NEW COMPANIES ORDINANCE GOES FAR BEYOND THE PREVIOUS ONE
Just while every one thought what the President re-promulgated on 7th January 1999 was a replica of the one that elapsed, the new Ordinance, titled Companies (Amendment )Ordinance 1999 in fact goes far beyond its 1998 version. In incorporating in the Ordinance all the provisions of the Companies (Amendment) Bill, which could not be taken up in the winter session of the Parliament, the Government has temporarily overcome the block created by lack of support for the Bill in the Parliament, and used the President's office as a surrogate for the Parliament's law-making power. While issues of Constitutional propriety can be raised on whether using the Ordinance route as an escape to Parliamentary process, the Government has, in the meantime, not only ensured continuity in corporate reforms but has overcome many of the lacunae of the previous Ordinance.
Significant changes in sec. 372A:
Sec. 372A has been changed substantially, mostly in light of the representations made by trade and profession. Among the significant changes are:
1. Loans to and investments in subsidiary companies exempted:
A proviso below sec. 372A (2) exempts loans to, guarantees for and investments in wholly-owned subsidiary companies, thus largely restoring the exemption available under the erstwhile sec. 372. The only notable difference is that the exemption given now is limited to investments in "wholly owned subsidiaries".
With this, and the other relaxations noted below, sec. 372A will largely become only an academic restriction, in the sense that one or the escape route to it will always be workable. It is worth noting that the limit of 60% of net owned funds, upto which corporates have been allowed to lend or invest, is now exclusive of loans and investments in wholly-owned subsidiaries. In other words, a corporate may invest upto 60% in independents, and without any limit into subsidiary, only on the condition that subsidiary is wholly owned.
And to form a wholly owned subsidiary, or to make any company such subsidiary, will be free from any approval now, as no reference is to be had to the percentage of capital of the investee company upto which the investing company can invest.
Coupled with full exemption given to investment companies and companies formed with the object of financing industrial enterprises (which practically includes every NBFC), the new relaxation leaves corporates no holds barred drive to corporate investing.
It might have been all the same if sec. 372A had been scrapped altogether, but for the utopian satisfaction that some control is still subsisting.
This amendment is practically meaningless and would make a mockery of corporate guarantees. While sec. 372A still includes prior sanction by a special resolution for giving guarantees to support a corporate loan, the Board is permitted to give a guarantee, if exceptional circumstances so warrant, without general meeting resolution, but subject to the condition that the guarantee shall be affirmed by the general meeting within 1 year.
This is a unique bureaucratic way of taking 10 steps backward, and 3 forward. If the objective was to meet business exigencies where guarantees may be required instantly, the objective is unlikely to be served by a "conditional guarantee", subject to confirmation by the general meeting. Suppose the general meeting rejects the guarantee. This will annul the guarantee already given. No lender will be willing to accept such a conditional guarantee.
The Ordinance makes two important amends over the previous one, relating to financial institution sanction:
Notably, even this restriction is not applicable for loans given to or investments made in subsidiary companies. So easy way out again - route the loan through a subsidiary.
The restriction that loans shall not be made at a rate of interest lesser than the bank rate now stands clarified - bank rate shall mean the RBI Bank rate, that is, the rate at which the RBI discounts bills of commercial banks.
This new provision restores one of the provisions proposed in the Companies Bill 1997. The provision, taken to its technical extreme, may be quite serious. A company making any default under sec. 58A shall be debarred from giving any loan, making any investment or giving any guarantee. Defaults under sec. 58A include, apart from such substantial defaults as failure to repay a deposit or pay interest thereon, even such technical lapses as the failure to file a return of deposits in time.
It is, however, worth noting that sec. 58A of the Companies Act is inapplicable to NBFCs who are covered by separate RBI regulations. A similar provision exists in Reg. 11A of RBI's Prudential Norms, but is very narrowly worded.
Another major relief is the restoration of exemption from the whole of the section to NBFCs. It may be noted that the erstwhile section 372 contained an exemption from the section for "companies formed with the object of financing industrial enterprises". While interpretations differed, some people took it to mean an exemption to all NBFCs such as leasing companies from the purview of the section.
The previous Ordinance severely restricted this exemption by limiting it only to "companies formed with the sole object of financing industrial enterprises". Dropping the word "sole", the new Ordinance restores the earlier exemption.