economic environment and continuous reforms in the financial sector ,a need has been felt for review of  the concept of the PFI”.It being felt in certain quarters that this concept should be eliminated with existing PFIs. Suitable to take care of provisions in other acts/delegated legislation which are using this term   should also be taken.Besides,there does not appear to be any definition for addressing such a concept(relating to financial institutions) in the companies Act.The companies bill 1997 had ,therefore ,proposed for shifting of the concept of PFI (Obligations as to Fidelity and security Act,1983,which is  administrated by Ministry of Finance.

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Concept and numbers of Independent Directors 

The committee was of the view that given the responsibility of the Board,to balance various interests ,the presence of independent directors on the Board of a company would improve the corporate governance .An important view point was explained that nominees of Books/financial Institutions (FIs) on the Boards of companies may be presented as “Independent”.After detailed definition,deliberations,the committee took the view that such nominees represented specific interests,and could not ,therefore,be correctly explained as independent.

The committee was also of the view that there should be no requirement for a subordinate company or a business to co-opt an independent director of the holding company/business as an independent directors on its board.Definition  of Independent director /Attributes of independent directors is also provided in the report.

Definition of Corporate Sectors

The committee of the company was of the view that three categories of key managerial personnel may be recognized by the law,along with their liability in appropriate aspects of company/business registration operation.There are other recommendations relating to the key managerial function covering their appointment ,removal.Being in whole-time employment of only one company/business Registration etc.,

Costs of raising capital of the company -shelf Prospectus

The committee was in favor of providing for shelf prospectus.Companies that may be acknowledged as well known Seasoned Issuers(WKSI) ,basis whereof to be evolved by SEBI through regulation,which raise capital more frequently,to be allowed to be provide a Main Document in a year and thereafter only incremental changes should be re-portable by them every time ,they access or definition the market during the currency of Shelf-prospectus.

Definition of minimum period of the financial year

The committee dwelt on the subject and came to the conclusion that the first financial year should begin from the date of incorporation and end on the immediately succeeding 31st March and the subsequent financial years of any business should end on 31 march every year.The definition of the financial year may be modified to indicate that the duration of the first financial year should be minimum three months instead of the six months proposed in the concept paper (2004) with no change in the provision regarding laying down of the accounts before the shareholders within the six months of the end of financial year.

Definition of Liability of board 

Recognition of situations where there is collective liability of the Board or that of individual directors.Where the definition of an offence is so obvious and fundamental that the very participation in the decision making process is enough to establish business culpability,collective responsibility may be thought of.In all the other cases ,focus has to be on individual liability of directors.The law should also seek to discourage “shadow directors” who tend to operate from beyond the scenes by adopting the framework of ‘attributability”  of directions to such persons,if the Board is accustomed to acting on their instructions in any or all matters.

Definition of Officers in default 

The committee was of the view that it was necessary to have a clear regime for identification of the officers in default and the liabilities of KMPs and also other officers of the company in default.Qualified professionals such as  accountant, the auditor,layer,company secretary  providing corporate advice should also be held liable for wrong doing if it can be established  that they had been specifically advised against actions or behavior  violative  of the law.

 Miscellaneous 

Revision of limit to have an MD or  a WTD to rupees 10 crores by definition of appropriate amendment of the rules and the said limit to be reviewed from the time to time.The option to a company/business to appoint director by proportional representation to be retained.

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