Govt set to iron out ‘thorny’ provisions in Companies Act

Govt set to iron out ‘thorny’ provisions in Companies Act

A draft Cabinet note has been floated by the corporate affairs ministry.

Amid its efforts to improve ease of doing business in the country, the government has decided to revisit rules related to the Companies Act, 2013, by doing away with or amending several provisions which were considered harsh by industry.

According to the proposal floated by the ministry of corporate affairs (MCA), the provisions invoking criminality in offences like mis-statement of prospectus or non-disclosure of financial statements will be made less severe.

Further, as per the draft Cabinet note circulated by the ministry, the provisions regarding related-party transactions (RPT) will be relaxed. The Act under Section 188 (1) says that RPTs of specified nature require approval by a board resolution or special resolution. It also bars a related-party member of the company from voting on special resolution.

“The industry has been saying that this is not business-friendly especially where holding companies and their wholly owned subsidiaries are involved. So for such transactions, the provision will be amended to make it more pro-industry,” a government source told The Indian Express.


The source added that for late disclosure, not keeping books of accounts, or financial statements not giving true and fair value, the “punishment of imprisonment is being done away with as the criminality of this kind is already dealt with in the Code of Criminal Procedure”. Currently, under Section 147, for such contraventions, the company is be punishable with fine up to Rs 5 lakh while every officer of the company who is in default is punishable with imprisonment of up to one year along with a fine up to Rs 1 lakh or both.

Industry sources said that the provisions are “draconian and must be rationalised” and should apply only to serious matters involving fraud or breach of trust.

Soon after taking over, the BJP-led government had assured that the concerns of the industry regarding the Act will be addressed. Commerce minister Nirmala Sitharaman, who was earlier holding MCA as well, had said that several hindrances can be removed by just amending certain provisions of the Act for improving the business environment of the country.

The MCA has also proposed to do away with the condition of mandatory appointment of independent directors on the board of a private or closely-held company which has no public involvement.

The Cabinet note also provides a breather to auditors regarding their responsibility of reporting frauds to the government.

“We are defining materiality of fraud in terms of percentage or absolute value as a threshold above which the auditors would be required to report to the government. Below that threshold, the auditors will need not report to the government, they will just have to inform the audit committee of the company,” the source added.

The industry sources that this will be a huge reprieve to the auditors who currently have to report all frauds to the secretary, MCA, adding to the compliance cost.

The amendments proposed also address the issue of maintaining confidentiality of information especially those pertaining to board resolution.

According to Section 179(3), several items including pure HR issues, require a board resolution.