Independent Directors & Comapnies Act - An Analysis

The Concept of “Independent Directors” though not mandated by the Companies Act 1956,is not new to the Corporate scenario. Before the enactment of Companies Act 2013, the Clause 49 of the listing agreement contained the code of appointment of independent directors to the Board of listed companies.

The concept of Independent Director has now become a mandatory requirement under the Companies Act 2013.

Scope of Section 149 :

Section 149 of the Companies Act 2013 deals with provisions relating to the Appointment of Board of Directors. Sub sections (6) to (13) of the Section 149 provides for the qualification, term, liability, code of conduct and other aspects relating to the Independent Director.

Rule 4 of The Companies Appointment and Qualification of Directors) Rules, 2014[1]:

The following class or classes of companies shall have at least two directors as independent directors

  (i) the Public Companies having paid up share capital of ten crore rupees or more; or

  (ii) the Public Companies having turnover of one hundred crore rupees or more; or

 (iii) the Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding fifty crore rupees:

Provided that in case a company covered under this rule is required to appoint a higher number of independent directors due to composition of its audit committee, such higher number of independent directors shall be applicable to it:

 Qualifications of an ‘I.D’:

According to Section 149(6), the following persons (other than a Managing Director or Whole Time Director of a Company) are eligible to be appointed as independent directors of a Company:

a)      A person who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience

b)      A person who is or was not a promoter of the company or its holding, subsidiary or associate company;

c)      A person who is not related to promoters or directors in the company, its holding, subsidiary or associate company;

d)     A person who has or had no pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year;

e)      A person none of whose relatives has or had pecuniary relationship or transaction with the company, its holding, subsidiary or associate company, or their promoters, or directors, amounting to two per cent or more of its gross turnover or total income or fifty lakh rupees or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year;

f)       A person who, neither himself nor any of his relatives--

(i) holds or has held the position of a key managerial personnel or is or has been employee of the company or its holding, subsidiary or associate company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed;

(ii) is or has been an employee or proprietor or a partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed, of--

(A) a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or

(B) any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to ten per cent. or more of the gross turnover of such firm;

(iii) holds together with his relatives two per cent or more of the total voting power of the company; or

(iv) is a Chief Executive or director, by whatever name called, of any non profit organisation that receives twenty-five per cent or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds two per cent or more of the total voting power of the company; or

g)      A person who possesses such other qualifications as may be prescribed.

The Ministry of Corporate Affairs has clarified that, the term “Pecuniery Relationship” does not include transactions at “Arms length” price and they are excluded from Section 149 (6) [2]

Declaration by the Independent Director:

According to Section 149 (7),  Every I.D,

·         At the first Board meeting after his appointment, and

·         First Board meeting in every financial year or

·          whenever there is any change in the circumstances which may affect his status as an independent director

Shall give a declaration that he meets the criteria of independence as provided in sub-section (6) of Section 149.

Term of office:

·         As per the provisons of Section 149 (10) an I.D shall hold office for a term up to five consecutive years on the Board of a company.

·         An I.D is eligible for re-appointment on passing of a special resolution by the shareholders. Such appointment shall be disclosed in the Board's report.

·         According to Section 149 (11), No I.D,  shall hold office for more than two consecutive terms, but such independent director shall be eligible for appointment after the expiration of three years of ceasing to become an independent director. [ Provided during the said period of three years, he shall not be appointed in or be associated with the company in any other capacity, either directly or indirectly.]

·         The provisions of sub-sections (6) and (7) of section 152 in respect of retirement of directors by rotation shall not be applicable to appointment of I.D’s. – Section 149 (13)

Liabillity :

The 2013 Act , while providing provisions relating to the I.D’s have also provided a shield to safeguard such directors from liability. Section 149 (12) draws a line of demarcation between acts committed within and outside the knowledge and consent of the I.D’s in determining the liability of the I.D’s. Accordingly an I.D is liable only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently. Though the wordings of the section with regard to the determination of liability of the I.D is vague and broad, the burden of proof is on the person who is desirous of imposing the liability on the I.D.

Other Provisions:

·         Subsection 8 of Section 149 connects with Schedule IV which provides for a comprehensive code of conduct with respect to the I.D.

·          Subject to the provisions of sections 197 and 198, an I.D shall not be entitled to any stock option. However he may receive remuneration by way of fee provided under sub-section (5) of section 197, reimbursement of expenses for participation in the Board and other meetings and profit related commission as may be approved by the members.[3]

Highlights of Schedule IV of the Act:

1.      The Code provides for guidelines for professional conduct of the I.D, which entrust fiduciary responsibility upon those directors to exercise their powers and duties in a bonafide and diligent manner.

2.      The Code enunciates the roles and functions of the I.D, where the I.Ds are required to take up different roles as a moderator, scrutiniser, a mediator etc ensuring effective functioning of the Board proceedings and safeguard the stakeholders interest.

3.      The Code lists the duties of the I.Ds right from periodical attendance and reporting of the Board Proceedings to acting as a Check point in preventing as to be filled any unfair practices etc happening in the Board and in the Company.

4.      The Code provides for the manner of appointment, removal and resignation of the IDs where in event of appointment, a letter of appointment containing various provisions relating to his appointment is mandatory[4]. In event of resignation / removal his place has to be filled up within 180 days from such resignation / removal. The MCA has clarified that, appointment of I.Ds who appointed before the commencement of this Act will not be considered for the purpose of calculating their tenure and fresh appointment has to be made under Section 149 (10) & (11) read with Schedule IV.[5]

5.       The code madates the meeting of the I.Ds without the presence of other directors of the Company atleast once in a year to review the activities of the Board throughout the year.

6.      The performance evaluation of the I.D shall be done by the Board excluding the director being evaluated and based on the report of such evaluation, the continuation of the I.D in the Company shall be determined.

In conclusion, it is very understood that the object behind the concept of Independent Directors as mandated by the legislation, is highly relevant for fair and ethical corporate governance, protection of Minority stakeholders’ interest and also it acts as a check point in conduct of affairs of the Board.

As pointed out in JJ Irani Committee Report, “The concept of Independence is not to be viewed merely as independence from promoters interest but from the point of view of the vulnerable stakeholders who cannot otherwise get their voice heard  ”, the new law has taken into consideration so many checkpoints before drafting the provisions relating to I.D’s.

However the question that whenever the compliance of this law is both in letter as well as in spirit has to be answered only over a period of time. Also the fact that the executive and wholetime directors’ fear of losing their confidentiality in entry of an external director who overlooks their proceedings cannot be ignored in a short period of time. To fill up the requirements, it needs as many independent directors as possible.

Also the fear of the Companies in finding a person of Expereince and expertise in the field is also to be noted here, as

Further the challenge lies in the hands of the I.D’s who are appointed with slightly over mounted responsibilities and when they overcome the same and contribute to the clean corporate governance.

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[1] As amended upto November 2014

[2] MCA Circular No. 14 of 2014 dated 9th June 2015

[3] MCA Circular No. 14 of 2014 dated 9th June 2015

[4] MCA Circular No. 14 of 2014 dated 9th June 2015

[5] MCA Circular No. 14 of 2014 dated 9th June 2015

Law Relating to Debt Recovery - I

Law relating to debt recovery has gained more significance in the recent past.  When lenders were not able to recover the dues from its borrowers, they found lot of difficulties in take recourse from complicated litigations piled up before the Civil Court.

In order to ensure speedy recovery of debts due to these banks and financial institutions, the specific enactment called the Recovery of debts Due to banks and financial institutions Act, 1993 (Debt Recovery Act) was passed.

ESTABLISHMENT OF DRT AND DRAT:

The act provides for establishment of special Tribunals called “Debt Recovery Tribunals” (DRT) and the “Debt Recovery Appellate Tribunals”(DRAT) exclusively for the speedy disposal of complaints under this enactment.

Debt Recovery Tribunals are established all over the country based on the volume of cases registered in a particular state. For instance a state may have more than one DRTs and on the other hand two states may have a same DRT. In India there are totally 33 Debt Recovery Tribunals and 6 Debt Recovery Appellate Tribunals.

COMPOSITION OF DRTS AND DRATS:

Every Debt Recovery Tribunal shall have a presiding officer who is or is qualified to be a Dirstrict Judge. The Presiding officer shall have such other officers as he may require for his assistance. Also the Presiding officer shall appoint Recovery officers who will discharge their duties assigned to them under this Act.

Similarly every Debt Recovery Appellate Tribunal Appellate shall have a Chairperson who is or is   qualified to be a Judge of High court. The Chairperson shall have such other officers as he may require for his assistance.

JURISDICTION AND LIMITATION:

Section 17 of the Act confers Jurisdiction on the DRTs and DRATs to entertain cases filed by the banks and the financial institutions. Further Section 18 of the Act Bars Jurisdiction of other Courts in hearing matters falling under Section 17 (except the Supreme Court, and a High Court exercising jurisdiction under Articles 226 and 227 of the Constitution)  

According to section 24, the provisions of the Limitation Act, 1963, (36 of l963) shall, as far as may be, apply to an application made to a Tribunal.

PROCEDURE:

Section 19 of the Act provides for the procedure pertaining to the Tribunals. Section 19 of the Act provides the following stages with respect to the proceedings before the Tribunal:

a)      Filing of Application before DRT - Bank / Financial Institution has to make an Application in prescribed form along with prescribed fee (based on the claim amount) to the Tribunal having competent Jurisdiction.

b)      Two or more banks against one Borrower : When a Bank / Financial Institution files an Application against a same person against whom an Application has already been filed by another bank, then the later bank may join the Applicant bank at any stage of the proceedings before the final order is passed.

c)      Issue of Summons : Summons will be issued upon filing of the Application requiring the Defendants to show cause within 30 days , as to why such prayers shall not be granted against the Defendants

d)     Filing of Written Statement : The Defendants inturn will have to file a Written Statement within the time prescribed by the Tribunal

e)      Set off : When the Defendant claims to set off any sum legally recoverable by him from the Applicant, against the Applicant’s claim, then the Defendant may file a Written statement containing particulars of set off. Such particulars of Set off cannot be filed after Written Statement. Such Written statement shall have the same effect as a plaint in a cross suit so as to enable the Tribunal to pass Orders in respect of both the claims.

f)       Counter Claim: The Defendant in addition to his right of pleading set off, may set Counter Claim against the Claim of the Applicant, any right or a claim of a cause of action accruing either before or after filing of the Application but not after filing of the Defence by the Defendant. Such Written statement shall have the same effect as a plaint in a cross suit so as to enable the Tribunal to pass Orders in respect of both the claims. The Applicant may file a Written statement to the Counter Claim within the time stipulated by the Tribunal

g)      Attachment of the property : At any stage of the proceeding, the Tribunal may Order for attachment of the whole or such portion of the properties claimed by the applicant as the properties secured in his favor or otherwise owned by the borrower to the extent that satisfies the recovery of debt, if the Tribunal is satisfied that the Defendant with intent to obstruct or delay or frustrate the execution of any order for the recovery of debt that may be passed against him, is about to dispose of, remove the property from the Jurisdiction of the tribunal or if he is likely to cause any damage or mischief to the property or affect its value by misuse or creating third party interest. The Defendant will be given an opurtunity of being heard before passing any such Order.

h)      Orders passed by the Tribunal :

a) Appointment of a receiver

(b) remove any person from the possession or custody of the property;

(c) commit the same to the possession, custody or management of the receiver;

(d) confer upon the receiver all such powers, as to bringing and defending suits in the courts or filing and defending applications before the Tribunal and for the realization, management, protection, preservation and improvement of the property, the collection of the rents and profits thereof, the application and disposal of such rents and profits, and the execution of documents as the owner himself has, or such of those powers as the Tribunal thinks fit; and

(e) appoint a Commissioner for preparation of an inventory of the properties of the defendant or for the sale thereof.

APPEAL:

Any person aggrieved by the Order of the Tribunal may prefer an appeal to an Appellate Tribunal having jurisdiction in the matter, in such form and manner as may be prescribed. Such Appeal has to be filed within forty-five days from the date on which a copy of the order made, or deemed to have been made, by the Tribunal is received by him

The Tribunal may entertain an appeal after the expiry of the said period of forty five days if it is satisfied that there was sufficient cause for not filing it, within that period. No appeal shall lie to the Appellate Tribunal from an order made by a Tribunal with the consent of the parties.

The Appellate Tribunal may, after hearing the parties, pass such orders confirming, modifying or setting aside the order appealed against.

It is pertinent to note that, the Act prescribes time limit of 6 months for the Appellate Tribunal and it shall try and dispose of the Appeal within such time.

Section 21 of the Act mandates that an Appeal under Section 20 shall not be entertained by the Appellate Tribunal unless such person has deposited with the Appellate Tribunal seventy-five per cent of the amount of debt so due from him as determined by the Tribunal under section 19.

Provided that the Appellate Tribunal may, for reasons to be recorded in writing, waive or reduce the amount to be deposited under this section.

MODE OF RECOVERY OF DEBTS:

The Recovery officer shall proceed to recover the amount of debt specified in the certificate of recovery by one or more of the following modes, namely,- 

(a) Attachment and sale of the movable or immovable property of the defendant; 

(b) Arrest of the defendant and his detention in prison; 

(c) Appointing a receiver for the management of the movable or immovable properties of the defendant.

Tax implications on Amalgamations in India - An overview

Corporate Restructuring has gained its significance in the recent Indian Corporate scenario. Amalgamations, mergers, demergers, reverse mergers etc take place in various levels ranging from small companies to corporate giants in India. These corporate actions take place both horizontally (between companies having similar line of businesses) as well as vertically (between companies having different areas of businesses).

At present sections 391 to 396 of the Companies Act 1956, deals with law relating to Amalgamations / demergers / Arrangements.

Companies considering one of these corporate actions take into consideration various “pre and post scheme” implications both positive and negative before entering into such a huge initiative. As in many cases, one of the Companies (The transferee company in most cases) loses its existence post the arrangement, dozens of factors were considered before entering into a corporate action.

One of the major concerns of the companies involved is the Tax implications involved in the Corporate Action.

Income Tax Act 1961 and Amalgamation – An overview:

1

1.          Section 72A – Set off / Carry forward of  losses / depreciation:

·         Applicability - Industrial undertaking,  or a ship or a hotel with other Company / banking Company as defined under the Banking Regulations Act1949 with a Bank / public sector company or companies engaged in the business of operation of aircraft with similar public sector Company

·         Provision for set off / carry forward - The accumulated loss and the unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or, as the case may be, allowance for unabsorbed depreciation of the amalgamated company for the previous year in which the amalgamation was effected, and other provisions of the Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly.

·         Conditions prescribed for Amalgamating Company-

a)      Must have been engaged in the business in which such losses / depreciation occurred for atleast 3 years.

b)      Must hold 3/4^th of book value of its fixed assets on the date of Amalgamation which was held 2 years prior to the Amalgamation

·         Conditions prescribed for Amalgamated Company-

a)      Must hold at least 3/4^th of the fixed assets of the Amalgamating Company for minimum 5 years after the date Amalgmation.

b)      Must continue the business of the Amalgamating Company for minimum 5 years.

c)      Must fulfill such other conditions as may be notified to ensure the revival of business of the Amalgamating Company or to ensure that the amalgamation is genuine.

·         Failure to fulfill any of the conditions prescribed-  The set off of loss or allowance of depreciation made in any previous year in the hands of the amalgamated company shall be deemed to be the income of the amalgamated company chargeable to tax for the year in which such conditions are not complied with.

·         Meaning of “Accumulated losses” - under the head “Profits and gains of business or profession” (not being a loss sustained in a speculation business), which the amalgamating Company would have been entitled to carry forward and set off under the provisions of section 72, if the amalgamation had not taken place.

·         Meaning of “Industrial undertaking”- Any Industry engaged in any of the following business.

·         Meaning of “unabsorbed depreciation”- Such amount allowed to the amalgamating company if the amalgamation had not taken place.

           2.  Section 47 (vi) & (vii) – Capital Gains Tax on Transfer:

·         Section 2 (47) defines transfer as a sale or relinquishment of the asset / extinguishment of right / compulsory acquisition / act involving transfer of possession of immovable propery.

·         Section 47 (vi) provides that, any transfer, in a scheme of amalgamation , of a capital asset by the amalgamating company to the amalgamated company is not a transfer under Section 2 (47) if the amalgamated company is an Indian company

·         Section 47 (via) provides that any transfer, in a scheme of amalgamation  of a capital asset being a share or shares held in an Indian company, by the amalgamating foreign company to the amalgamated foreign company, is not a transfer under Section 2 (7) if

a)      At least twenty-five per cent of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company, and

b)      such transfer does not attract tax on capital gains in the country, in which the amalgamating company is incorporated.

·         Section 47 (vii) provides that any transfer by a shareholder, in a scheme of amalgamation, of a capital asset being a share or shares held by him in the amalgamating company is not a transfer under Section 2 (47), if

a)      the transfer is made in consideration of the allotment to him of any share or shares in the amalgamated company, and

b)      the amalgamated company is an Indian company;

       3.    Section 35(5) – Expenditure on Scientific research:

·         In a scheme of amalgamation, the amalgamating company sells or otherwise transfers to the amalgamated company (being an Indian company) any asset representing expenditure of a capital nature on scientific research, then the provisions of this section is applicable

·          2 (ii) and 2 (iii) of this Section is not applicable.

1    4.    Section 35A(6) – Expenditure on Scientific research:

·         In a scheme of amalgamation, the amalgamating company sells or otherwise transfers the rights to the amalgamated company (being an Indian company), the provisions of this section shall, as far as may be, apply to the amalgamated company as they would have applied to the amalgamating company if the latter had not so sold or otherwise transferred the rights

·         sub- sections (3) and (4) shall not apply in the case of the amalgamating company

1   5.  Section 35AB – Expenditure on Know how:

•      In case of lump sum consideration paid in any previous year for acquiring any know- how for use for the purposes of business, one- sixth of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year, and the balance amount shall be deducted in equal instalments for each of the five immediately succeeding previous years

2   6.  Section 35ABB – Expenditure on obtaining license to operate telecommunication services:

•          In case of such expenditure, a deduction equal to the appropriate fraction of the amount of such expenditure is allowed.
•          The provisions of sub-sections (2), (3) and (4) shall not apply in the case of the amalgamating company.
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    7.   Section 35ABB – Amortisation of expenditure in case of amalgamation :

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•    If an Indian Company incurs any expenditure, on or after the 1st day of April, 1999, wholly and exclusively for the purposes of amalgamation of an undertaking, then a deduction of an amount equal to one-fifth of such expenditure for each of the five successive previous years beginning with the previous year in which the amalgamation or demerger takes place is allowed.
•     No deduction shall be allowed in respect of the expenditure mentioned in sub-section (1) under any other provision of this Act.