Amendments in Definitions as per Companies Act 2017

INTRODUCTION

The Companies Act 2013, came with significant changes and challenges in the Companies law in India. The Government of India in order to address the difficulties posed in the implementation of rigorous compliances, facilitate with the ease of doing business, harmonizing with the various Acts and regulations came up with the introduction of Companies (Amendment) Bill 2016 in the Lok Sabha after rectifying inconsistencies in the Act. The Bill was referred to the Standing Committee on Finance, it was further examined and renamed as Companies (Amendment) Bill 2017 after making related changes as per the suggestions received by the committee. The Bill was further reintroduced in the Lok Sabha and passed on 27^th July 2017. Then the Bill was approved by the Rajya Sabha on 19^th December 2017 and got the assent by the Honourable President Mr. Ram Nath Kovind on 3^rd January 2018.

The Ministry of Corporate Affairs has appointed 9th February, 2018 as the date on which the following provisions 7 shall come into force, vide notification dated 9th February, 2018.  1.      Associate Company (Section 2(6)) (Not notified) The amendment has brought changes in the explanation of the term “significant influence” in the definition of associate company. The explanation describes that control of atleast 20% of the total voting power by replacing the word total share capital or control of or participation in business decision agreement will cause a company to be an associate company.  The term total voting power as described under Section 2(89) of The Companies Act, 2013 says that “the total number of votes which may be cast in regard to that matter on a poll at a meeting of a company if all the members thereof or their proxies having a right to vote on that matter are present at the meeting and cast their votes.” This concept will make the equity share capital with voting rights the sole basis for determining the associate company. This change will remove the ambiguity of considering Preference share capital to check status as Associate. The next addition is the word “control of” the business decision agreement which can be understood with its own definition described under Section 2(27) of the Companies Act, 2013. This makes it very clear that, in order to check the same one has to go through the shareholder’s or voting agreements and their control on the management affairs. The expression “Joint Venture” has also been explained which says that a JV is a joint arrangement whereby the parties that have joint control of the arrangement, have rights to the net assets of the arrangement. This will lead to increase in associate companies thereby leading to more compliance risk and consolidation of accounts. 2.      Debenture (Section 2(30)) A new proviso has been added to the definition of debenture which states its exceptions (not to be treated as debenture). It says that the instruments referred to in Chapter III-D of the Reserve Bank of India Act 1934 and such other instruments prescribed by the Central Government in consultation with the RBI shall not be considered as debenture.  Chapter III-D regulates the transactions dealt in derivatives, money market instruments and securities. It basically includes short term instruments like commercial paper, certificate of deposit, term money. 3.      Financial year (Section 2(41)) The proviso of this definition has been revamped and has allowed the associate company of a company incorporated outside India to apply to Tribunal for a different financial year. 4.      Holding Company (Section 2(46)) An explanation has been added which clarifies that the “company” expression used in the definition includes any body corporate. 5.      Key Managerial Personnel(KMP) (Section 2(51)) The scope of the definition has been extended by including an officer not more than one level below the directors who is in whole time employment and designated as KMP by the Board. This will allow companies to develop their own policies for assigning officials as KMP. 6.      Net worth (Section 2(57)) The earlier definition created a debate in the mind due to lack of clarity. The amended act has addressed this issue by including the term “the debit or credit balance of profit and loss account” in the definition of net worth. 7.      Related Party (Section 2(76)(viii)) The amendment act expands the scope of definition by including “an investing company or the venture of the company” as related party. Also, explanation has been given to the above term stating that a body corporate whose investment in the company would result in the company becoming an associate company in the body corporate. Earlier only an associate company was treated as related party but with this amendment the converse relationship has come into existence. 8.      Small Company (Section 2(85)) The act has brought some changes with regards to the criteria of determining the small company.  The maximum paid-up share capital has been increased from five crore rupees to ten crore rupees and turnover from twenty crore rupees to one hundred crore rupees. Further, turnover should be as per profit and loss account for the immediately preceding financial year and not as per its last profit and loss account. 9.      Subsidiary Company (Section 2(87)(ii)) (Not notified) The change has been brought in by revising the criteria of determining a subsidiary company. The definition now says that “A subsidiary company or subsidiary – in relation to any other company (the holding company) – means a company where the holding company controls the composition of the Board of Directors or exercises or controls more than one-half of the total voting power(replaced by total share capital) either on its own or together with one or more of its subsidiary companies.”   This concept will make the equity share capital with voting rights the sole basis for determining the subsidiary company. This change will remove the ambiguity of considering Preference share capital to check status as subsidiary. 10.  Turnover (Section 2(91)) The act has substituted a new definition which has answered to various issues like, indirect taxes should be a part of turnover or not. Now with the new definition turnover will be considered as recognised in P&L Account.

Turnover means the gross amount of revenue recognised in the profit and loss account from the sale, supply, or distribution of goods or on account of services rendered, or both, by a company during a financial year