Companies Act 2013 & Bankers - 1

Ministry of Corporate Affairs has notified the implementation of 98 sections of the Companies Act 2013 vide a notification dated Sept 12, 2013. The corresponding sections of Companies Act 1956 have since been repealed too.

The new Act is set to usher in a new regime of transparency and rule-based governance in the country.

A few sections of the Act have enormous implications for lending institutions in credit administration.

I thought I'd jot down a few of the features in a series of entries in this blog and think aloud on the implications for Banks. Hope it'll be useful to all.

Sec 2(57) says that “'Net worth' means the aggregate value of the paid-up share capital and all reserves created out of the profits and securities premium account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited balance sheet, but does not include reserves created out of revaluation of assets, write-back of depreciation and amalgamation."

Issue: Credit Balance in P&L Account has been left out. The “Highlights of the Companies Act 2013” brought out by the Institute of Chartered Accountants of India also points this out. Should Credit Balance in P&L Account be left out by Banks while computing the Net Worth of companies henceforth? If so, the leverage ratio will move up.

The new Companies Act has withdrawn many of the privileges and exemptions that were available to Private Limited Companies - e.g. Special Resolution is necessary for borrowings “exceeding aggregate of its paid-up share capital and free reserves” u/s 180; under section 293 of the erstwhile Act, this limit was applicable in a different manner and that too for public limited companies only.

Issue: Special Resolution would now need to be obtained in case of Private Limited Companies too, who form a large part of the borrower universe of banks, failing which the borrowing would be rendered unenforceable unless bona fides is proven! And, Indian judiciary often do not take a kind view on lapses from banks.