8 Key Recommendations of Company Law Committee – March, 2022 Report

The Company Law Committee’s (2022) report suggests a number of amendments to the Companies Act, 2013, in order to recognise new ideas, speed up corporate procedures, strengthen compliance requirements, and eliminate ambiguities in current laws. The Report also contains recommendations for incorporating producer organisations under the Limited Liability Partnership Act, 2008.

Key Abstract

The Company Law Committee (2022) (CLC-2022) study suggests many modifications to the Companies Act, 2013. Recognizing new ideas, speeding up business procedures, enhancing compliance standards, and reducing ambiguities from current regulations are among the suggested modifications. In addition, the CLC-2022 recommends modifications to the Limited Liability Act, 2008 to allow producer organisations to organise under the Limited Liability Partnership Act, 2008. The Committee sought to include enabling provisions in Companies Act, 2013 that expressly recognise various practises such as Stock Appreciation Rights (“SAR”), Restricted Stock Units (“RSU”), Special Purpose Acquisition Companies (“SPACs”), and so on.

Furthermore, the Committee discussed on many ideas aimed at structural reforms to the Companies Act, 2013 framework and expediting the procedure for audits, mergers, and the restoration of struck-off firms, among other things.

All of these reforms are aimed at making it easier to do business in India and ensuring the efficient execution of the Companies Act, 2013, the Limited Liability Partnership Act, 2008, and the Rules established thereunder.

Company Law Committee

The Ministry of Corporate Affairs (MCA) has formed a Company Law Committee (CLC) to make recommendations to the government on how to improve the ease of doing business in India and the effective implementation of the Companies Act, 2013, the Limited Liability Partnership Act of 2008, and the rules that go with it.

Concept behind formation of Company Law Committee

Company Law Committee was established to enhance the ease of doing business for law-abiding corporations and to create greater corporate compliance for all stakeholders. The CLC’s term has been extended until September 17, 2021. MCA established the 11-member CLC on September 18 last year, chaired by MCA Secretary, to provide recommendations to the Government on different laws and concerns relevant to the implementation of the Companies Act, 2013 and the Limited Liability Partnership Act, 2008.

Over the last several years, the government has focused on increasing the ease of doing business in the country, even amending the company legislation to re-categorize certain company law offences as “civil wrongs” and de-clogging the National Company Law Tribunal (NCLT). The CLC, which was formed last year, was also tasked with recommending ways to further declog and enhance the operation of the NCLT. It was also requested to provide solutions to any bottlenecks in the general operation of statutory entities such as SFIO, IEPFA, and NFRA.

Company Law Committee, March Report 2022

The following are the salient Recommendations made by Company Law Committee in March 2022 Report:

• Issue of fractional share
• Non-monetary compensation in the form of RSU’s and SAR’s
• Use of technology
•  Mandatory Joint Audit for certain Companies
• Forensic Audit during Investigation
• Cooling off period before change of Position/designation
• Recognizing SPAC
•  Producer LLP

Salient Recommendations made by Company Law Committee in March 2022 Report

Let us discuss them one by one in detail:

• Issue of fractional share: Section 4 of the Companies Act 2013, as well as paragraph 4 of Schedule F, currently restrict the issue and holding of fractional shares. A fractional share is a fraction of a share that is less than one unit. Fractional shares may result from business acts such as mergers, bonus issues or rights issues. In view of the growing role of retail investors in the Indian financial market, the Company Law Committee has proposed that the Companies Act be amended to include provisions enabling the issue, holding and transfer of fractional shares in dematerialized form for a class or classes of companies in the prescribed manner. These regulations may be made for listed companies in consultation with the Stock Exchange Board of India. The CLC also emphasized that this proposal only applies to cases where a company issues new fractional shares, not to cases where fractional shares currently arise as a result of the company’s actions.

• Non-monetary compensation in the form of RSU’s and SAR’s: Restricted Stock Units (RSU’s) and Stock Appreciation Rights (SAR’s) are currently frustrating as a method of non-monetary compensation, often used by many companies, especially start-ups, as a way to compensate, retain and attract employees, even though the legal terms SAR is currently defined under the Share Based Employee Benefits and Sweat Equity (SEBI) Regulations, 2021 as a right granted to the grantee of a SAR entitling him to receive an appreciation for a specified number of shares in a company where settlement of such appreciation may be made in cash or shares of the company

• Use of technology: In this day and age when it was already a trend to be digital, the advent of Covid has turned the trend into a necessity and made it even more important than before to be digitally upgraded and virtually available and accessible. The Committee took cognizance of this fact and recommended changes to make the Act more technologically and user friendly as per current scenarios;
  • Virtual Meeting Enablement – ​​Prescribed companies to hold AGMs and AGMs physically, virtually and in hybrid mode. 
  • Electronic enforcement and electronic decision-making – suitable changes are proposed in the law with regard to the main objective of the “electronic courts project” and to enable the execution of actions related to enforcement in a transparent and non-discretionary way with the right way through the electronic platform. 
  • Electronic Platform for Maintenance of Statutory Registers – The Central Government is advised to operationalize an electronic platform to ensure mandatory electronic maintenance of statutory registers of the prescribed class of companies.

• Mandatory Joint Audit for certain Companies: The scope, importance and necessity of a joint audit have been debated again and again among various academics and wealthy personalities, but nothing of the kind has yet emerged in its entirety. Presently, joint audit is at liberty of the members of the company under the Companies Act, 2013. The committee has recommended mandatory joint audit for the prescribed class of companies.

• Forensic Audit during Investigation: Although forensic audit is of great importance due to lack of corporate governance and increasing cases of fraud among companies, yet it remains beyond the jurisdiction and legality of the Companies Act and found no mention of it in the law governing companies. The committee recommended including in the law the concept of a forensic audit that regulators and law enforcement can order when a predetermined event is triggered. The Committee is of the view that the trigger event should be clear and uniform across all regulatory authorities.

• Cooling off period before change of Position/designation: As per Section 149(10) of the Companies Act, 2013, the maximum term of office of an Independent Director (ID) is 5 consecutive years. He is eligible for re-appointment for another 5 years only with the prior approval of the company’s shareholders. Section 149(11) states that an independent director is not allowed to continue his term of office as an ID for more than 2 consecutive periods of five years, unless the required three-year cooling-off period has elapsed, after which he can be re-appointed. The Committee clarified that the period of 5 years will start from the date of appointment of the independent director as the next director. While calculating the total tenure of an independent director, the period during which the independent director worked as an additional director prior to legalization will also be included. This clarification provided by Company Law Committee (CLC) India Inc. welcomes and resolved ambiguities.

• Recognizing SPAC: The SPAC, or Special Purpose Acquisition Company, has escaped the attention of lawmakers for years, but has proven to be a very powerful tool for Indian companies aspiring to be listed on international exchanges. A SPAC is a Non-Operating Company that is formed for the sole purpose of acquiring or merging with a target company, where the target company is a company that wishes to be listed without going through the rigorous process and complexity of an initial public offering (IPO). This particular concept is a bit rigid and due to the complexity it may take a lot of time, effort and planning to actually implement.

• Producer LLP: Considering the advantages associated with producer institutions and the benefits of LLP to the company, the committee recommended that the concept of producer LLP be incorporated in the LLP Act, 2008. It also recommended that a model LLP agreement be framed. Included in the Act for LLP manufacturers to ensure smooth functioning and easy decision making.

Takeaway

The word “Corporate law” relates to both corporate law practise and corporate philosophy. Corporate law is the body of law that deals with issues that come directly from the life cycle of a business. As a result, it includes the formation, funding, governance, and eventual dissolution of a business. The committee was founded as part of the government’s efforts to promote ease of living by making it simpler for law-abiding companies to do business, to encourage increased corporate compliance for all stakeholders, and to handle emerging business issues. So the question of who formed the business legal committee is now clearly addressed.