Investors Push for Changes to India’s Companies Act 2013

July 9, 2014 Posted by India Briefing Reading Time: 3 minutes

DELHI – As Narendra Modi takes charge as Prime Minister, Indian businesses and foreign investors are pushing for a review of several provisions in the Companies Act 2013.

Last year, the Companies Act 2013 replaced the Companies Act 1956, stipulating updated regulations for incorporation, responsibilities within a company and the dissolution process. The new 2013 version of the Companies Act (effective April 1, 2014) incorporates a number of changes including the introduction of new definitions, raising the number of members in a private company from 50 to 200 and modifications to the roles and standards that independent directors must maintain, among others.

The new 2013 Act has recently stirred a wave of discontentment among businesses demanding the new government review elements of the Act to reduce ambiguity and provide for a more uniform legal interpretation of its provisions.

Although there are several concerns regarding the implementation of the Act, the most substantial relates to directors and membership on a company board.

The Act currently stipulates that one of the directors must be in India for at least 182 days, which can be problematic for both foreign and private companies in the country. While it is now also mandatory to appoint at least one woman director, many companies overcome this requirement by appointing a promoter’s female family member on the board.

Another concern is the timeline for company registration. While company registration could previously be completed in only a few days, the process now takes several weeks under the new Act. Additionally, the government now wants companies to commence their accounting year on April 1 unless an exemption is acquired from the National Company Law Tribunal (which is yet to be constituted).

The Act also extends the role of auditors, now requiring an assessment of management’s decision making which, according to the Confederation of Indian Industries (CII), is an unreasonable expectation that transcends the capability of auditor committees. Regarding this requirement, enforcement is typically stricter vis-à-vis the merger of companies from foreign jurisdictions.

Other issues relate to fundraising as companies are supposed to set aside 50 percent of raised money into a debenture redemption reserve, which ultimately raises borrowing costs significantly. For example, a company that needs US$1 million will need to raise at least US$2 million as 50 percent of that amount will need to be set aside.

The CII has criticized the Companies Act 2013 by deeming it too ambiguous. Specifically, it mentions that the process of appointment of independent directors is difficult to interpret and is not clearly stated in the law. The CII also points out that some rules and provisions reflect inconsistencies.

In an attempt to rectify the trust deficit between the government and business community that has materialized partly from the Company Act’s ambiguous and inconsistent nature, there are signs the Modi administration may seek to ease the Act’s regulatory burden later this year. Yesterday, the government proposed relaxing certain provisions related to public deposits, share capital, voting rights, board powers and auditor appointments, among others, outlined in a draft notification.

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email india@dezshira.com or visit www.dezshira.com.

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