The Company Law Report comes with 3 clear intentions-
- Technology and digitisation;
- Harmonisation and consolidation; and
- Governance, Transparency and Disclosure accountability.
WHERE DO THE CHANGES POINT?
Everything always points to the “Naya Bharat”!
- Anyhow, technology and data concentration are fuelled by the ruling Government’s digitisation drive and the Pandemic taught lessons. It is possible that this may expedite the firming data laws in India.
- The Consolidation feeds into the digitisation efforts and offers an opportunity for transparency.
- The recommendations on the fractional issue of shares for ESOP, Buy back threshold modifications and the empowering of the IEPF (Investor Education and Protection Fund) and the NFRA (National Financial Reporting Authority) is preparation for liquidity and flexibility tools.
- The Governance and Audit structures are placing an increased level of accountability on the auditors with impact assessment and adverse remark justification.
- Similarly, curbing tenures of IDs and increasing KMPs obligations are the smaller tributaries to governance.
- Relaxations on the mergers and acquisitions, is likely to offer operational fluidity.
- Positive initiative on SPACs, it can be the much-required structured stimulus for IPOs and cross border listing.
THE DETAILS
Harmonisation & Disclosure: Section 2(41), urging the FY alignment by companies not associated with foreign companies, by making an application to the Central Government
Technology & Pandemic Upgrade: Electronic communication by companies, certain documents to be served in electronic format only. Section 20 to be amended, the fees borne can be determined in the General Meeting.
Holding AGMs and EGMs in electronic format and in hybrid forms. The notice for the electronic meetings shall be as prescribed by the Central Government. Amend Sections 96, 100 and 101.
Electronic maintenance of statutory registers. Certain class of companies to maintain corporate registers on the prescribed electronic format/platform. Central Government may set up a dedicated facility. Amend Section 120, some information may have to be shared in enforcement-related functions. Empowering ED, more.
Facilitate e-enforcement and e-adjudication thus, deletion of explanation to Section 398 to
ESOP: Issuance of Fractional shares for RSUs and SARs by inserting a section in Chapter IV for a prescribed class of companies. Amendment to Section 62(1) will allow additional employee compensation schemes linked to the value of the share capital. Only those Stock Options which have been exercised can be bought back.
How will the ESOP pool be treated?
Prescribed class(s) of companies as distressed by the central government, to be allowed to issue shares at a discount under a Section 532A, this, despite the restriction under Section 53(1).
Buy Back: Companies to file self-declarations instead of affidavits in case of buybacks. Amend Section 68(6) and Section 374 (c) when seeking registration under Part I of Chapter XXI. Move to Disclosure & Accountability.
Free Reserves to be included in calculating buy-back of equity shares while calculating threshold of 25%. Amend Section 68(2), amend explanation to Section 68.
Restriction on companies from entering notice of any trust, express, implied, or constructive on their register of members. Insertion of a section in Chapter VII.
Investor Education and Protection Fund (IEPF) under the MCA: This was set up in September 2016. All unclaimed dividends and interest on shares (bought back/canceled or transferred) to move to the IEPF. Amend Section 124 (5), 125(3)
Audit and National Financial Reporting Authority (NFRA): This was set up in October 2018 (governance and financial reporting) the NFRA is empowered to initiate investigations and has the same powers as a civil court under the CrPC for summoning and inspection, examination of witnesses etc.
NFRA can take action against the auditor for non-compliance with the provisions of the Companies Act, 2013. An NFRA Fund is proposed to be set up under the directions of the Central Government. Amend Section 132.
Penal consequences to be included for contravention. Amend Section 143. Disclosure obligations on the resigning auditor regarding non-co-operation of the client, diversion of funds. Chapter XIV to recognise forensic audit.
Standardisation in each qualification offered by an auditor: to provide impact of every qualification or adverse remark and circulate to the Board and then pass to the Shareholders, about the financial statements. Amend Section 143.
Setting up Risk Management Committees (RMC): Insert section in Chapter XII for certain class of companies to establish RMC and provide the composition for the same.
Directors, Independent Directors and stakeholders: The duration for which an ID operated/ acted as an additional director should be included in computing total tenure of the ID. Amend Section 149.
IDs cannot become MD or any managerial person, if the person was appointed ID in the past 1 year. Amend Section 196(3).
The maximum revenue threshold for association with a company to be brought down to 5% from 10%. Amend Section 149(6) and (11).
Amendments to the LLP Act, 2008 under Section 67. Disqualification of directors to be restricted to personal incapacity and not on default by companies where director holds position. The relaxation period of new directors to be extended to 2 years from 6 months. Disqualification grounds shall not apply to nominee directors appointed debenture trustees registered with the SEBI. Amend Sections 164 and 167.
Auditors of a Company cannot become directors if they have been auditors of the Company in the previous 1 year. For partnerships and LLP audit firms, this restriction shall apply to only the partner who audited the Company. Amendment to Section 164(1).
Resignations of KMP are now required to be notified to the RoC. Harmonisation with Section 168 aligned to the resignation of directors and insertion of Chapter XIII for the procedure.
Mergers and Acquisition: Treasury stock to be reported through a company declaration. Proviso to Section 232 to be included to deal, extinguish or dispose the treasury stock within 3 years. Does not require the intervention of the NCLT and can be done in any manner the Company decides. Failure to do so comes with a penal implication.
Fast track mergers, require a twin test approval –
a. majority of persons present and voting at the meeting should be 75% in value of the shareholding of the person present and voting; and
b. represent more than 50% in value of the total number of shares of the company for fast track merger.
Amendment to Section 233 for central government to make rules for compromise or arrangements under Section 230 or division or transfer under Section 232. Special Bench of NCLT to be constituted for matters of economic importance relating to mergers, amalgamation or corporate restructuring or specialised IBC.
Shell corporations: Restoration of companies struck off by aggrieved person can be in a period of 3 years by applying to the Regional Director. Amend Section 252. This is a step to accommodate the SPAC.
Recognising Special Purpose Acquisition Company: SPAC.
A relatively new topic in India and gained momentum after ReNew used this to get listed on NASDAQ. Insertion of a new chapter on SPAC. Allowing India incorporated SPAC to be listed on Indian and global exchanges. It is also proposed that dissenting shareholders should have exit rights.
Non-Conversion of co-operative societies into company. Amending Section 366.
Nidhi companies: incorporation and functioning of Nidhi’s to be more stringently monitored. Chapter XXVI to be amended.
Drafting and clarificatory changes: Section 24(2) to be amended to remove reference to Section 458, whereby SEBI will not be able to regulate issue and transfer of securities where matters delegated to it will not be covered.
Separate schemes have to be provided for AGMs and General Meetings when sending copies of financial statements. Amend Section 136(1).
Any penalty under Section 188 for related party transaction is a ground for disqualification under Section 164(1).
Holding Assets should include joint ventures, Section 187 (1) to be amended to include Subsidiary Company or Joint Venture. Additionally, only a holding company to be members of WOS. Amendment to Section 248(6) publishing of notice by RoC for striking off by RoC.
Penalties: Amend Section 446B to include penalties for one person, small, start-ups and producer companies.
The Quorum requirements for general meetings for Producer Companies to be amended to include either 1/4th of the members or 100 members whichever is less.
This is only for informational purposes. Nothing contained herein is, purports to be, or is intended as legal advice and you should seek legal advice before you act on any information or view expressed herein. Endeavoured to accurately reflect the subject matter of this alert, without any representation or warranty, express or implied, in any manner whatsoever in connection with the contents of this. This is not an attempt to solicit business in any manner.
Source: Report of the Company Law Committee