If the big news in India’s corporate law domain in 2013 was the enactment of the Companies Act, 2013, , the year 2014 made news for its chaotic implementation. Of the total 470 sections, 98 came into force in 2013 while another 184 with their corresponding rules came into effect from April 1, 2014. Then there were a series of circulars, notifications, amendments to rules, and so on which, at last count stood at a whopping 45 general circulars, 17 amendments and an equal number of notifications, 7 orders to remove difficulties, an amendment Bill (already passed by the Lok Sabha) and a few judgments including the crucial one of the Bombay High Court in the Godrej Industries’ case dealing with e-voting.

Initially, one serious concern was that around 70 per cent of the Act would be implemented as a delegated legislation through the rules prescribed by the Ministry of Corporate Affairs (MCA). The situation is worse now as the Act and the rules do not comprise the entire law on the subject. Besides, a large portion of the Companies Act, 1956 continues to be in force.

So, companies in India are in a piquant situation. For instance, a company desirous of raising capital will need to comply with the Act but if it wants to repay capital to its shareholders by winding up it needs to follow the Companies Act, 1956.

These days it is not uncommon to see articles of association with jumbled up provisions from both the statutes. So, what really is the Indian company law today? Remember, what has been implemented in 2014 is just 60 per cent of the Act. The fate of the remaining 40 per cent hangs in the balance. This deals essentially with the the National Company Law Tribunal (NCLT) — which has been challenged in the Supreme Court.

The government is now looking to hire new members for the existing quasi-judicial body which will eventually be replaced by NCLT.

While Section 135 of the Act dealing with CSR is absolutely clear that the criteria of networth, turnover or net profit pertains to a ‘financial year’, an ambiguous circular of MCA says the norm should be ‘preceding three financial years’. The Act is silent on treating a ‘preferential issue’ as ‘private placement’ but MCA’s rules provide that a ‘preferential issue’ amounts to a ‘private placement’.

There is no rationale for MCA providing that security for debentures can only be of the assets of the borrowing company (and not that of the group company or promoter company) and that period of repayment cannot exceed 10 years. Also, why do the deposit rules provide that compulsorily convertible debentures having redemption period exceeding 5 years will be treated as ‘deposits’? These are harsh and impractical provisions.

The Act has failed in simplifying rules for the benefit of private limited companies operating small businesses.They have an ordeal dealing with the complexities of the Act, which was not the case under Companies Act, 1956.

There are conditional exemptions for private companies based on criteria such as turnover, paid up capital, borrowings, type of shareholders. The rationale for such conditional exemption defies logic. There is little merit in subjecting private companies to regulatory interference. Only very large companies should be covered, smaller ones should be spared. Difficulties in the current avatar of the Act have led to the idea that private companies can be converted into LLPs.

Companies in the listed space were perhaps the hardest hit. They were subjected to the Act as well as SEBI regulations which supposedly claim to be aligned to the Act. Unfortunately, that is not the case — the contradictory provisions affected the smooth operations of these companies in 2014.

The author is a partner at J Sagar Associates. The views are personal

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