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Companies Act: 1956 VS 2013- New Rules to the Game

The Companies Act, 2013- a new era for corporate India.  This modern legislation is to change the rules of game in Indian corporate law in the context of changing economic and business environment. To help decode the nuances and implications of this 2013 Act, we have analysed the key changes w.r.t. 1956 Act.
The 2013 Act is more concise as compared to the 1956 Act, with just 470 sections and 7 schedules. There are over 300 references in the 2013 Act to Rules that may be prescribed to implement and operationalise those sections. Therefore, the full impact of the 2013 Act can only be understood when the related Rules get finalized and two are read together.

Number of members of Private Company
Upto 50
Increased upto 200
Allows access to large pool of capital without the need to go public
One Person Company
No Provision
Separate regime for ‘one person company’ introduced
Allows individuals to adopt corporate structures for carrying out business under a simplified regime
Concept of Dormant Company
No Provision
Separate regime for a ‘dormant company’
Flexibility to create entities to house future project/ or valuable assets such as IPR ( Intellectual Property Rights)
Concept of Small Company
No Provision
Separate regime for ‘small company’ introduced
Allows individuals to adopt corporate structures for carrying out business under a simplified regime
Recognition of ‘inter-se’ shareholders arrangements on transferability of shares of public companies
Shares of public company are freely transferable
Recognition granted to transfer restrictions inter-se shareholders- ‘right of first refusal’ will be enforceable
Would hopefully clear existing ambiguity on legal enforceability on transfer restrictions under joint venture/shareholder agreements
Mandatory Transfer to reserves prior to declaration of dividend
Mandatory transfer of 10% profits to reserves
Requirement of mandatory transfer disposed
Provides discretion in hands of company
Declaration of Interim Dividend
No restrictions
Interim dividend can be declared only for surplus in P&L (profit & loss) account and current year profits
Allows greater flexibility in dividend declaration
Rights Issue
No provisions for offer of shares to ESOP (employee stock option plan) holders
Provisions created for offering rights entitlement to employees holding options
Treats employees holding option at par with shareholders and protects their rights
Buyback of Shares
Ambiguity whether more than one buyback offer can be made in one year
Mandatory ‘cooling off period’ of one year from date of closure of preceding buyback
Prohibits undertaking multiple buybacks with minimal intervals
Acceptance of Deposits
Companies permitted to raise deposits from public
Central government to prescribe rules for acceptance of deposits from public, including category of companies
Greater accountability/additional compliance requirement
Loans to Directors
Applicable to only public companies. Permission required from central government in certain cases
Applies to public and private companies. Companies cannot approach central government
Creates accountability by bringing private companies under the net
Loans & Investment by Companies
Covers loans/investment to/in body corporate/company
Scope expanded to include ‘person’
Brings into net loans given by companies to individuals
Step Down Subsidiary
No restrictions on creating ‘multi-layered’ structures
Prohibits making investments through more than two lawyers of investment companies
Will impact the creation of multi-layered structures used for facilitating financial/strategic investments at various levels
Statutory Auditor Certificate for accounting treatment in case of Compromise/Arrangements
No requirement
Mandatory statutory auditor certificate for listed and unlisted companies
Will prevent companies from undertaking financial reengineering contrary to accounting standards via court approval
Notice to Authorities for Compromise/Arrangement
Notice required to be served to shareholder/creditors
In addition to shareholders and creditors, notice required to be served on regular authorities
Will ensure that all parties concerned are given due opportunity
Class Action Suits
No Specific provisions other than for small shareholders
Specific provisions introduced for class action suit by specified number of members or depositors
Damages/Compensation can be sought against all parties who have assisted in wrongdoings
Rationalization of Sickness Laws
Applies only to industrial undertaking
Applies to ‘any company’. Net worth criteria for determination of sickness dispensed with
Every company would get an opportunity to approach tribunal and seek a revival and rehabilitation scheme. Secured creditors can approach tribunal
Rotation of Auditors
No specific provisions
For listed companies and other companies as may be specified, individual auditor will be changed after five years and audit firm after 10 years
Mandatory rotation of auditors will enhance auditor’s independence
Postal Ballot
Applies only to public company
Scope extended to include ‘any company’
Increased participation by members to ensure greater transparency
Corporate Social Responsibility
No specific provisions
Specific provisions for creating Corporate Social Responsibility- 2% of average net profits during three preceding financial years
In line with government’s focus on inclusive growth creates an almost mandatory requirement of spending 2% net profits on social activities
Appointment of Women Directors
No specific provisions
Prescribed companies to appoint one woman director
Attempt to improve diversity and remove glass ceiling for women
Cross Border Mergers
Only merger of a foreign company with an Indian company permitted
Permits merger of Indian companies with foreign companies in specified jurisdictions
Progressive move, will enable cross border consolidation of global businesses/assets
Restriction on ‘Treasury Stock’
No specific provisions governing issuance of ‘treasury stock’
Holding ‘treasury stock’ (arising on consolidation) prohibited, whether trust or otherwise
Will restrict creation of ‘trust structures’ often used by listed companies to retain control or future monetization
Merger of a Subsidiary with a Parent or between two Small Companies
No spate regime, dispensation granted based on precedents
Separate and simplified regime, no approval required from tribunal ( high court currently)
Reduction in administrative burden, timelines and related costs
Merger of listed company with unlisted company
No specific provisions governing it
Permits merger, subject to exit opportunity being offered to shareholders of listed company
Provides ease of consolidation
Objections to schemes by small creditor/minority shareholders
No thresholds
Objections can be raised by shareholders holding more than 10% or creditors owed more than 5%
Will ensure that only ‘serious’ objections are considered by courts
Buyout of Minority Shareholders
No Specific provisions governing it
Detailed mechanism for acquisitions of shares by majority shareholder from balance shareholders
With adequate safeguards, this is powerful tool for effective re-organization
Buyback of shares under a Scheme of Arrangement
Court approval route used by companies
Permitted subject to compliance with buyback norms
Will ensure that companies cannot bypass provisions of Companies Act via court approval

Our article is based on the laws of India as on date. The views mentioned above are subject to changes from time to time and any such changes may affect the article. We have no responsibility to update our article for events and circumstances occurring after the date of this note, unless specifically requested for.


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