The Company Law Committee (CLC) was formed on 18th September 2019, which recommended numerous modifications to the Companies Act 2013 to introduce novel concepts, accelerate corporate processes, improve compliance requirements and remove anomalies from the existing provisions. The third report of the CLC was published on 13th April 2022, making suggestions to the Government on changes to the Companies Act, 2013, the Limited Liability Partnership Act, 2008, and the rules framed thereunder. The amendments and additions proposed in the Report aim to bring Indian company law in order with global practices and to simplify business in India. The significant points of the Report and the effects of the same are discussed hereafter.
To promote ease of doing business and simplifying compliance, the Committee proposed that such companies, which cease to be associated with a foreign entity, should be allowed to file a fresh application with the Central Government in a prescribed form to allow them to revert back to the financial year followed under Companies Act, 2013. The Committee recommended that Section 20 should be amended to introduce a specific provision enabling the Central Government to prescribe Rules, with suitable safeguards to protect the interest of investors, for such class or classes of companies for whom it shall be adequate to serve such documents as may be prescribed to all their members in electronic mode only for compliance with the provisions of the Act. However, if requested, the company shall, as an investor-friendly measure, also serve such documents in physical mode.
The CLC felt that the Companies Act, 2013, should be amended to insert provisions that enable issuance, holding and transfer of fractional shares for a class or classes of companies in such manner as may be prescribed. Such shares should only be issued in dematerialised form. For listed companies, such prescriptions may be made in consultation with SEBI. It is also clarified that this recommendation only pertains to cases that would involve a fresh issue of fractional shares by the company and not to those cases where fractional shares get created for the time being on account of any corporate action.
The Committee was of the opinion that Restricted Stock Units and Stock Appreciation Rights should be recognised under the Companies Act, 2013, through enabling provisions. If these schemes require the issue of further securities by the company, their issuance must be allowed only after the approval of the shareholders through a special resolution. The provisions should also allow an annual omnibus approval by the shareholders of the company to ensure that fresh approvals should not be required at the time of each allotment of such schemes. However, where the settlement of such rights does not involve an offer or conversion into securities, approval by shareholders need not be mandated.
The Committee recommended that distressed companies be allowed to issue shares at a discount to the Central Government or State Government or to such class or classes of persons as prescribed, notwithstanding the prohibition under Section 53 of the Companies Act, 2013. It was stated that for this purpose, distressed companies might be categorised as such class or classes of companies that have cash losses for the previous three consecutive years or more and fulfil such terms and conditions and issue shares at a discount in such manner as may be prescribed by the central government. To ensure further safeguards, the Committee recommended that the registered valuers should continue to value such issuances, failing which such issuances would be void.
The Committee sought to include the reference to free reserves in the proviso to Sec 68(2)(c).
Under the first proviso to Section 2(41) of the Companies Act, 2013, a company which is the holding company or subsidiary, or associate of a company incorporated outside India, and is required to follow a different financial year for consolidation of its accounts outside India, may be allowed to follow such different financial year upon making an application to the Central Government. The Committee noted that if such a company ceases to be a holding, subsidiary or associate company of the foreign entity, the Companies Act currently contains no provision allowing such company to revert to the financial year required to be followed under the Companies Act. Therefore, the Committee recommends that such companies should be allowed to file a fresh application with the Central Government to allow them to revert back to the financial year followed under the Companies Act, 2013.
The Committee recommends an amendment to Section 20 of the Companies Act, 2013, to introduce a specific provision enabling the Central Government to prescribe rules, with suitable safeguards to protect the interest of investors, for such class or classes of companies for whom it shall be adequate to serve documents to all their members in electronic mode only for compliance with the provisions of the Companies Act, 2013. However, where a member has requested the company to serve physical documents also, the company shall, as an investor-friendly measure, also serve such documents in physical mode.
Owing to the benefits of relaxing the requirement for physical meetings, which were realised during the pandemic, the Committee recommends amending the Companies Act to enable the Central Government to prescribe the manner in which companies can hold annual general meetings and extraordinary general meetings physically, virtually and in hybrid mode.
Considering globally accepted practices and benefits of maintaining registers electronically, the Committee recommends that certain class or classes of companies, should be required to compulsorily maintain their registers on an electronic platform in such form and manner as may be prescribed by the Central Government. For this purpose, the Committee recommends that the Central Government may set up an electronic platform for such registers to be maintained, stored and periodically updated. This measure will reduce the compliance costs incurred by companies in the maintenance of statutory registers and facilitate greater transparency.
The Committee recommends that a resigning auditor should be under an explicit obligation to make detailed disclosures before resignation and should specifically mention whether such resignation is due to non-cooperation from the client company, fraud or severe noncompliance, or diversion of funds. Moreover, if such information comes to light after the resignation of an auditor but has not been disclosed in the resignation statement, suitable action may be taken against the resigning auditor. Additionally, the auditor should be mandated to provide assurance about the company’s accounts and the independence of his/her decision to resign.
The Committee recommends that there should be a format for auditors to provide the impact of every qualification or adverse remark on the company’s financial statements for circulation to the board of directors before the same is passed on to the shareholders.
The Committee also recommends certain clarificatory and drafting changes to the Companies Act, inter alia inclusion of ‘free reserves’ in calculating the buy-back of equity shares, removing ambiguity in the computation of the total tenure of an independent director and making it obligatory for companies to notify the Registrar of Companies (ROC) of resignations tendered by certain key managerial persons whose appointment intimation was filed with the ROC.
The Committee deliberated whether Producer LLPs may be incorporated within the LLP Act, 2008. The Committee noted that Producer LLPs would serve as a more desirable option for small producers since LLPs have been provided with a range of relaxations in the conduct of their affairs. The CLC felt that Producer LLPs are expected to function on a threshold lower than this stipulated limit and agreed that incorporating Producer LLPs would significantly reduce compliance costs for producers. Similarly, the LLP model offers ease of formation, business management, taxation and flexible regulatory compliances, which may be particularly beneficial for producers. Therefore, to enable producer institutions to take advantage of the light touch regime under the LLP Act, 2008, the Committee recommended enabling the incorporation of Producer LLPs by an amendment to the Act. The Committee further emphasized the importance of an LLP Agreement to guide the decisions of the Producer LLP and ensure its smooth working. Accordingly, a model agreement is to be inserted under the LLP Act, 2008, for ready use by Producer LLPs.
The Report summarizes recommendations and modifications in regards to the Companies Act, 2013, and focuses on removing anomalies of the same.