Recommendations on Definitions under Companies Act, 2013

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CS Varun Kapoor

The Companies Law Committee (hereinafter called as The Committee) has submitted its recommendations to Honourable Union Minister of Finance, Corporate Affairs and I&B.

About The Companies Law Committee: The Companies Law Committee, set up on 4th June, 2015, to make representations to the Government on issues arising from the implementation of the Companies Act, 2013 as well as on the recommendations received from the Bankruptcy Law Reforms Committee, the High Level Committee on CSR, the Law Commission and other agencies.  Also, The Committee has made recommendation on the issues as observed by the Committee and other stakeholders.

Recommendations: I would like to highlight Recommendations of The Committee on various Definitions like Associate Company, Charge, Deposit, Related Party etc. under Companies Act, 2013. Such recommendations are given below:

Companies Law Committee Recommendations on Definitions under Companies Act, 2013
S.No.	Particulars	Present Law	Recommendation
1	Definition of Associate Company	Section 2 (6) of the Companies Act, 2013 defines the term “associate company”, in relation to another company, to mean a company in which the other company has a significant influence, but is not a subsidiary company of the company having such influence, and also includes a joint venture company. The Explanation to Section 2(6) defines the phrase “significant influence” to mean control of at least twenty per cent of the total share capital, or of business decisions under an agreement. The term “total share capital” has been defined in Rule 2(1) (r) of the Companies (Specification of Definitions Details) Rules, 2014, to mean the aggregate of (a) paid-up equity share capital; and (b) convertible preference share capital.	The Committee recommended- Replacing ‘total share capital’ with ‘total voting power’ would be consistent with accepted principles. The Committee, therefore, further recommended that the Explanation to Section 2(6) should read as “For the purposes of this clause, ‘significant influence’ means control of at least twenty per cent of the total voting power, or control of or participation in taking business decisions under an agreement.” The Committee further recommended that the term “joint venture” may be assigned the same meaning as under Indian Accounting Standard (IndAS) 28 as part of the Explanation to Section 2(6) itself.
2	Charge	Section 2(16) defines “charge” to mean an interest or lien created on the property or assets of a company or any of its undertakings or both as security and includes a mortgage.	The Committee felt that amending the definition of “charge” would not be desirable. Instead, an amendment to exclude the registration/filing requirement for banker’s lien, etc. under Chapter VI is suggested (paragraph 6.2 of the Part I of the report).
3	Control	Section 2(27) of the Act defines the term “control” in inclusive terms and provides for it to include “the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.”	The Committee felt that such an inclusive definition of ‘control’ would be required in view of the myriad of instruments and corporate structuring that are constantly evolving and, therefore, the Committee by a majority view, did not recommend any change in the definition of control.
4	Debenture	Section 2(30) defines the term “debenture” to include debenture stock, bonds “or any other instrument of a company evidencing a debt”, whether constituting a charge on the assets of the company or not.	The Committee felt that an exception be made for instruments covered under Chapter III D of the RBI Act, 1934 in the term ‘debenture’ as defined in Section 2 (30) of the Companies Act, 2013. In addition, an exception may also be made for deposits accepted by banking companies, and flexibility be given to the Central Government, in consultation with RBI and SEBI, as applicable, to carve out other instruments from the definition, as may be required.
5	Deposit	“Deposit” includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India;	The Committee considered the suggestion for making the definition of deposit less restrictive, but felt that adequate prescriptive powers for excluding amounts received by a company from the term ‘deposit’ have been provided in the definition and no change is, therefore, required.
6	Financial Year	Section 2 (41) of the Act provides that the financial year in relation to a company or a body corporate shall mean the period ending on the 31st of March every year. It gives the ‘National Company Law Tribunal’ (NCLT) the authority to allow a company or a body corporate, which is a subsidiary or a holding company of a company incorporated outside India, to follow a different financial year, if it is required to do so, for the consolidation of its accounts outside India.	The Committee recommended that the first proviso to Section 2(41) be expanded to also allow associates and joint ventures of a company incorporated outside India to apply for a different financial year to the NCLT.
7	Foreign Company	Section 2(42) of the Act defines the term “foreign company”. This is wider than the definition provided in the Companies Act, 1956, and includes companies conducting business in India through electronic and other manner, and through an agent. Rule 2(1) (c) of the Companies (Registration of Foreign Companies) Rules, 2014, further expands on the term “electronic mode”.	The Committee felt that even though no amendment needs to be carried out in the definition of ‘foreign company’, those foreign companies with incidental, insignificant transactions may be exempted from the requirement for registration and other requirements under Chapter XXII by providing for prescriptive powers under section 379 (Paragraph 20.2 of the report may be referred to).
8	Holding company	Section 2 (46) of the Act defines a “holding company” in relation to other companies, as a company of which such other companies are subsidiary companies. Section 2 (87) of the Act defines a “subsidiary company”, and Explanation (c) to Section 2(87) clarifies that the expression “company” includes a ‘body corporate’.	The Committee recommended that an Explanation (on the lines of Explanation (c) to Section 2(87)) be included in Section 2 (46).
9	Interested Director	Section 2 (49) of the Act defines an “interested director”. Section 184 (2) provides nature of interests to be disclosed by directors, but does not use the phrase ‘interested director’. The provision in essence, defined an interested director. Further, the only reference to the term ‘interested director’ in the Act was in Section 174 (3), and an Explanation to that provision clarified that the meaning of the term ‘interested director’ would be the same as for the purposes of Section 184 (2).                               The definition provided in Section 2(49), though much wider, has not been used in the Act and is redundant.	The Committee felt that in view of the redundancy, the definition of ‘interested director’ may be omitted.
10	Listed Company	Section 2(52) of the Act defines a “listed company” as “a company which has any of its securities listed on any recognised stock exchange”.	The Committee felt that while the definition of the term ‘listed company’ need not be modified, the thresholds prescribed for private companies for corporate governance requirements may be reviewed. In addition, specific exemptions under section 462 of the Act could also be given to Listed Companies(which listed their privately placed debentures/preference shares), other than the equity listed companies, from certain corporate governance requirements prescribed in the Act
11	Net worth	Section 2(57) of the Act defines the term “net worth”, and specifies various amounts that are to be taken into consideration while calculating it. The net worth of a company reflects its intrinsic value. The definition does not include the phrase ‘debit or credit balance of the profit and loss account’	The Committee recommended for the phrase ‘debit or credit balance of the profit and loss account’ to be included in the definition.
12	Related Party	Section 2 (76)(viii)- “related party”, with reference to a company, means— any company which is— (A) a holding, subsidiary or an associate company of such company; or (B) a subsidiary of a holding company to which it is also a subsidiary; (ix) such other person as may be prescribed;	The Committee recommended that Section 2 (76) (viii) be amended to substitute ‘Company’ with ‘Body Corporate’ and should also include investing company or the venturer of a company in sub-clause (viii)(A) thereof.
13	Small Company	Section 2(85) defines “small company” as a company, other than a public company,— (i) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than five crore rupees; or (ii) turnover of which as per its last profit and loss account does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than twenty crore rupees:	The Committee recommended the replacement of the words “last profit and loss account” with the words “last audited profit and loss account”, to take care of what seemed to be an inadvertent drafting error. It also recommended the Removal of Difficulty Order to be given effect to through an amendment to the Act itself. Further, it was noted that a review of the thresholds for small companies would be done by MCA, at an appropriate time.
14	Subsidiary Company	Section 2(87) of the Act defines a “subsidiary company”, in relation to another company (that is to say a holding company), as a company in which the holding company controls the composition of the Board of Directors, or exercises or controls more than one-half of the total share capital. Further, Rule 2(1) (r) of the Companies (Specification of Definitions Details) Rules, 2014, specifies that the ‘total share capital’ shall be the aggregate of the paid up equity share capital and the convertible preference share capital.	In order to address the practical problems, the Committee recommended that the term “total share capital” be replaced with the term ‘total voting power’, as equity share capital should be the basis for determining holding/subsidiary status. Consequential changes in the Rules may also be required.
15	Layers of subsidiaries other than investment subsidiaries	First proviso to Section 2(87)- Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed.- Not yet enforced	The Committee felt that while the proviso to Section 2(87) has not yet been notified, it was likely to have a substantial bearing on the functioning, structuring and the ability of companies to raise funds when so notified and hence recommended that the proviso be omitted.
16	Turnover	Section 2(91) defines turnover” means the aggregate value of the realisation of amount made from the sale, supply or distribution of goods or on account of services rendered, or both, by the company during a financial year	The Committee recommended that the definition of the term ‘turnover’ be revised to read “turnover” means the gross amount of revenue recognized in the profit and loss account from the sale, supply or distribution of goods or on account of services rendered, or both, by the company during a financial year’.

Source: Companies Act, 2013 and Report of the Companies Law Committee – February 2016

About Author: The above has been compiled by CS Varun Kapoor, an Associate Member of ICSI. His areas of interest include Corporate and Allied Laws vis a vis SEBI, Listing Regulations etc. For any queries or suggestions, he can be approached at csvarunkapoor@gmail.com