Examining the Various Laws in India’s Companies Act

By Pritesh Samuel

India presents a complex economic, regulatory, and legal landscape for doing business. A company’s successful navigation of the Indian business landscape is closely linked to the risk management and mitigation strategy that that the company undertakes.

Companies must also be aware of corporate laws, which are governed by the Companies Act, 2013, as well as several others legal Acts that depend on the industry, such as The Banking Regulation Act. The Companies Act discusses laws related to mergers and acquisitions, board room decision making, party transactions, corporate social responsibility, and shareholding.

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Aspects of the Companies Act

Mergers & Acquisitions (M&A): M&As are governed by the Companies Act, 2013, and while they may be instigated by mutual consent, they are mainly court driven. The approval of the High Court is highly desirable, while the action should be approved by three-fourths of the shareholders. Provision for tax allowances for mergers or de-mergers between two business identities is allocated under the Indian Income Tax Act, 1961. To qualify for the allocation, these mergers or de-mergers are required to fulfill the requirements related to section 2 (19AA) and section 2(1B) of the Income Tax Act as per the pertinent state of affairs. Several foreign enterprises, including BNP Paribas, Emerson Process Management, and International Paper Company, have acquired Indian companies to gain access to new markets.

Boardrooms: A listed company must have at least one director who has been a resident of India for a minimum of 182 days during the preceding calendar year, and must also have at least one woman director on their board. The duties of the director are also defined in the Companies Act. Companies subject to certain conditions must also have ‘independent’ directors; a nominated director cannot be considered ‘independent’. In addition, at least seven days are required to call a board meeting. Certain decisions like approval of financial statements, diversion of businesses, and approval of mergers and takeovers may only be done at a meeting of the board rather than be delegated. In addition, some decisions such as approval of financial statements and mergers cannot be done via video conference.

Corporate Social Responsibility (CSR): A company that has a net worth of at least US$ 74,917,650 (Rs 5 billion), a turnover of at least US$ 149,835,300 (Rs 10 billion), or a net profit of at least US$ 749,289 (Rs 50 million) during any financial year, is required to constitute a “Corporate Social Responsibility Committee” with three or more directors to establish and oversee the company’s general policy and specific corporate social responsibility activities. At least two percent of the average net profits every financial year must be spent on CSR activities. However, the law does not state any sanctions for non-compliance with the obligation to spend the two percent as long as there are valid reasons for it; the board may be required to explain their reasons. Activities for any political parties will not be considered as a CSR activity, while only CSR activities in India will be considered for a CSR expenditure. Initiatives that can be undertaken to fulfil CSR obligations include eradicating hunger, poverty, and malnutrition, promoting preventive healthcare, promoting education and gender equality, setting up homes for women, orphans, and senior citizens, measures to reduce inequalities faced by socially and economically backward groups, minorities, and women, among several others; preference should be given to local areas and where the company operates.

Shareholders: The maximum number of shareholders in a private company is 200. While shareholders can be foreigners, their identity and address must be validated by an Indian consulate of the country they belong to. They have rights to appoint directors, vote in general meetings, inspect statutory registers and minute’s books, receive copies of financial statements, and initiate winding up of the company. Minority shareholders have certain statutory rights, including requisition of a general meeting, approach of courts to cancel variation of rights, and approach the company law board in instances of oppression and mismanagement. Minority shareholders can also initiate a class action suit in certain circumstances. Resolution can be passed by a simple majority. Voting can be done by a show of hands, by a poll, by electronic means, or through a postal ballot.

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Recent Changes

The Companies Act, 2013 was further amended with changes coming into effect on April 1, 2014. Some of the changes include:

• No minimum paid-up share capital for incorporating private and public companies.
• A common company seal is optional. Instead, documents that require a seal can be signed by two directors or one director and a company secretary.
• No declaration on the commencement of business is required to be sent to the Registrar of Companies, thereby reducing the number of company filings.

Key Takeaways

Companies that plan on, or already are doing business in, India must ensure that they are up to date with the latest regulations relevant to their business scope. While the Indian government is keen to make it easier to do business, as reflected in the aforementioned amendments to the Companies Act, more will need to be done. Finance Minister Arun Jaitley has acknowledged that the micro, small, and medium enterprises (MSME) sector has not received enough attention, even though they form the backbone of the economy. Jaitley has proposed reforms, which are currently being considered by the Parliament. As with most reforms in India, companies must be in India for the long run to reap benefits and fully unlock the country’s potential.

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