India Inc has cause for cheer as the new Companies Bill has gone the whole hog to remove the restrictions around structuring of companies, giving them complete flexibility in designing efficient structures.
Both the existing layering restriction on investment companies and the one preventing certain class of companies from having more than the specified number of subsidiaries are proposed to be done away with.
Enabling provisions to this effect form part of the Companies (amendment) Bill 2016 introduced by Finance Minister Arun Jaitley in Lok Sabha last Wednesday (March 16).
The Companies Act 2013 had stipulated that a company can make investment through not more than two layers of investment companies.
The proposal to remove such restrictions should be seen as part of the government’s effort to improve the ease of doing business in India, say corporate law experts.
““These are welcome proposals in the new Bill. It would give freedom to companies to design and structure investments”, Lalit Kumar, Partner, J Sagar Associates, a law firm, said.
S.N.Ananthasubramanian, former President of the Company Secretaries Institute and advisor to several banks, said that work around tactics of compliance is sought to be tackled through a laissez faire approach.
“Read with steps to allow companies to have unrestricted object clause, this move seeks to significantly enhance the ease of doing business in the country”, Ananthasubramanian told BusinessLine.
Panel report
The government’s plan to do away with layering restrictions essentially flows out of the recommendations of the 10-member Companies Law Committee, which proposed 100 amendments to the existing company law enacted in 2013 by the UPA government.
In its report, submitted in late January this year, the committee had suggested that the layering restriction on investment companies be done away with. It had noted that there may be several legitimate business justifications for use of a multi-layered structure and such restriction hampers the ability of a company to structure its business.
It also felt that layering restrictions may become too obtrusive and impractical in the modern business world. Regulatory concerns arising out of earlier scams were also noted.
The committee said that sufficient safeguards have been built into the oversight mechanism of market regulator SEBI and stock exchanges, and the recommendations on Beneficial Ownership register requirements should dispel the regulatory concerns.
In India, most large corporate empires are controlled through ingeniously constructed pyramid of ownership, where the percentage of equity investments in the holding company is generally very small.
Companies Act 2013
The Companies Act 2013 was not the first instance when the government sought to rein in on any form of multi-tiered investment structures.
Even in 2003 — during the term of the earlier NDA regime, the Government had attempted to restrict the number of investment companies that could be floated by promoters. However, this did not see the light of the day.
Out of the 470-odd sections of the new Companies Act 2013, the Government has already notified 283 for implementation.
After the constitution of the National Company Law Tribunal and National Company Law Appellate Tribunal, most of the remaining 186 sections of the Company Law will be brought into force, sources said.