The upper house of the Parliament passed the Companies Bill on Thursday after much delay. The bill replaces Companies Act, 1956, and had been passed by the Lok Sabha in December last year. VCCircle takes a look at key provisions which can impact dealmaking.
- The concept of One Person Company has been introduced in the new company law.
- The bill increased the number of members of private companies from 50 to 200. This allows companies access to large pool of capital without going public.
- The new bill gives recognition to transfer restrictions on inter-se shareholders – ‘Right of First Refusal’ will be enforceable. This would clear existing ambiguity on legal enforceability on transfer restrictions under JV/shareholder agreements.
- While the old bill only permitted merger of a foreign company with an Indian company, the new bill allows merger of Indian companies into foreign companies which would aid in consolidation of cross-border businesses/assets.
- The new bill permits merger of a listed company with an unlisted one, subject to exit opportunity being offered to shareholders of the listed company.
- While the old bill depended on precedents for merger of a subsidiary with a parent (or between two small companies), the new bill provides a separate and simplified regime for this without any approval from High Court.
- The new bill also gives rights for objections to schemes to only creditors who owed over 5 per cent and minority shareholders with over 10 per cent stake against no thresholds earlier.
- The new bill also has a detailed mechanism for acquisition of shares by majority shareholder from minority shareholders.
- The bill restricts creation of multi-layered holding structures, prohibiting making investments through more than two layers of investment companies.
- The new bill bans holding ‘Treasury Stock’, which is often used by companies to increase shareholding or future monetisation after consolidation.
- The new bill asks that listed companies and other specified companies will have to change individual auditor after five years and audit firm after 10 years. The old bill had no provisions for this.
- Under the new bill, companies are required to spend at least 2 per cent of their average net profits for the three immediately preceeding financial years on CSR. This is applicable to companies with a networth of Rs 500 crore or more, or Rs 1,000 crore turnover or Rs 5 crore net profits, who have to set up a corporate social responsibility committee. The companies will also have to give preference to the local areas of their operation for such spending.
- The new bill also requires companies to appoint one woman director.
(Edited by Joby Puthuparampil Johnson)