[Analysis] of Key Changes proposed by Company Law Committee Report (2022) | CLC 2022

The Company Law Committee (CLC) submitted its third report to the Hon’ble Union Minister of Corporate Affairs on 21.03.2022. The CLC was set up on 18.09.2019 to make recommendations to the Government on changes aimed at facilitating and promoting greater ease of doing business in India and effective implementation of the Companies Act, 2013, the Limited Liability Partnership Act, 2008, and the Rules made thereunder.

Accordingly, the CLC Report has recommended various changes to the Companies Act, 2013 to recognize new concepts, expedite corporate processes, improve compliance requirements, and remove ambiguities from existing provisions. The report also includes recommendations to enable producer organizations to get incorporated in the form of LLP under the Limited Liability Partnership Act, 2008. This write-up aims to discuss and analyze in-depth, the key proposals by CLC to amend the Companies Act, 2013, and the LLP Act, 2008.

For an easy understanding of the recommendations, the proposals made by CLC have been grouped into the following categories:

1. Proposals to introduce New Concepts to the Companies Act, 2013 and LLP Act, 2008
2. Proposals relating to digitization and improving the ease of doing business
3. Proposals to amend norms relating to Audits, Auditors and NFRA
4. Proposals relating to KMPs and Independent Directors
5. Proposals aiming to strengthen some of the extant provisions
6. Proposal aiming to remove the ambiguity in provisions

1. Proposals to introduce New Concepts to the Companies Act, 2013 and LLP Act, 2008.

1.1 Proposal to recognize the Issuance and holding of fractional shares [Amendment to the chapter- IV]

Extant norms – Currently, Section 4 of the Companies Act, 2013, and para 4 of Table F restrict the issuance and holding of the fractional share.

Committee’s proposal – The CLC recommended that the company law can 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.”

CLC further 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.

Taxmann’s Views – The proposal to recognize the issuance and holding of fractional shares would help the small investors to invest in the fractional units of a stock when they do not have much amount to invest in a full share. Further, as issuance of the fractional shares is an international practice so it will help India to align its norms with globally set standards/norms.

1.2 Proposal to recognize issuance of Restricted Stock Units (RSUs) and Stock Appreciation Rights (SARs) to employees [Amendment to section 62 (1)]

Existing Norms – Currently, the Companies Act, 2013 recognizes only issuance of the Employees’ Stock Options (“ESOPs”) and Sweat Equity Shares to the employees no other type of issuance has been specifically recognized by the act.

Committee’s Proposal – The committee viewed that in addition to monetary remuneration, the compensation of a company’s employees may be linked to its shares, aimed at granting such employees ownership rights in the company.  Such schemes include RSUs and SARs that allow employees to subscribe to the company’s equity capital.

Presently, SARs have been defined under the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021. The Committee recommended that RSUs and SARs should be recognized under the Companies Act.

Taxmann’s Views – This is a welcome step as the employees are the most important asset of the company. Issuing the SARs and RSUs to employees will boost their morale which will lead to their better performance which will further lead to the betterment of the business as a whole. Therefore it will be a win-win situation for both the companies and employees.

1.3 Introduction of the concept of Producer LLPs.

Existing Norms – Section 378C of the Companies Act, 2013, recognized the concept of producer companies. But there are no provisions in the LLP Act, 2008 which allow that the producer institute can be incorporated in the form of the LLP.

Committee’s Proposal – Considering the benefits of the producer institution these institutions should be allowed to run in the form of LLP as there are various benefits associated with producer institutions and the comparative advantages of LLPs as compared to companies (reduced compliance burden, Audit based on certain threshold), the Committee recommended enabling the incorporation of Producer LLPs by an amendment to the Act.

The committee further recommended that a model agreement be inserted under the LLP Act, 2008 for ready use by Producer LLPs.

Taxmann’s Views – This is a welcome move recognition of the Producer LLPs will open new doors for the producer institution. The proposed recognition will enable the producer institution to get their business registered in the form of a Limited Liability Partnership (LLP) and can avail of the benefits thereof.

1.4 Inclusion of the new concept ‘Forensic Audit’ under Companies Act, 2013

Extant norms – As per extant norms, forensic audit is required to be conducted only on the specific directions of regulators or on demand of the creditors. However, with the advent of definition of fraud under the Companies Act, 2013, the concept of forensic audit has gained immense importance and relevance in addition to the regular auditing techniques already in place.

Committee’s Proposal – The committee recommended to include the concept of Forensic Audit under the Companies Act, 2013 for use in enforcement actions in case of severe non-compliance. Further, the committee has recommended that forensic audit may be ordered during investigations of such nature as prescribed under Chapter XIV of Companies Act, 2013. Chapter XIV contains sections 206 to 229 of the Companies Act, 2013, that deals with the provisions relating to inspection, inquiry and investigation of the affairs of company.

Taxmann’s Views – Forensic audit focuses on providing evidence for legal proceedings, assists in detecting the financial crimes and helps in avoiding the loss related to the fraud conducted. Further, the concept of Forensic audit will bring uniformity across all the regulators.

1.5 Certain companies to be allowed to realign their financial year after ceasing to be associated with a foreign entity [Amendment to Section 2(41)]

 Extant norms – Companies Act, 2013 contains no provision allowing the company, or body corporate, ceases to be a holding, subsidiary, or associate company of the foreign entity, to revert to the FY required to be followed under the provisions of the act.

Committee’s proposal – 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 FY followed under the Companies Act, 2013.

Taxmann’s Views – This is a welcome proposal as following the different financial years even after ceasing to be associated with foreign entities is un-justified. Once a company ceased to be associated with foreign entity that should be allowed to follow the same FY as per Indian laws so that a true picture of the company’s or body corporate’s ability to measure its revenue and earnings in that FY, as per Indian laws can be reflected.

1.6 Maintaining Statutory Registers through a common electronic platform

Extant norms – As per Section 120 of the Companies Act, 2013 ‘any document, record, register, minutes etc. required to be kept by the company, may be kept by the company in an electronic form in form and manner as may be prescribed’. As per rule 27 of the Companies (MGT) Rules, 2014, every listed company or a company having 1000 or more shareholders, debenture-holders and other security holders may maintain its records in electronic form. Thus, there is no mandatory requirement to maintain registers in electronic form.

Committee’s Proposal – The committee has proposed to mandate certain class of companies to maintain their statutory registers on an electronic platform in such a form and manner as prescribed by the Central Government. Further, the committee has also proposed to set up a single consolidated electronic platform by the Central Government for the registers to be maintained, stored and updated periodically.

Taxmann’s Views – The electronic platform helps in reducing the compliance costs to the company associated with physical maintenance of statutory registers, make the process more secure and transparent and avoid duplication of efforts by the company. At the same time, shareholders can easily share & view the information stored in the registers.

1.7 Proposal to prescribe specific provisions w.r.t extinguishment of ‘Treasury Shares’ [Amendment to Section 232]

Extant Norms – Under the extant norms holding of the treasury shares is prohibited. The provisions of sec 232, 233 states that any treasury shares arising as a result of a compromise or arrangement shall be cancelled and extinguished.

Treasury shares refer to the own shares of a company and are categorised as assets of the company. Such treasury stock may arise on an amalgamation or merger where the transferee company receives its own shares pursuant to merger of transferor- company with itself.

Committee’s Proposal – The committee proposed that the companies act provides that treasury shares arising as a result of a compromise or arrangement shall be cancelled and extinguished. But no provision for cancelling or extinguishing treasury stock that existed before the notification of the provisions of the Act has been provided in the Act. The committee recommends the norms w.r.t holding and extinguishment of the treasury shares.

Taxmann’s Views – As under the extant norms no specific provisions are prescribed w.r.t the holding and extinguishment of the treasury shares. The Enactment of specific provisions will provide more clarity.

1.8 Twin test approval requirement for merger [Amendment to section 233]

 Existing norms – The existing norms required that the scheme of the merger has to be approved by the persons holding 90% of total share capital of the company.

Committee’s proposal – The committee observed that this threshold is particularly difficult to achieve in listed companies. Therefore, the consent threshold significantly delays the approval process, defeating the section’s essence that seeks to expedite mergers.   Therefore, the committee recommended that a modified twin test requiring approval by:

• • majority of persons present and voting at the meeting accounting for 75% in value, of the shareholding of persons present and voting; and
  • representing more than 50% in value, of the total number of shares of the company.

The Committee also expressed that Section 233 should be amended to also permit fast track mergers between a holding company and its subsidiary company or companies if such companies are not listed and meet such other conditions as may be prescribed.

Taxmann’s Views – The purpose of the amendment as given by the CLC is to fasten the process of the merger. However, the proposed amendment requires the approval of majority of persons voting and accounting for 75% in value of shareholding, present and voting and approval by members representing more than 50% in value of the total shares of the company.   This, will lead to more burden on the company, while also delaying the approval process.

1.9 Tenure of Independent director shall start from the date of his appointment as an additional director [Amendments in Section 149]

Extant Norms – As per the provisions of section 149(10), an independent director can hold an office for a maximum term of  five consecutive years and is eligible for re-appointment for a further period of 5 years subject to the approval of the shareholders of the company. The appointment of ID must be disclosed in the Board’s report.

Section 149(11) states that an ID shall not be permitted to hold office beyond two consecutive terms of five years and shall be eligible for re-appointment only after the expiry of the requisite cooling-off period of three years.

Committee’s clarification – The committee observed that it is an industry practice the Board of directors appoints a person as an additional director in the capacity of ID, subject to approval by shareholders in the next meeting.

Committee clarified that the period of 5 years commences from the date the Board initially appoints the ID as an additional director. Therefore, the period during which the ID functioned as an additional director before regularisation cannot be excluded while computing the total tenure of the ID.

Taxmann’s Views – This is a welcomed clarification provided by the CLC as a person is appointed as the additional director in the capacity of ID. Therefore the time he served as an additional director should be included in the total period of 5 years.

2. Proposals relating to digitization and improving the ease of doing business

2.1 Central Government to be empowered to prescribe rules for classes of companies mandatorily required to serve certain documents in electronic mode only [Amendment to Section 20]

Extant norms – Section 20 of the act prescribes the mode by which documents can be served on a company, its officers, or the Registrar of Companies (RoC).

Committee’s proposal – The Committee proposed to introduce a specific provision enabling the Central Government to prescribe rules for such classes or classes of companies that are mandatorily required to serve such documents as may be prescribed to all their members in electronic mode only.

The committee further clarified that where a member has requested the company to serve physical documents also, the company shall also serve such documents in physical mode.

Taxmann’s Views – This is a welcome step as it will lead to the ease of doing business, we all have realised the importance of the electronic mode during the pandemic time. Further, electronic communication is the most cost-effective and convenient mode for dispatching and delivering documents. Furthermore, the physical mode of sending the documents also suffers from the fear of being misplaced which is not there in the e-mode.

2.2 Companies to be allowed to determine the fee for delivery of the document in any general meeting [Amendment to Section 20]

Extant Norms – Proviso of section 20 provides that:

Provided that a member may request for delivery of any document through a particular mode, for which he shall pay such fees as may be determined by the company in its annual general meeting.

Committee’s proposal – The Committee recommended that the proviso to Section 20(2) should be amended to allow companies to stipulate such fees in any general meeting in place of deciding the same in the Annual General Meeting (AGM).

Taxmann’s Views – This was the much-needed clarity as deciding the fee only in AGM is not feasible as AGM are convened only once a year. If this proposal is accepted companies will be at the liberty to decide the fee in any general meeting.

2.3 Removal of the Explanation under Section 398 (1) for facilitating E-Enforcement and E-Adjudication [Amendment to section 398]

Extant norms – Section 398 of the Companies Act, 2013 empower the Central Government to prescribe rules regarding the filing of applications, documents, inspection, etc., in electronic form.

Whereas the explanation appended to section 398 (1) provides that the rules made under this section shall not relate to the imposition of fines or other pecuniary penalties or demand or payment of fees or contravention of any of the provisions of this Act or punishment thereof.

Committee’s proposal – The Committee has proposed to remove the Explanation under Section 398 of the Companies Act, 2013 to enable the Central Government to make Rules, for conducting enforcement-related actions in a transparent and non-discretionary manner with a proper trail through an electronic platform, under the Act.

Taxmann’s Views – This is a welcome move as we all have realised the importance of the e-adjudication during the pandemic, the explanation was acting as a roadblock in carrying out certain adjudication-related activities in electronic mode. Removing the explanation will strengthen the e-enforcement and e- adjudication process and will lead to the timely and speedy disposal of the cases.

2.4 Affidavits to be replaced with the self-declaration at certain places

Extant norms – The Companies Act, 2013 encompasses several provisions that lay down a requirement to furnish an affidavit before the Registrar of Companies (“RoC”), Regional Director (“RD”), the National Company Law Tribunal (“NCLT”) and the National Company Law Appellate Tribunal (“NCLAT”).

Committee’s proposal– The committee recommends replacing affidavits with the self-declaration except in those provisions that involve filing an affidavit in a judicial or quasi-judicial proceeding before the NCLT, the NCLAT, or the RD.

Taxmann’s Views – The Modi government always emphasized developing a trust-based system by way of self-declaration in place of affidavits to promote the ease of doing business in India. The proposal of replacing the affidavits with self-declaration will ease the declaratory process and lead to a trust-based system.

2.5 Change in the quorum requirement for general meeting of the producer company [Amendment to Section Sections 378Y and 378ZA]

Existing norms – Sections 378Y and 378ZA (9) require at least 1/4^th of the total members of a producer company to be the quorum in the general meeting.

Committee’s proposal – The Committee proposed that this provision should be modified to allow a Producer Company to have a quorum of the lower of the following:

• • 1/4^th of the total members or
  • 100 members

Taxmann’s Views – The proposed change will promote to the ease of doing business and will remove the hardship faced by the producer companies caused due to the more stringent requirements.

3. Proposals to amend norms relating to Audits, Auditors NFRA

3.1 Mandatory Cooling-off period before auditors become directors [Amendment to Section 164(1)] 

Extant norms – Companies Act, 2013 contains no provision prohibiting an auditor from becoming a non-executive director (“NED”), managing director (“MD”), or whole-time director (“WTD”) in the same company or group of companies.

Committee’s proposal – The committee recommended the insertion of a mandatory one-year cooling-off period, from the date of cessation of office, only after which an auditor of a company may be permitted to hold the position of a NED, MD, WTD in the same company or its holding company, subsidiary company(ies), fellow subsidiary(ies) or associate company(ies).

Taxmann’s Views – The proposed change will sustain the independence of the auditors who wish to be appointed a director in the same Company. As the directorship is an important position in any organisation. Therefore, the person holding it should be free from all prejudice. The mandatory cooling-off period will help the ceasing auditor to serve the role of the director with utmost professional integrity.

3.2 To prescribe a separate list prohibiting non-audit services [Amendments in Section 144 ]

Extant norms – The provisions of section 144 provides an exhaustive list of prohibited non-audit services. At the same time, it also authorises the CG in section 144(i) to prescribe any other kind of services in this list.

Committee’s Proposal – The committee has recommended to enable CG to prescribe a separate list of prohibitions on availing non-audit services or total prohibition on availing non-audit services for such class of companies where public interest is inherent, may be provided. Further, committee took note of class of companies for which NFRA has the jurisdiction under section 132 of the Companies Act, 2013 read with NFRA Rules, 2018.

Taxmann’s Views – The separate list is initiated to reduce the risk of self–review by the auditors and potentials for conflict of interest. At the same time, where public interest is inherent, companies can only avail audit related services from their auditors.

3.3 Specific assurance from resigning auditor [Amendment in Section 140(2)]

Extant norms – The provisions of section 140(2) of the Companies Act, 2013 states that the auditor who has resigned from the company is required to file a statement indicating the ‘reasons for resignation’ and any ‘other facts relevant with regard to resignation’.

Committee’s Proposal – Now, the committee is of opinion that provisions with regard to resignation of auditor followed in the U.K. Companies Act, 2006 can be adopted in the same manner. As per U.K. Companies Act, 2006, an auditor must clearly state the matters which he/she considers necessary to be brought to the attention of members or creditors of the company. In case, an auditor fails, he/she shall be liable to fine.

An auditor is under an explicit obligation to make detailed disclosures before resignation in the statement and requires to specifically state whether the resignation is due to non-cooperation of Auditee Company, fraud, severe non-compliance or diversion of funds.

Taxmann’s Views – To assure the shareholders that auditor has taken an independent decision to resign and not under the influence of the company.

3.4 Mandatory joint audit for certain companies [Amendment to Section 139(3)]

Extant norms – The provisions of section 139(3) of the Companies Act, 2013 permits an audit to be conducted by more than one auditor. Although, the Companies Act, 2013 does not mandate the application of joint audit by the companies.

Committee’s Proposal – The committee has proposed to mandate joint audits for such class or class of companies as CG may prescribe with recognition of liability of individual auditors.

Taxmann’s Views – Joint audit enables the companies to share the responsibility, get benefit of technical expertise of more than one firm, thus resulting in improved quality of service.

3.5 Auditor of holding company to comment on true and fair view of each subsidiary company [Amendment to Section 143(1)]

Extant norms – As per section 143(1) proviso, the auditor of a company which is a holding company shall have the right of access to the records of all its subsidiaries and associate companies in so far as it relates to the consolidation of its financial statements with that of its subsidiaries and associate companies.” Thus, there is no statutory obligation or liability on the auditor of the holding company to verify and confirm on the fairness and truthfulness of accounts of subsidiary companies.

Committee’s Proposal – The committee proposes to make suitable changes so as to ensure that the auditor of holding company has been given assurance about the fairness of audit of each subsidiary company by respective auditors. In addition, the auditor of the holding company may be empower to independently verify the accounts or part of accounts of any subsidiary company.

Taxmann’s Views – To give assurance and power to the holding company to verify & confirm on the fairness of accounts of subsidiary company on independent basis.

3.6 Standardized format for qualification made by auditor

Extant norms – As per the provisions of section 134(3)(f) of the Companies Act, 2013, directors of the company are required to provide information and explanations on every reservation, qualification, adverse remark or disclaimer made in the auditor’s report and secretarial audit report on annual financial statements.

Section 143(3) (f) and section 143(3) (h) of the companies act, 2013 puts obligation on the auditor to provide observations and comments on financial statements of company and to provide qualifications, reservations or any adverse remarks in relation to the maintenance of accounts of the company.

Committee’s Proposal – Now, the committee has proposed to insert an enabling provision under the Companies Act, 2013 so as to allow the Central Government to introduce a format for auditors to enable them to state the impact of every qualification or adverse remarks made on the financial statements of the company for circulation to the Board before circulating to the shareholders of company.

Taxmann’s Views – The standardised format is made to sufficiently elaborate on the impact of qualification, adverse remark made by auditor on economic health or functioning of the company in order to ensure better clarity, disclosures.

3.7 Proposed Amendments relating to NFRA

(a) To Empower NFRA to take appropriate action against ‘members and firms’ in matters of professional or other misconduct [Amendment in Section 132(4)]

Extant norms – As per the provisions of section 132, NFRA does not have the powers to take appropriate action against a member or firm in matters of professional or other misconduct as specified in the first and second schedule of the Chartered Accountants Act, 1949.

NFRA has only the power to investigate misconduct by any member or a firm of Chartered Accountants registered under CA Act, 1949. Where any misconduct is proved, NFRA has the power either to impose a penalty or debar a member or firm from being appointed as an auditor of the company.

Committee’s Proposal – Now, the committee has proposed to empower NFRA to take appropriate action against member or firm in respect of professional or other misconduct. Further, the committee has also proposed to make specific provisions to enable NFRA to take action in case its orders are neither complied with nor any appeal is made against such order to NCLAT.

Taxmann’s Views – This amendment aims to ensure that professionals renders audit and accounting services to the companies with accuracy & efficiently. Now NFRA would get more power to take action against the members or firm who are indulged in the professional misconduct.

(b) Constitution of NFRA Fund [Amendments in Section 132]

Extant norms – At present, NFRA receives its funds entirely from the CG. These funds are used for the (a) salaries and allowances etc., for Chairperson, Members and other officers and employees of NFRA; and (b) other expenses of NFRA connected with functions and purposes of NFRA.

Committee’s Proposal – Now, the committee recommends to constitute NFRA fund so as to enable the NFRA to make regulations and grant supervisory powers to the chairperson of NFRA.

Taxmann’s Views – NFRA fund is basically constituted to grant the degree of financial autonomy to NFRA so as to enable them to manage their funds on its own.

(c) Enable NFRA to make regulations & grant powers of superintendence and direction to NFRA chairman

Extant norms – Under the extant norms NFRA has not been empowered to make any regulations on its own.

Committee’s Proposal – The committee recommends to enable NFRA to make regulations for specific matters – a) form and manner of filing information with NFRA, b) place, timing, and procedure to be followed for NFRA meetings. Further, the committee also recommends to provide the chairman of NFRA, the powers of general superintendence and direction within NFRA.

Taxmann’s Views – The amendment is made in order to enable NFRA to make its own regulations and to grant supervisory powers to the NFRA Chairperson.

4. Proposals relating to KMPs and Independent Directors

4.1 Empower the Key Managerial Personnel (KMPs) to file their resignation to RoC on their own [Amendment to Section 168]

Extant norms – Currently Companies Act, 2013 contains no provision whereby KMPs (other than director) can file their resignation on its own to RoC.

Committee’s proposal – The committee deliberated that the directors have been empowered to directly file their resignation with the RoC under the act since there is no requirement on the company’s part to formally accept a director’s resignation for it to become effective.

The committee felt that similar provisions should be there for mandating the filing of resignation tendered by certain KMPs, other than directors, who are entrusted with the company’s day-to-day functioning, the Committee felt that the resignation of such a KMP has a significant impact on the company and must therefore be suitably recorded with the RoC.

The committee suggested that the initial obligation to notify the RoC of resignations tendered by certain KMPs should be placed on company in cases where the company fails to intimate the RoC within 30 days, the KMPs, whose appointment intimation was filed with the ROC, should be allowed to file their resignations directly with the RoC.

Taxmann’s Views – The proposal is made to empower the KMPs to file their resignation on their own, because sometimes a company advertently reject the resignation of a KMP which cause a lot of hardship on them and they stuck in the company unwillingly. The proposed change will certainly help those KMPs to smoothly exit companies. However, like every coin has 2 sides this power could also be misused by the KMPs. In case a company has genuine reasons to reject the resignation, the KMPs can file their resignation on their own and can misuse this power.

4.2 Mandatory Cooling-off period before a person who ceased to be an Independent Director become MD,WTD or manager [Amendment to Section 196(3)]

Extant norms – Companies Act currently provides no restriction w.r.t appointment of the ID as a managerial person, i.e., an MD, WTD or manager, in the same company or group of companies after ceasing to be an ID of such company.

However, Regulation 25(11) of SEBI (Listing Obligations and Disclosure Requirements), 2015 provides that no ID who resigns from a listed entity shall be appointed as an executive director or WTD on the board of the company, its holding, subsidiary, associate company or any other company belonging to its promoter group before the lapse of a period of 1 from the date of resignation as an ID.

Committee’s proposals – The Committee recommended that similar provisions could be inserted under the Companies Act, 2013 to prohibit an ID from becoming a managerial person for a period of 1 year from the date of his cessation as ID.

Taxmann’s Views – The proposed amendment will align the provisions of the Companies Act, 2013 with that of Regulation 25 of SEBI (Listing Obligations and Disclosure Requirements), 2015.  The mandatory cooling period will help a company to ensure there is no compromise in the independence of the director during his term as an ID.

4.3 Engagement of Independent Directors (IDs) as a legal/ consulting firm during cooling-off period [Amendment to Section 149]

Extant norms – Companies act restricts a person from being appointed as an ID if he or any of his relatives are or have been an employee, partner or proprietor of any legal or consulting firm, that has or had any transaction with the company or group of companies in the immediately preceding financial year, amounting to 10% or more of the gross turnover of such firm.

Further the companies act provides that during the cooling period the ID of a company shall not be appointed in or associated with the company in any other capacity directly or indirectly.

The committee noticed that there is a view/practice that upon ceasing to hold office after two consecutive terms, the person would not be allowed to be associated with the company in any capacity thereby resulting in a blanket prohibition of functioning as a legal or consulting firm regardless of the threshold of ten per cent.

Committee’s proposal –  

• • The committee proposed that the section should be amended to allow the relevant legal or consulting firm referred above to continue to render its services as per thresholds ( i.e. 10% of the gross turnover)
  • The threshold limit of 10% to be reduced to the 5%

Taxmann’s Views – The proposed amendment will provide relaxation to the firm acting as a legal/ consulting firm (having one of the IDs as an employee/ proprietor/ partner).

As per the proposed amendment the firm can continue providing such services to the company and its group companies, even during the cooling-off period of the ID subject to the pecuniary interest being within the specified limits.

5. Proposals aiming to strengthen some of the extant provisions

5.1 Prohibition on the conversion of co-operative societies into a company to bring it in tune with the RBI’s policy [Amendment to section 366]

Extant norms – Section 366 allows co-operative societies to convert to a company without fresh incorporation. Whereas RBI’s scheme permits the transition of a Primary (Urban) Co-operative Banks (UCB) into a Small Finance Banks (SFB) only by incorporating a fresh company under the Companies Act, 2013  since the license of the UCB is not directly converted into that of an SFB. Instead, the banking license is transferred after RBI’s approval to the SFB which is a newly incorporated company.

Committee’s proposal – Based upon the above the committee recommends that it would be expedient to amend Section 366 and expressly prohibit the conversion of co-operative societies into a company.

Taxmann’s Views – The existing norms are not in line with the RBI’s policy, the proposed norms will bring them in tune with the RBI’s policy which will lead to more consistent norms.

5.2 Stringent regulation to be proposed for Nidhi Companies [Amendment to section 406]

Existing norms – The Companies Act does not define a Nidhi Company whereas Section 406 empowers the Central Government to designate certain companies as “Nidhis” and modify the applicability of the provisions of the Companies Act, 2013 on such companies.

Committee’s proposal – The Committee highlighted that during the administration of Section 406, the MCA noticed that Nidhis have committed violations of numerous provisions of CA-13 and the applicable Rules. The Committee also noted that the growth of Nidhis has been unbalanced across the country and that some states have an extraordinarily high number of Nidhis, thus raising doubts regarding the intention of promoters in setting up such Nidhis. The Committee, therefore, recommended that Section 406 should be amended to incorporate more stringent regulation of Nidhi.

Taxmann’s Views – To date, there are no proper regulatory provisions are in place for the Nidhi companies and considering an increase in the number of new Nidhi companies being incorporated. There is an urgent need to revamp the existing provisions and to bring the Nidhi companies under the purview of the stricter provisions.

5.3 Trust not to be entered on register [Insertion of new provision in Sec 89(10)]

Extant norms – The existing norms doesn’t contain any provisions regarding the notice of any trust in the register of members or debenture holders. However, Para 4 of Table F – Schedule I of Companies Act, 2013 prohibits a company from recognizing a person holding any shares upon any trust.

Committee’s Proposal – The committee has proposed to insert the provision that prohibits the companies from entering notice of any trust, express, implied or constructive in the register of members or debenture holders.

Taxmann’s Views – This restriction is inserted in order to relieve the company from taking note of third party rights w.r.t the shares registered in the name of members.

6. Proposals aiming to remove the ambiguity in provisions

6.1 Clarification on Inclusion of free reserves in calculation of buy-back [Proviso to Sec 68(2)(c)]

Extant norms – The section does not clearly specify as to whether the  free reserves for to be included for the purpose of calculation of threshold limit under buy-back.

Committee’s Proposal – The committee has proposed to include free reserves in the calculation of buy-back even though the term has not been specifically stated in the proviso. Further, the committee has proposed that only those shares will be allowed to buy-back on which the shareholders have exercised the stock option.

Taxmann’s Views – The clarification helps to remove ambiguity from the existing provisions and give much better clarity with respect to inclusion of free reserves in calculation of buy-back.

6.2 Inclusion of ‘transfer of unpaid/unclaimed dividend in respect of securities’ to IEPF [Amendments to Section 124(5)]

Extant norms – As per section 124(5) of the Companies Act, 2013, any money transferred to Unpaid Dividend Account of a company which remains unpaid or unclaimed for a period of seven years from the date of such transfer, is required to be transferred by the company along with interest accrued to the Investor and Education Protection Fund (IEPF).

Further, the provisions of section 124 (6) of the Act, 2013 states, “All shares in respect of which dividend has not been paid or claimed for seven consecutive years or more shall also be transferred by the company in the name of Investor Education and Protection Fund along with a statement containing such details as may be prescribed”.

Thus, the extant norms does not cover the unpaid/unclaimed dividend in respect of the securities.

Committee’s Proposal –The Committee noted that presently, at the time of transfer of shares to IEPF after seven years, the dividend of only the first year is being transferred along with the shares. The unclaimed dividend for the balance of six years continues to remain with the company and same gets transferred to IEPF over the next six years. Thus, the committee has proposed to mandate the transfer of all pending or unclaimed/unpaid dividend in respect of securities to the IEPF fund along with the unclaimed shares without holding the same for six years.

Taxmann’s Views – This amendment clarifies the existing provision in such a manner that all pending or unclaimed dividend regarding securities irrespective of the year pertaining to being transferred to IEPF should be transferred to Unpaid Dividend account.

6.3 Inclusion of ‘Redemption amount towards unpaid/unclaimed preference shares’ in list of utilization of IEPF [Amendments to Section 125(3)(a)]

Extant norms – Section 125(3) (a) of the Companies Act, 2013 provide for the purposes for which the fund must be utilized. The fund must be utilized for the refund in respect of unclaimed dividends, matured deposits, matured debentures, the application money due for refund and interest thereon.

Committee’s Proposal – Now, the committee has proposed to include ‘redemption amount towards unpaid or unclaimed preference shares’ in the list of purposes for which the fund must be utilized.

Taxmann’s Views – Amendment is done in order to make the provision in line with the purpose of fund as well as sources of money transferred to fund under section 125(2) (m). Section 125(2) (m) states there shall be credited to the fund “redemption amount of preference shares remaining unpaid or unclaimed for seven or more years”.

6.4 Amount unclaimed on shares bought back/ cancelled credited to IEPF [Amendment in Section 125(2)]

Extant norms – The provisions of section 125(2) does not provide for unclaimed amount on shares bought back or cancelled to be credited to IEPF.

Committee’s Proposal – The committee has proposed to include the money that remains unclaimed for seven years or more in respect of shares/securities that have either bought back or cancelled requires to be credited to IEPF under section 125(2) of the Companies Act, 2013.

Taxmann’s Views – Amendment is made to cover the provisions related to buy-back under section 68 of the Companies Act, 2013.

6.5 Setting up Risk Management Committee

Extant norms – The Companies Act, 2013 does not contain any provisions in regard to risk management committee. However, under Part D of Schedule II of SEBI (LODR) Regulations, 2015, risk management committee have been entrusted with formulating framework for identifying risks faced by entity, suggest measures for risk mitigation, overseeing implementation of scheme, evaluating adequacy of risk management systems.

Committee’s Proposal – The committee has noted that risk management allows every company to function efficiently and facilitates the development of corporations, particularly in COVID-19 pandemic. Therefore, the committee has recommended to include the new provisions in the Companies Act, 2013, for setting up of a risk management committee, as a separate committee on the board, for such class of companies, as CG may prescribe.

Taxmann’s Views – The risk management committee assist the Board in fulfilling its corporate governance responsibilities with regard to risk identification, risk evaluation, risk assessment and risk control.

6.6 Other drafting and clarificatory changes to remove the inconsistency in various provisions of the Act.

The committee noticed that there are certain inconsistencies in the provisions of the Companies Act, 2013 which need to be addressed. The committee suggested the following amendments to remove the inconsistency:

• • Amendment in Section 24(2) to omit the reference to Section 458:
  • Amendment in Section 136 (1) to provide different schemes for sending of copies of relevant documents at shorter notice for AGM and other general meetings
  • Amendment to Section 164(1)(g); Penalty in relation to Section 188 (i.e. related party transaction) to be included as a ground for disqualification
  • Amendment to Section 187; inclusion of joint venture under the scope of section 187, allow Wholly Owned Subsidiary (WOS) to be the only member of the subsidiary.