A Comprehensive Study of the Company Law Committee Report 2022
The article 'A Comprehensive Study of the Company Law Committee Report 2022' highlights that in order to comply with international industry and compliance standards, the most recent Company Law Committee (CLC) Report has recommended significant changes to the current Companies Act, 2013, including revisions relating to transparency, investor protection, and accountability.
The article 'A Comprehensive Study of the Company Law Committee Report 2022' highlights that in order to comply with international industry and compliance standards, the most recent Company Law Committee (CLC) Report has recommended significant changes to the current Companies Act, 2013, including revisions relating to transparency, investor protection, and accountability.
The proposals' goal is to reinforce the current framework for company law in an effort to help businesses with real-world issues. The Report's suggested changes and additions are meant to harmonize Indian company law with international standards and make doing business there easier. The Committee has also made it clear that it wants to recognize numerous innovative ideas that have proven successful throughout the world.
The author attempts to make the readers aware of the current legal changes pertaining to the Companies Act, 2013
Introduction
The Companies Act, 2013, was enacted with the intention of significantly updating Indian company law to be in line with international standards. Through their knowledge of business and market processes, the different committees the government established are essential in guiding legislative reforms.
The Proposals and recommendations given by the Company Law Committee of 2019, the Committee to Review Offences under the Companies Act, 2013, and the Companies Law Committee of 2016 led to a number of prior changes to the Companies Act of 2013. These committees have assisted in the development of suitable guidelines and procedures that are best suited to India's domestic requirements.
A company law committee was established by the Ministry of Corporate Affairs (MCA) on September 18 with the goal of making amendments that will strengthen corporate governance, make it easier for law-abiding corporates to conduct business, and make living easier. The Committee made recommendations for improvements to support and promote improved ease of doing business in India in its third report, which was delivered to the national government on March 21, 2022.
The report made several changes to the Limited Liability Partnership Act of 2008, the Companies Act of 2013, and the Rules enacted thereunder. The Committee has examined pertinent worldwide best practices and analyzed the current framework for corporate law during its deliberations. The Committee has also taken into account advice and ideas put forth by other interested parties.
Working Process of the Committee
The Committee convened five sessions of meetings during which time each topic included in this report was thoroughly addressed and an attempt was made to establish an agreement. In light of the limitations imposed by COVID-19, the Committee evaluated several provisions of the Companies Act, 2013, and resolved to recognize electronic communication and virtual meetings for the convenience of conducting business.
The Committee aimed to add enabling clauses to the Companies Act, 2013 so that different practices, such as Stock Appreciation Rights ("SAR"), Restricted Stock Units ("RSU"), Special Purpose Acquisition Companies, etc., might be formally acknowledged.
The Committee also discussed various recommendations to expedite the procedures for audits, mergers, and the restoration of struck-off enterprises, among other things, as well as making structural improvements to the CA-13 framework.
To clarify and improve the phrasing of several clauses in the 2013 Companies Act, certain amendments were also suggested. The Committee also thought about amending the LLP Act of 2008 to include a new notion of Producer LLP. The MCA commissioned Vidhi Centre for Legal Policy to do legal research on the pertinent problems, compare them to global best practices, and aid with drafting in order to help the Committee make educated decisions.
Structure of the Report
There are two chapters in the Report. The proposals for CA-13 modifications are covered in Chapter I. The Committee's recommendation for a change to the LLP Act of 2008 is presented in Chapter II. In Annexure II, a summary of the suggestions covered in Chapters I and II of the Report has been tabulated. At the end of the report, there is a list of terms that have been defined and are used throughout.
Changes Proposed to Companies Act, 2013
The recommendations of the CLC for the Companies Act, 2013 are summarised hereunder:
1. Recognizing Fractional Shares
The law now prohibits the issuance of fractional shares, notwithstanding the fact that they occasionally result from the issuance of right or sweat equity shares. Since the issue is prohibited, the Company's Board of Directors has the right to handle it any way they see fit. The committee has suggested including enabling provisions in the act to permit the issuing, holding, and transfer of fractional shares for the designated class of companies in the manner proposed. Retail investors may ultimately benefit from this since they will have the chance to invest in the company by purchasing a portion of the shares at a lower price when the price of even one share on the stock market is too high.
2. Non-Monetary Compensation in The Form of RSU's and SAR's
Even though the legalities surrounding them are still missing from the Companies Act of 2013, Restricted Stock Units (RSU's) and Stock Appreciation Rights (SAR) are currently a rage as a type of non-monetary compensation frequently used by many Corporates, primarily Start-ups, to compensate, retain, and attract Employees. Currently, SAR is defined as a right granted to a SAR grantee entitling him to receive appreciation for a specified number of shares of the company, where the settlement of such appreciation may be made by way of cash payment or shares of the company, under the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021.
There are currently no legal restrictions on RSUs, but they can be thought of as vested stock that becomes transferrable to the employee after certain requirements are met. Similar to the ESOP, shares are awarded upon the conclusion of a predetermined vesting period and following the satisfaction of predetermined requirements. The issues surrounding the issuance of shares under these non-monetary compensation schemes will be resolved by bringing RSUs and SARs within the purview of the law, which will also result in the proper and correct governance and management of the same.
3. Use of Technology
Being digitally updated and virtually accessible and available was already in demand in the modern day, but the introduction of Covid has transformed the trend into a requirement and made it much more crucial than before. The Committee recognized this and consequently suggested amendments to the Act to make it more technologically and user-friendly in light of contemporary conditions;
i. Required organizations to enable physical, virtual, and hybrid EGM and AGM meetings.
ii. In order to facilitate the conduct of enforcement-related acts in a transparent and non-discretionary way with a proper trail through an electronic platform, appropriate adjustments to the Act are suggested.
iii. It is advised that the Central Government implement an electronic platform to ensure that the statutory registers of the specified class of Companies are maintained electronically on a compulsory basis.
4. Mandatory Joint Audit for certain Companies
Time and again, the scope, importance, and necessity of Joint Audits have been discussed among various academicians and affluent personalities but nothing of the sort has surfaced as yet on a full scale. Currently, Joint Audit is at the liberty of the members of the Company under the Companies Act, 2013. The Committee has recommended a mandatory joint audit for the prescribed class of Companies.
5. Forensic Audit during Investigation
Even though there is a lack of corporate governance and a rise in fraud charges among corporations, forensic auditing is not covered by the Companies Act's legal framework and is not mentioned in the legislation that regulates corporations. The Committee advised including the idea of forensic auditing in the Act, which might be requested by law enforcement and regulatory bodies in response to a predetermined incident. The Committee thinks that the trigger event should be defined clearly and applied consistently by all regulators.
6. Cooling off period before a change of Position/designation
i. Before auditors become directors: In its recommendation, the Committee suggested requiring a one-year cooling-off period from the date of cessation, following which the Auditor would only be allowed to hold non-executive director (NED), managing director (MD), or whole-time director (WTD) positions in the company or its holding company, subsidiary companies, or associate companies. The prohibition only applies to the partner who audited the company in question if the auditor is an LLP or partnership firm.
ii. Independent Director becomes Managerial Personnel: An Independent Director should only be allowed to hold the position of Managing Director, Whole-Time Director, or Manager in the Company or holding Company, Subsidiary Company, or Associate Companies after a mandatory one-year cooling-off period from the date of cessation.
7. Recognizing SPAC
SPAC, or Special Purpose Acquisition Company, has long gone unnoticed by lawmakers but has emerged as a very effective mechanism for Indian businesses seeking to list on international stock exchanges. The main goal of SPAC, a non-operational corporation, is to acquire or merge with a target company that wants to go public without having to go through the lengthy and complicated process of an initial public offering (IPO). Given the difficulties involved, this specific notion may require a lot of time, thought, and work before it is actually put into practise.
Other Recommendations
The CLC has asserted various other recommendations to further update the provisions of the Act, including the following:
i. Allowing companies to re-align their financial year: By submitting an application to the Central Government, a firm that is a holding company or a subsidiary of a company formed outside India may currently choose to use a different financial year for the consolidation of its accounts. The Act does not, however, cover the circumstance where a firm ceases to be a holding company or a subsidiary of a foreign company. As a result, the CLC has advised that these enterprises seek Central Government consent before returning to the financial year format specified by the Act.
ii. Tenure of Independent Directors: The CLC has made it clear that the five-year term for an independent director begins on the day they were appointed as an additional director, not on the day they were regularized. Because of this, the Independent Director's tenure prior to regularisation cannot be disregarded when determining their overall tenure.
iii. Prohibition on the conversion of a cooperative society into a company: The CLC has recommended against allowing cooperative societies to turn into companies under the Act. A registered cooperative society is expressly excluded by the Act from the definition of a corporate body. A limited liability partnership, partnership firm, or cooperative society may register as a corporation under the Act, nevertheless, according to Section 366. The CLC made it very clear that cooperative societies are founded on cooperative values and that they are not driven by financial gain. In response, the CLC has advised changing the Act.
Changes Proposed to the LLP Act, 2008
Producer organizations are crucial in lowering transaction costs because they give members a venue to exchange information that will benefit both parties, plan activities, and come to decisions together. Although producer institutions have historically been set up in cooperative societies, the Companies (Amendment) Act of 2002 added the idea of producer companies to the 1956 Companies Act. The 2013 Companies Act's Chapter XXIA, or Producer Companies, continued the idea.
The CLC has suggested that Producer LLPs be included in the LLP Act, 2008, in light of the advantages associated with LLPs compared to corporations, particularly regarding reduced compliance burden. Small producers would find them a more appealing alternative because LLPs have been given a number of administrative leniencies.
For instance, unless its capital contribution or turnover exceeds Rs. 40 lakhs, an LLP is not required to have its accounts audited. The Committee proposed making it possible for Producer LLPs to be incorporated by an amendment to the Act so that producer institutions might benefit from the LLP framework. The Committee emphasized the necessity of an LLP Agreement once more in order to direct the Producer LLP's choices and guarantee its efficient operation. As a result, it was suggested that a model agreement be added to the LLP Act, 2008 for Producer LLPs to utilize right now.
Conclusion
These suggestions seem to be a positive step toward making doing business in India easier. However, the manner the regulator chooses to implement these recommendations and the precise structure chosen will affect, to what extent they are received by the Indian markets. Although the regulatory framework for these recommendations is eagerly awaited, it may be difficult for the regulator to effectively carry out their goals and intentions without raising the compliance and reporting burden. In addition to the aforementioned changes, other suggestions include realigning the fiscal year, establishing the terms for independent directors, and forbidding the transfer of cooperative societies into corporations.
Overall, the Report appears to be a safety net for the abundance of compliance that India Inc. has always envisioned, but it is yet unclear how various committees and agencies will design and put the structure in place to turn words into deeds. This is merely the beginning, and much will depend on whether the Ministry accepts and approves the proposals and how the recommendations are put into action after that.
References
[1] Report of the Company Law Committee, Available Here
[2] Company Law Committee report - Key proposals, Available Here
[3] Key Highlights of the Company Law Committee Report (2022), Available Here
[4] Company Law Committee Report 2022: Setting global standards, Available Here
[5] 8 Key Recommendations of Company Law Committee – March, 2022 Report, Available Here
[6] The Company Law Committee Report 2022: An ambitious Report with far-reaching consequences, Available Here
[7] An Analysis of The Recommendations Of The Company Law Committee, 2022, Available Here
[8] The Company Law Committee Report 2022: Highlights & Insights, Available Here
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