New Company Law: First set of Final Rules is a Mixed Bag for India Inc

Private companies with an annual turnover of ?200 crore or an outstanding loan of ?100 crore would now be required to appoint an internal auditor.

This is one among the several compliance challenges that India Inc will have to brace up to from April 1, thanks to the first set of final rules on new company law notified by the Corporate Affairs Ministry on Thursday.

Mixed bag

This corporate affairs move – prescribing final rules for ten chapters – has delivered a “mixed bag” to corporates, say corporate observers and experts. More rules are expected over the next few days.

The rules notified have brought relief in areas such as inter-corporate loans, related party transactions (through a change in the definition of related party), allowing guarantees to be provided by a parent company for loans taken by a wholly-owned subsidiary and providing new norm for the number of independent directors in unlisted public companies.

“The Corporate Affairs Ministry has addressed the genuine concerns of India Inc and taken a practical view of things in areas such as inter-corporate loans, related party transactions and independent directors for unlisted public companies,” Sai Venkateshwaran, Partner and Head of Accounting Advisory Services, KPMG in India, told Business Line.

Independent directors

The final rules provide that unlisted public companies (with paid up capital of ?10 crore and above and those with loan of over ?50 crore) need to have at least 2 independent directors.

This is in variance to earlier proposal that one-third of the boards of unlisted public companies should comprise independent directors.

Also, now every listed company and a public company with a paid-up capital of ?100 crore or a turnover of ?300 crore should have a woman director.

The time specified for compliance is now truncated to one year as against earlier proposed three years for existing companies, while for new companies it should be done in six months.

While welcoming the flexibility provided on related party transactions, Yogesh Sharma, Partner Assurance, Grant Thornton India LLP, noted that negligible transition periods have been provided for many provisions and this could turn out to be a challenge for corporates.

Dolphy D’Souza, Partner in a member firm of Ernst & Young Global, said the rules have eased some of the harsher provisions of the new company law such as related party transaction, consolidated financial statements and loan/guarantees and investments.

“This is certainly a welcome step. However, at many places it appears that the rules are overriding the requirement of the main Act. This issue will need to be carefully resolved,” he said.

The latest rules have to some extent ended a long wait for Corporate India which until Friday had little clue how the six sets of draft rules published through September, October and November last year will be fashioned into final rules. 

Business Line, New Delhi, 29-03-2014