On April 13, 2022, the Company Law Committee released its third report, in which it made suggestions to the Government for amendments to the Companies Act, the Limited Liability Partnership Act of 2008, and the laws and rules enacted thereunder. The Report suggested changes and additions are meant to harmonize Indian company law with international standards and make doing business easier. Below is a discussion of the Report’s main points and their ramifications:
1. Recognising issuance and holding of fractional shares, Restricted Stock Units (“RSUs”) and Stock Appreciation Rights (“SARs”)
- A fractional share is a part of a share that is less than one share unit, as stated in item one. According to the Companies Act, holding fractional shares is not permissible. The Committee suggests amending the Companies Act to include clauses that permit the issuing, holding, and transfer of fractional shares in dematerialized form for a class or classes of companies in the way that may be prescribed. Such recommendations may be made for listed firms after consulting with the Securities Exchange Board of India. This advice only applies to situations in which the company would issue new fractional shares; it does not apply to situations in which fractional shares are temporarily produced as a result of corporate activity.
- Retail investors who lack the funds or purchasing power to purchase a whole share will invest if the holding of fractional shares is permitted. If authorised, this measure will increase stock market involvement and give businesses access to a previously untapped pool of ordinary investors for capital raising.
RSUs and SARs
- The Committee urges recognition of additional employee pay plans that are based on the market value of a company’s stock. RSUs and SARs are two examples of such programmes that let staff members invest in the company’s stock.
- RSUs are a plan in which the employee will be entitled to the shares at the end of the vesting period, provided that the conditions pertaining to the length of employment and performance criteria are satisfied. RSUs do not give the employee the option to directly purchase or subscribe to the share. SARs, on the other hand, are a type of deferred or incentive payment linked to the stock performance of the hiring business. They grant workers the right to the monetary equivalent of the increase in a specific number of shares’ value over a particular time period.
- The implementation of RSU and SAR schemes will be profitable to the company and its employees and will raise employee morale and productivity, much like the advantages of offering employee stock options.
2. Recognizing Special Purpose Acquisition Companies (“SPACs”)
- A SPAC is a sort of company that has been established with the express purpose of purchasing a target firm but does not currently operate as a business. This idea enables a shell company to launch an Initial Public Offering (“IPO”) devoid of any business operations. After going public, the SPAC merges with or buys a firm, i.e., the target, enabling the target company to profit from the listing without having to go through the formalities and difficulties of an IPO.
- The Committee suggests enacting a provision that will recognise SPACs under the Companies Act and permit the listing of an Indian-incorporated SPAC on both domestic and international markets.
EASING THE BURDEN OF COMPLIANCE
- Simplifying raising of capital in distressed companies
- Section 53(1) of Companies Act, 2013 forbids the issuance of shares at a discount. The Committee suggests that, despite the restriction under this Section, distressed companies should be permitted to issue shares at a discount to the Central Government or State Government or to such class or classes of persons as may be authorised.
- This relaxation will give enterprises who have been harmed by the pandemic and are having trouble obtaining new funding for their resurrection some breathing room.
- Replacing affidavits with self-declaration
- Affidavits must be provided in accordance with numerous sections of the Companies Act. Except for clauses requiring the filing of an affidavit in a legal or quasi-legal procedure, the Committee advises that this requirement be replaced with the filing of a declaration.
- The Committee observed that a self-declaration accomplishes the same thing as an affidavit without the formalities of printing the statement on a stamp paper and having a magistrate or public notary testify to it under oath. Furthermore, since furnishing a false declaration is punishable under Section 448, the substitution of declarations for affidavits does not lessen the severity of the repercussions under the Companies Act.
- Allowing companies to re-align their financial year
- A company required to use a different financial year for the consolidation of its accounts outside of India may be permitted to do so upon application to the Central Government under the first proviso of Section 2(41) of the Companies Act if it is the holding company, subsidiary, or associate of a company incorporated outside of India. The Committee noted that the Companies Act does not currently contain a mechanism permitting such a business to return to the financial year mandated by the Companies Act if it ceases to be a holding, subsidiary, or associate company of the foreign firm.
- As a result, the Committee advises that the Central Government should grant these firms permission to submit a new application so they can resume using the financial year prescribed by the Companies Act.
REAPING THE BENEFITS OF DIGITIZATION
- Facilitating communication in electronic form
The Committee suggests changing Section 20 of the Companies Act to add a specific provision allowing the Central Government to specify rules, with appropriate safeguards to protect investors’ interests, for such class or classes of companies for whom it shall be sufficient to serve documents to all of their members in electronic mode only for compliance with the Companies Act. However, in cases when a member has asked the company to serve documents in physical form as well, the corporation must do so as a step to protect investors.
The Committee advises amending the Companies Act to allow the Central Government to specify how companies can hold annual general meetings and extraordinary general meetings physically, virtually, or in a hybrid mode. This is because the benefits of relaxing the requirement for physical meetings were realised during the pandemic.
- Maintaining statutory registers through an electronic platform
- The Committee recommends that certain kinds of corporations be compelled to compulsorily retain their registers on an electronic platform in such form and manner as may be defined by the Central Government, taking into account generally accepted practises and benefits of doing so. The Committee suggests that the Central Government establish up an electronic platform for maintaining, storing, and routinely updating such registries for this purpose.
This action will promote greater openness and lower the compliance expenses spent by businesses in maintaining statutory registers.
STRENGTHENING THE AUDIT FRAMEWORK
- Resignation by auditors
The Committee suggests that a departing auditor be required to make clear disclosures prior to leaving and should particularly state if the departure was brought on by the client company’s lack of cooperation, fraud, egregious noncompliance, or money-diversion. Furthermore, appropriate action may be taken against the retiring auditor if such material is discovered after the resignation of an auditor but was not stated in the resignation statement. The auditor should also be required to guarantee the accuracy of the company’s financial statements and the independence of his or her choice to resign.
- Standardising qualifications by auditors
The Committee advises that before financial results are distributed to shareholders, the board of directors should receive a format from auditors detailing the effects of any qualifications or critical remarks.
CLARIFICATORY CHANGES IN THE COMPANIES ACT
The Committee also suggests making a number of clarifications and drafting changes to the Companies Act, including removing ambiguity in the calculation of an independent director’s total tenure and requiring companies to notify the Registrar of Companies of resignations tendered by specific key managerial figures whose appointment intimation was filed with the ROC.