Key Highlights of the Company Law Committee Report (2022) | CLC-2022

The report of the Company Law Committee (2022) (CLC-2022) recommends various changes to the Companies Act, 2013. The proposed changes include recognising new concepts, fastening the corporate processes, improving compliance requirements, and removing ambiguities from existing provisions. The CLC-2022 also proposes changes to the Limited Liability Act, 2008 to enable producer organisations to incorporate under the Limited Liability Partnership Act, 2008. The Committee sought to insert enabling provisions under CA-13 for expressly recognizing various practices such as Stock Appreciation Rights (“SAR”), Restricted Stock Units (“RSU”), Special Purpose Acquisition Companies, etc.

Further, the Committee also deliberated upon several proposals striving for structural changes to the framework under CA-13 and streamlining the process for audits, mergers, and restoration of struck-off companies, amongst others.

All these changes are 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. The recommendations of the CLC committee for Companies Act, 2013 are summarised hereunder:

Table of Contents

1. Amendment to Section 2(41); Certain companies to be allowed to realign their financial year in line with India where they cease to be associated with a foreign entity.
2. Amendment to Section 20; Central Government to be empowered to prescribe rules for classes of companies mandatorily required to serve certain documents in electronic mode only.
3. Amendment to the chapter- IV; Proposal to recognize the Issuance and holding of fractional shares
4. Amendment to section 62 (1); Proposal to recognise issuance of Restricted Stock Units (RSUs) and Stock Appreciation Rights (SARs) to employees
5. Amendment to section 53; Distressed companies to be allowed to issue shares at a discount.
6. Affidavits to be replaced with the self-declaration to ease of doing business
7. Amendment to section 366; Prohibition on the conversion of co-operative societies into a company to bring it in tune with the RBI’s policy.
8. Amendment to section 398; Removal of the Explanation under Section 398 (1) for facilitating E-Enforcement and E-Adjudication
9. Amendment to section 406; Stringent regulation to be proposed for Nidhi Companies.
10. Drafting and Clarificatory Changes to remove the inconsistency in various provisions of the Act.
11. Amendment to Section 248(); include publishing of notice of striking-off by the RoC.
12. Amendment to Section 446B; lesser penalties for certain companies.
13. Amendment to Section Sections 378Y and 378ZA; change in the quorum requirement for general meeting of the producer company.
14. Amendment to Section 164(1); Mandatory Cooling-off period before auditors become directors
15. Amendment to Section 196(3); Mandatory Cooling-off period before a person who ceased to be an Independent Director become MD,WTD or manager.
16. Amendment to Section 168; Empower the Key Managerial Personnel (KMPs) to file their resignation to RoC on their own.
17. Revision of provision on Disqualification and Vacation of Director’s office
18. Amendment to Section 252; Easing of restoration of struck off companies
19. Insertion of a new chapter for recognizing special purpose acquisition companies (SPACs)
20. Amendments in Companies (Incorporation) Rules, 2014
21. Holding of AGM/EGM in physical/virtual/hybrid mode
22. Maintaining Statutory Registers through electronic platform
23. Amendments in Section 124(5) – Inclusion of unpaid/unclaimed dividend in respect of securities to be transferred by company
24. Amendments in Section 125(3)(a) – Inclusion in the list of purpose for which the IEPF may be utilized
25. Insertion of new sub-section 125(12) – Delegation of powers by authority
26. Amendment in Section 125(2) –Amount credited to IEPF
27. Amendments in Section 132 – NFRA
28. Amendments in Section 144 – Enable CG to prescribe a separate list prohibiting non-audit services
29. Amendment in Section 140(2) – Resignation of auditor
30. Amendment in Section 139(3) – Mandatory joint audit for certain companies
31. Amendment in Section 143(1) – Auditor of holding company to comment on true and fair view of each subsidiary company
32. Inclusion of the new concept ‘Forensic Audit’ under Companies Act, 2013
33. Standardized format for qualification made by auditor
34. Setting up Risk Management Committee
35. Amendments in Section 149 – Clarification on term of Independent director(ID)
36. Clarifications relating to provisions of amalgamation & mergers
37. Key Recommendation of the CLC committee for LLP Act, 2008

1. Amendment to Section 2(41); Certain companies to be allowed to realign their financial year in line with India where they cease to be associated with a foreign entity.

 The first proviso to section 2(41) of the Companies Act, 2013 provides that a company which is the holding company or a subsidiary or associate of a company incorporated outside India and is required to follow a different Financial year (FY) for consolidation of its accounts outside India, may be allowed to follow such different FY upon making an application to the Central Government.

The Committee observed that if such a company, or body corporate, ceases to be a holding, subsidiary or associate company of the foreign entity, the Companies Act, 2013 contains no provision allowing such company to revert to the FY required to be followed under the provisions of the act. This hinders the company’s or body corporate’s ability to accurately measure its revenue and earnings in that FY, as per Indian laws.

 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. 

2. Amendment to Section 20; Central Government to be empowered to prescribe rules for classes of companies mandatorily required to serve certain documents in electronic mode only.

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).

The Committee proposed to introduce a specific provision enabling the Central Government to prescribe rules for such class 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.

Further, the amendments are proposed to be made in the proviso of section 20. 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.

The Committee felt that it may be onerous for companies to decide such fees only in an AGM since these meetings are convened only once every year.

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).

3. Amendment to the chapter- IV; Proposal to recognize the Issuance and holding of fractional shares

A fractional share refers to a portion of a share less than one share unit. Fractional shares may arise as a consequence of corporate actions like mergers, issue of bonuses, or rights issues. Companies Act, 2013 prohibits the holding of fractional shares.

The committee observed that the International Financial Services Centres Authority (“IFSCA”) has recently permitted trading of fractional shares under its regulatory framework regime in India.

Similar global practices that allow holding and trading fractional shares may be observed in Canada, Japan, and the United States (“USA”).

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.

4. Amendment to section 62 (1); Proposal to recognise issuance of Restricted Stock Units (RSUs) and Stock Appreciation Rights (SARs) to employees

 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.

RSUs do not give the employee an option to purchase or subscribe to the share directly, they are a scheme under which the employee will be entitled to the shares at the end of the vesting period, so long as the restrictions concerning the duration of employment and performance parameters are met.

SARs are a form of incentive or deferred compensation tied to the employing company’s stock performance. They give employees the right to the monetary equivalent of the appreciation in the value of a specified number of shares over a specified period. The settlement of the SARs may also be made by way of shares of the company.

Presently, SARs have been defined under the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 but there are no regulations in place for RSUs. The Committee recommended that RSUs and SARs should be recognised under the companies act.

The committee further proposed that if these schemes require the issue of further securities by the company, their issuance must be allowed only after 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.

5. Amendment to section 53; Distressed companies to be allowed to issue shares at a discount.

 Section 53 prohibits a company to issue shares at a discount. The Committee observed that it might cause hardship to distressed companies where the market value of the shares becomes less than the nominal value, thereby leading to difficulties in raising fresh share capital for the revival of the company.

The committee recommended that distressed companies should be allowed to issue shares at a discount to the Central Government or State Government or to such class or classes of persons as may be prescribed.

“Distressed Companies” 

The committee further clarified that for this purpose, distressed companies may be categorised as such class or classes of companies that have cash losses (other than those arising out of depreciation or revaluation) for previous 3 consecutive years or more and fulfill such terms and conditions and issue shares at a discount in such manner as may be prescribed by the Central Government.

6. Affidavits to be replaced with the self-declaration to ease of doing business

 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”).

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.

The committee emphasises that self-declaration serves the same purpose as an affidavit without the formality of printing the declaration on a stamp paper and attestation on oath by a magistrate or public notary. Furnishing a false declaration attracts the same punishment under Section 448 of CA-13. Further, the punishment for giving false evidence on affidavits is the same as the punishment for issuing or signing a false certificate or declaration.

The committee recommends the replacement of affidavits with declarations in the following 6 cases:

• • Section 68(6); to permit a company to file a self-declaration in place of an affidavit when purchasing its own shares.
  • Section 374(c); to permit a company to file a self-declaration in place of an affidavit when seeking registration under chapter XXI part I.
  • Rule 7(4)(i), Companies (Incorporation) Rules, 2014; to permit the company to file a declaration in place of an affidavit when the company apply for conversion into a One Person Company (OPC).
  • Rule 7(4)(i), Companies (Incorporation) Rules, 2014; to permit section 8 company to file declaration in place of affidavit when section 8 company apply for the name including the phrase ‘Electoral Trust’.
  • Rule 10(3)(b), Companies (Registration of Foreign Companies) Rules, 2014; ; to permit foreign company to file a declaration in place of affidavit where documents are not submitted to the RoC in English and the translation is done in India.
  • Rule 4(3)(iii), The Companies (Removal of Names of Companies from the Register of Companies) Rules, 2016; to permit the companies to file a declaration in place of an affidavit when a company applies for the strike off.

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

Section 2(11) of the Companies Act, 2013 expressly excludes a co-operative society registered under any law relating to co-operative societies from the definition of a body corporate.

However, Section 366(1) states that any partnership firm, limited liability partnership, co-operative society, society or other business entity can apply for registration under the Companies Act, 2013.

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.

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 to bring it in tune with the RBI’s policy.

8. Amendment to section 398; Removal of the Explanation under Section 398 (1) for facilitating E-Enforcement and E-Adjudication

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 therefor.

The explanation acts as a roadblock in carrying out certain adjudication related activities in electronic mode.

The Committee 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, this will strengthen the e-enforcement and e- adjudication process.

9. Amendment to section 406; Stringent regulation to be proposed for Nidhi Companies.

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 companies act, 2013 on such companies.

The committee highlighted that during the administration of Section 406 MCA noticed that Nidhis have committed violations of numerous provisions of CA-13 and the applicable Rules. It was brought to the Committee’s notice that the violations are repetitive and that many such companies have been incorporated after demonetisation. The Committee also noted that the growth of Nidhis has been unbalanced across the country and that some states have extraordinarily high number of Nidhis, thus raising doubts regarding the intention of promoters in setting up such Nidhis.

Considering the above problems, the Committee recommends that Section 406 should be amended to incorporate more stringent regulation of Nidhis.

The committee proposed the following amendments:

• • Central Government to be empowered to prescribe the criteria to be declared as Nidhi

The Central Government shall have the power to prescribe Rules pursuant to which only those companies that fulfil certain financial and non-financial criteria, as may be prescribed, shall become eligible to be declared as Nidhis.

• • Central Government to be empowered to prescribe the additional conditions/restrictions for Nidhis

The declaration notification, for each Nidhi, may also specify additional restrictions or conditions as may be considered necessary and reasonable by the Central Government, and in case of non-compliance by such Nidhi, the Central Government should have the power to withdraw or revoke the declaration;

• • Declaration granting the status of Nidhi shall be valid for a specified period

The declaration granting the status of Nidhi should be valid for a specified period (approximately 5 years). Upon the expiry of such period, Nidhis may apply for renewal of their status, and such renewal should be subject to the Nidhi’s compliance with the provisions of CA-13 and the Rules framed thereunder, and the conditions or restrictions, as the case may be, as specified in its declaration notification;

• • Central Government to be empowered to formulate the restructuring schemes for Nidhis.

The Central Government shall have the power to formulate schemes for restructuring (merger, amalgamation or takeover) of Nidhis which are either sick, financially weak or have been mis-managed. Additionally, Nidhis which are found to not be financially viable should be wound up through summary liquidation provisions;

• • Existing Nidhis to comply with the new requirements within a period of 2-3 Years.

Existing Nidhis should be mandated to comply with new requirements within a reasonable transitional period (approximately 2-3 years).

10. 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:

 Section 2(41) relates to the power of the SEBI to regulate the issue and transfer of securities. The section includes a reference to section 458 (1) whereby SEBI can delegate its power.

The relevant reference in Section 458 concerning delegation of powers to the SEBI was omitted in 2017[1] but no deletion was done in the provisions of section 24(2). The reference to the proviso of Section 458(1) in Section 24(2) is presently redundant and requires deletion.

• • 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

First Proviso of section 136 (1) deals with the sending of the copies of audited financial statements to members in a shorter time. No distinct provisions are provided for Annual General Meeting or other general meetings as has been provided under Section 100.

The committee suggested that distinguished provisions shall be provided for AGM and other general meeting.

• • 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

Section 164(1)(g) disqualifies a director who has been convicted of an offence dealing with related party transactions under Section 188 at any time during the last preceding five years.

Section 188 was decriminalised in 2020 and presently only attracts a penalty. As such, the Committee recommended the inclusion of such penalties attracted under Section 188 also as a ground for disqualification under Section 164(1)(g) of the Act.

• • 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.

Section 187 of the Companies Act, 2013 provides that a company’s investments shall be held in its own name.

Proviso to section 187 provides that a holding company may hold any shares in its subsidiary company in the name of any nominee or nominees of the company.

The committee proposed that such an exception may also be provided in the case of joint ventures.

Further, the committee also recommended that the requirement to meet the minimum membership conditions of 2 or 7 members for private and public companies, respectively, may be waived off.

Meaning thereby the WOS (whether public or private), and the holding company (whether public or private) should be allowed to be the only member.

The committee also clarified that the WOS should not be considered a ‘One Person Company’ just because it has only one member.

11. Amendment to Section 248(); include publishing of notice of striking-off by the RoC.

Section 248(6) relates to removing the name of a company from the register of companies, Upon striking off, the RoC must publish a notice in the Official Gazette. On publication of such a notice, the company shall stand dissolved.

Section 248(5) refers to a ‘notice’ and not an ‘order’. Consequently, the reference to Section 248(5) in Section 248(6) needs to be amended to suitably refer to such notice.

12. Amendment to Section 446B; lesser penalties for certain companies. 

As per the provisions of section 446B  if the penalty is payable for non-compliance of any of the provisions of this Act by a One Person Company, small company, start-up company or Producer Company, or by any of its officer in default, or any other person in respect of such company, then such company, its officer in default or any other person, as the case may be, shall be liable to a penalty which shall not be more than one-half of the penalty specified in such provisions subject to a maximum of two lakh rupees in case of a company and one lakh rupees in case of an officer who is in default or any other person, as the case may be.

The Committee felt that there is a need to remove the extant discretion of the adjudicator and stipulate that the penalty shall be equal to precisely one-half of that provided for other companies.

Therefore the committee recommends that for the words “which shall not be more than”, the word “of” should be substituted.

13. Amendment to Section Sections 378Y and 378ZA; change in the quorum requirement for general meeting of the producer company.

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.

During the Covid, MCA received various representations from the stakeholders to relax the quorum requirement of the producer companies.

Therefore, 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

14. Amendment to Section 164(1); Mandatory Cooling-off period before auditors become directors

Section 149(6)(e)(ii) prohibits a person from being appointed as an Independent director of a company if she or any of her relatives has been an employee, proprietor or partner of a firm of auditors or company secretaries or cost auditors in such company or group of companies, in any of the three financial years preceding the year in which employment is to take place.

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.

The committee opined that in order to serve their role with utmost professional integrity, auditors ought to be free from all economic, financial and other inducements that tie them to the company.

Considering this barrier 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).

The Committee further recommended that in case of an audit firm structured as a partnership/LLP, such a restriction would operate only concerning the partner that audited the company not against the all the partners.

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

Section 149(6)(e)(i) provides that a person shall not be appointed as an Independent Director (ID) of a company if such a person currently holds or used to hold the position of a KMP or an employee in the same company or group of companies during any of the three financial years immediately preceding the financial year in which employment is to take place.

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.

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.

Therefore, in the interest of greater transparency and accountability, the Committee recommended the insertion of a mandatory one-year cooling-off period, from the date of cessation of office, only after which an ID may be permitted to hold the position of an MD, WTD, or manager in the same company or its holding company, subsidiary company(ies), fellow subsidiary(ies) or associate company(ies).

16. Amendment to Section 168; Empower the Key Managerial Personnel (KMPs) to file their resignation to RoC on their own.

Section 168 of act provides provisions relating to the resignation of directors. Section 168(1) allows a director to resign from their office by providing notice to the company in writing.

Further, the directors have been empowered to directly file their resignation with the RoC 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.

17. Revision of provision on Disqualification and Vacation of Director’s office

The Committee recommended that the vacation of directorship under Section 167(1)(a) should be limited only to disqualifications triggered by reasons of personal incapacity under Section 164(1) and not those incurred under Section 164(2). However, the proposed amendment shall not apply retrospectively. As such, any vacation of directorship that has arisen under Section 164(2) shall not be affected by the proposed amendment.

As per extant norms, Section 164(1) covers cases where disqualification arises from personal incapacity such as unsoundness of mind, insolvency, conviction by a court, etc.

On the other hand, Section 164(2) deals with the disqualification of directors on account of lapses made by a company in filing its annual returns and financial statements or default in repayment of deposits or debentures

Section 167 provides for the grounds and circumstances under which the office of a director shall become vacant.

• • Modifying the six-month time period for new directors

A proviso was inserted in Section 164(2), through the CAA-17, to safeguard all directors freshly appointed after the default in such companies from similar disqualification

for a period of six months. By virtue of this proviso, a newly appointed director was granted a period of six months from the date of her appointment to make good the company’s default.

Now, the Committee recommended that the relaxation be extended to a period of two years, from the date of appointment, for new directors insofar as obligations under Section 164(2)(b) are concerned. If the defaults under Section 164(2)(b) are not satisfactorily remedied, the newly appointed directors would be liable for automatic disqualification upon the completion of 2 years.

• • Safeguarding rights of nominee directors

Based on representations received from SEBI, the Committee also recommended that a new proviso be inserted in Section 164(2) to the effect that the disqualification as referred to in clause (b) shall not apply to the nominee directors appointed pursuant to nomination by the debenture trustees registered with SEBI.

• • Applicability of Provision of Section 164 and 167 to LLPs

The Committee also recommended that since provisions of Section 164 and 167 are proposed to be extended to LLPs soon, through a notification under Section 67 of the LLP Act, 2008, the above changes may also be considered suitably for LLPs. 

18. Amendment to Section 252; Easing of restoration of struck off companies

• • Regional Directors to be empowered to pass order for restoration if applied within 3 yrs

The Committee noted that the NCLT, as constituted under Section 408 of CA-13, hears matters both under CA-13 and the IBC and is reported to be overburdened. Accordingly, it was recommended that in cases where aggrieved persons apply for restoration within three years under Section 252(1), the application should be filed before the RD, and the RD may pass an order of restoration of name upon her satisfaction. The Committee felt that this proposed manner of restoration of companies would ensure that the process is carried out in a seamless and time-bound manner and de-burden the NCLT of such routine matters.

• • Power of restoration to continue with NCLT if application is filed after 3 yrs but before 20 yrs

The Committee, however, additionally noted that where the application is filed after three years but before the expiry of twenty years, under Section 252(3), the power of restoration should continue to rest with the NCLT so that it can exercise adequate discretion and scrutiny before the name of the company is restored in the register of companies. This provision should continue without any change since the company has not come forward within a reasonable period for its restoration.

19. Insertion of a new chapter for recognizing special purpose acquisition companies (SPACs)

• • What is SPAC?

A Special Purpose Acquisition Companies (“SPAC”) is a type of company that does not have an operating business and has been formed with the specific objective of acquiring a target company. This concept allows a shell company to issue an Initial Public Offering (“IPO”) without any commercial activity. After listing, the SPAC merges with or acquires a company, i.e., the target, thereby allowing the target company to benefit from such listing without going through the formalities and rigours of an IPO.

• • Benefits of SPAC

Indirect listing of the target company through a SPAC offers many benefits. It allows a target company to get listed without undertaking the expensive and time-consuming process of an IPO. The Committee felt that this is a clear indicator of the desirability of Indian companies to list on overseas exchanges through the SPAC route. Such a route may be particularly profitable for Indian companies in cases where overseas investors possess a keener awareness of the company’s potential than their domestic counterparts.

• • Recognition of SPAC by IFSCA

The Committee also noted that IFSCA has already provided regulatory clarity on listing SPACs in International Financial Services Centres (“IFSCs”). The IFSCA (Issuance and Listing of Securities) Regulations, 2021, recognise the listing of SPACs in IFSCs and lay down a detailed set of regulations governing SPAC eligibility, offer timing, initial disclosures on the offer document, underwriting and other SPAC specific obligations.

• • Recommendation of the Committee

The Committee has recommended introducing an enabling provision to recognize SPACs under CA-13 and allow entrepreneurs to list a SPAC incorporated in India on domestic and global exchanges. The Committee further recommended that provisions on relaxing the requirement to carry out businesses before being struck off and providing exit options to the dissenting shareholders of a SPAC if they disagree with the choice of the target company identified must be laid down in CA-13. The Committee also opined that for a foreign listing of Indian incorporated SPACs to become a reality, the commencement of Section 23(3) and 23(4) of CA-13 is a necessary pre-condition.

20. Amendments in Companies (Incorporation) Rules, 2014

• • Rule 7(4)(i) of Companies (Incorporation) rules, 2014 – Replacing affidavit with self-declaration

As per extant norms, a private company applying for conversion into OPC must file an application in Form INC.6 with the Registrar. An application is required to be accompanied by an affidavit from the directors confirming that all members and creditors of the company have given their consent for conversion.

Now, the Committee has proposed to replace the requirement of furnishing affidavit with the filing of a declaration along with the application form for conversion of company into OPC.

• • Rule 8A(1)(j) of Companies (Incorporation) rules, 2014 – Replacing affidavit with self-declaration

As per extant norms, an application for name including the phrase ‘Electoral Trust’ can be allowed for registration of companies to be formed under Section 8 of Companies Act, 2013 in accordance with the Electoral Trusts Scheme, 2013 as notified by the CBDT. Further, an application is required to be accompanied by an affidavit to the effect that the name has been obtained only for the purpose of registration of companies under the said scheme.

The committee has proposed to replace the requirement of furnishing affidavit with the filing of a declaration. Now, an application is required to be accompanied by a declaration to the effect that the name has been obtained only for the purpose of registration of companies under the said scheme.

• • Amendment in Rule 10(3)(b) of Companies (Registration of Foreign Companies) rules, 2014 – Replacing affidavit with self-declaration

As per extant norms, a) foreign companies must file all the documents in English language and where the document is not in English language, a translation of the document is required to be filed with the Registrar and b) the translation done in India, is required to be authenticated by an affidavit of a competent person, having adequate knowledge of both the original language and English.

The committee has proposed to replace the requirement of furnishing affidavit with the declaration. Thus, the translation done in India can be authenticated by a self-declaration of a competent person.

• • Amendment in Rule 4(3)(iii) of Companies (Removal of Name of Companies from the Register of Companies) rules, 2016 – Replacing affidavit with self-declaration

Earlier, an application for removal of company’s name in form STK 2 is required to be accompanied by an affidavit in form STK 4 and is filed by every director of the company to the Registrar.

Now, the committee has proposed that an application requires to be accompanied by a declaration filed by every director of the company.

• • Clarification on Sec 68(2)(c) Proviso – inclusion of free reserves in calculation of buy-back

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.

Earlier, the extant norms does not clearly specify as to include free reserves in the total paid up equity capital or not.

• • Insertion of new provision in Sec 89(10) – Trust not to be entered on register

The committee has proposed to insert the provision that prohibits the companies from entering notice of any trust, express, implied or constructive on the register of members or debenture holders.

Earlier, no such provision was there in the section

21. Holding of AGM/EGM in physical/virtual/hybrid mode

The committee has proposed to empower the CG to prescribe the manner in which the companies can hold AGM/EGM physically, virtually and in hybrid mode. Further, the committee has also proposed that, where an EGM requires to be conducted entirely in an electronic mode, then the notice period for such meeting can be reduced to such a period as may be prescribed by CG.

The extant norms does not contain any specific provision for allowing conduct of meeting through video conferencing(VC) or other audio visual means(OAVM). However, due to COVID-19 pandemic and social distancing norms, MCA vide Circular no. 14/2020 dated 08-04-2020 and Circular no. 20/2020 dated 05-05-2020 had allowed the companies to hold AGM/EGM through Video Conferencing or Other Audio Visual Means

22. Maintaining Statutory Registers through electronic platform

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, it is clear that there is no mandatory requirement to maintain registers in electronic form.

Now, the committee has proposed to mandate certain class of companies to maintain their statutory registers on an electronic platform in such form and manner as prescribed by CG. Further, the committee has also proposed to set up an electronic platform by CG for the registers to be maintained, stored and updated periodically. Only CG will have access to the registers maintained in the ordinary course. However, CG may, in case of certain enforcement related functions, direct the company to share the information held on the statutory registers.

23. Amendments in Section 124(5) – Inclusion of unpaid/unclaimed dividend in respect of securities to be transferred by company

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

Now, the committee has proposed to cover any dividend which has not been paid or claimed in respect of securities requires to be transferred by the company to the IEPF fund.

24. Amendments in Section 125(3)(a) – Inclusion in the list of purpose for which the IEPF may be utilized

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.

Now, the committee proposes to include ‘redemption amount towards unpaid or unclaimed preference shares’ in the list of purposes for which the fund must be utilized.

25. Insertion of new sub-section 125(12) – Delegation of powers by authority

As per the provisions of section 125(5) of the Companies Act, 2013, the CG is required to constitute an authority for administration of the Fund consisting of a chairperson and seven other members and a chief executive officer, as the CG may appoint.

As per report of company law committee, the authority may, by general or special order in writing delegate the powers to any member, officer or any other person subject to such conditions as may be specified in the order.  The committee proposes to take note of the delegation powers in legislations such as IBC.

26. Amendment in Section 125(2) –Amount credited to IEPF

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.

Earlier, section 125(2) does not provide for such amount to be credited to IEPF.

27. Amendments in Section 132 – NFRA

• • Amendment in Section 132(4) –Empower NFRA to take appropriate action against ‘members and firms’

The provisions of Section 132 of the Companies Act, 2013, empowers CG to constitute the National Financial Reporting Authority (NFRA) for matters relating to accounting and auditing standards for companies. NFRA has 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.

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 CA Act, 1949.

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.

• • Amendments in Section 132 – Constitution of NFRA Fund

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.

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.

• • Amendments in Section 132 – Enable NFRA to make regulations & grant powers of superintendence and direction to NFRA chairman

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.

Earlier, there was no such regulations prescribed in the section.

28. Amendments in Section 144 – Enable CG to prescribe a separate list prohibiting non-audit services

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.

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.

The list of companies are as follows –

• • Companies whose securities are listed on any stock exchange in India or outside India
  • Unlisted public companies having paid-up capital of Rs. 500 cr or more, having annual turnover of Rs. 1000 cr or more, having in aggregate, outstanding loans, debentures and deposits of Rs. 500 cr or more as on the 31^st March of immediately preceding F.Y.
  • Insurance companies, banking companies, companies engaged in the generation or supply of electricity or body corporate incorporated in accordance with the section 1(4) of the Companies Act, 2013

29. Amendment in Section 140(2) – Resignation of auditor

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 in prescribed form within a period of 30 days to Company and Registrar from the date of resignation. The statement must indicate the ‘reasons for resignation’ and any ‘other facts relevant with regard to resignation’.

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.

Thus, as per committee, 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. However, if auditor fails to make disclosures in the resignation statement, then appropriate suitable action can be taken against such auditor.

30. Amendment in Section 139(3) – Mandatory joint audit for certain companies

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.

However, the committee has proposed to mandate joint audits for such class or class of companies as CG may prescribe. At the same time, the provisions concerning the extent of liability of individual auditors requires to be provided under section.

31. Amendment in Section 143(1) – Auditor of holding company to comment on true and fair view of each subsidiary company 

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.

Now, 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.

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

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.

“Fraud” in relation to affairs of a company or any body corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss”.

The committee recommends to include the concept of Forensic Audit under the Companies Act, 2013 for use in enforcement actions in case of severe non-compliances. 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.

33. Standardized format for qualification made by auditor

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 has obliged 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. Thus, the existing norms does not covers the impact of such qualification or adverse remark made on the economic health or functioning of the company.

Now, the committee has proposed to insert an enabling provision under the Companies Act, 2013 so as to allow the CG 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. This is proposed to ensure better clarity, disclosures and standardization.

34. Setting up Risk Management Committee

As per the provisions of section 134(3)(n) of the Companies Act, 2013, a board report must contain a statement indicating the development and implementation of a risk management policy for the company, including the identification of risks that may pose a threat to the existence of company. Section 177(4)(vii) of the Companies Act, 2013 places an obligation on the audit committee to evaluate the company’s internal financial controls and risk management systems. In addition to this, Part II of Schedule IV of the Companies Act, 2013 requires an Independent director of a company to bring an independent judgement to the board deliberations regarding the risk management systems.

Thus, 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.

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.

35. Amendments in Section 149 – Clarification on term of Independent director(ID)

As per the provisions of section 149(10), an independent director is required to hold an office for a term up to five consecutive years but is eligible for re-appointment on  passing special resolution by 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. Further, proviso to section states that an independent director is not required to be appointed or be associated with the company in any other capacity, either directly or indirectly during the cooling off period of three years. This means that after expiry of three years, an ID will not be allowed to be associated with the company in any capacity resulting in clear prohibition of functioning as a legal or consulting firm irrespective of the threshold limit of 10% under section 149(6) of the Act.

Further, an explanation clarified that any tenure of an ID as on the date of commencement of this Act shall not be counted in the term of ID.

Clarifications issued by the committee are as follows-

• • The committee agrees that the total tenure of an ID shall not go beyond the prescribed period of five years for a single term and for two consecutive terms, a period of ten years, as the case may be, under any circumstances.
  • The total tenure of ID is inclusive of any tenure held by ID as an additional director. This means that the period during which the ID functioned as an additional director before regularisation in a general meeting requires to be included while computing the total tenure of ID.
  • The total tenure of an ID should be capped at a period of five years for a single term and period of ten years where the re-appointment of an ID is made after expiry of first term. The tenure is capped irrespective of any resignation made by an ID before the expiry of the term of appointment.
  • The committee has recommended that the relevant legal or consulting firm shall be allowed to render the services as per the threshold limit under section 149 of the Companies Act, 2013. Further, the threshold limit of 10% should be reduced to 5% to increase transparency and reduce the pecuniary relationship of persons appointed as IDs as well as legal advisors or consultants.

36. Clarifications relating to provisions of amalgamation & mergers

As per the proviso of section 232(3)(b) of the Companies Act, 2013, a transferee company is not required to hold any shares in its own name or in the name of trust  whether on its behalf or on behalf of any of its subsidiary or associate companies and any such shares shall be cancelled or extinguished. Thus, the proviso prohibits the word ‘Treasury shares’.

1. 1. The committee has recommended to include the treasury shares under section 232 as treasury shares refers to the own shares of a company and are categorized as assets of the company. Further, the committee has recommended that company holding treasury stock requires to report to CG through a declaration in the prescribed form. The company requires to dispose of treasury stock within a period of 3 years and report the same to CG. In case, the company fails to dispose of the treasury shares, then the shares shall stand cancelled and share capital shall be reduced in prescribed manner and penal action can be initiated against such company.
   2. The committee has also recommended to permit the fast track mergers between a holding company and its subsidiary company or companies other than WOS, if such companies are not listed and meet such conditions as prescribed. Further, the committee empowers CG to make rules pursuant to scheme of compromise or arrangements under section 233(12) of the Companies Act, 2013.
   3. As per section 419 of the Companies Act, 2013 CG is required to constitute Benches of the NCLT. The committee has suggested to include a provision so as to enable the competent authority to constitute the Benches of the NCLT that may deal with matters of economic importance such as mergers, amalgamations, corporate restructuring and specialized IBC cases involving public interest.

37. Key Recommendation of the CLC committee for LLP Act, 2008

Introduction of the concept of Producer LLPs

Producer institutions have traditionally been organised in the form of co-operative societies, the concept of Producer Companies was introduced in the Companies Act, 1956 which was later on recognised in Companies Act, 2013 also.

Section 378C of the Companies Act, 2013 , a producer company may be incorporated where the objects of such company include matters relating to production, harvesting, procurement of primary produce; processing and packaging of produce; manufacture, sale or supply of machinery or equipment to members; providing education on mutual assistance principles to members; and rendering technical consultancy services, training and development for the promotion of interests of its members.

Producer organisations play a pivotal role in reducing transaction costs and provide a forum for members to share mutually beneficial information, coordinate activities and make collective decisions.

Considering the benefits of the producer institution these institution 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, particularly concerning reduced compliance burden, an LLP is not required to get its accounts audited unless its turnover exceeds Rs. 40 lakhs or its capital contribution exceeds Rs. 25 lakhs.

To enable producer institutions to take advantage of the LLP regime, the Committee recommended enabling the incorporation of Producer LLPs by an amendment to the Act.

The Committee further underscored the importance of an LLP Agreement to guide the decisions of the Producer LLP and ensure its smooth functioning. Accordingly, it was recommended that a model agreement be inserted under the LLP Act, 2008 for ready use by Producer LLPs

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[1] Omitted vide Companies (Amendment) Act, 2017 dated 03.01.2018