Company Law Committee (CLC) set up on 18th September, 2019 has issued its 3rd Report in March, 2022 and has made some stellar recommendations in the Companies Act, 2013 and Limited Liability Partnership Act, 2008 (LLP Act, 2008) with an object to further strengthen India’s corporate framework by recognizing new concepts, improving compliance requirements and removing ambiguities from existing provisions.
I absorbed the 95 page report thoroughly and few out of many recommendations caught my attention; some of which are fresh in its approach while the others are important and necessary for the Corporate sector.
This post is about those 8 Amendments recommended by the Company Law Committee in March, 2022 Report that will bring the Indian Corporate jurisprudence in line with the vogue trends currently doing rounds in the corporate sector; domestically and globally.
8 Salient Recommendations made by Company Law Committee in March, 2022 Report
Issue of fractional shares are currently not allowed as per the provisions of the law though sometimes it gets created during the process of Issue of Sweat Equity Shares or Right Shares. Since the issue is not allowed, the same are accordingly treated by the Board of the Company as per their discretion and understanding.
The committee has recommended to introduce in the act the enabling provisions for issuance, holding and transfer of fractional shares for prescribed class of companies and in the manner specified.
This can ultimately prove to be in favor of retail investors as they will get an opportunity to invest in the Company by buying a part of the share at a reduced price when the price of even One share is too high in the Stock Market.
2. Non-monetary compensation in the form of RSU’s and SAR’s
Restricted Stock Units (RSU’s) and Stock Appreciation Rights (SAR) are currently a rage as a method of non-monetary compensation frequently adopted by many Corporates majorly Start-ups, as a way to compensate, retain and attract Employees, even though the legalities surrounding it remains absent from the Companies Act, 2013.
Presently SAR is defined under the SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 as a right given to a SAR grantee entitling him to receive appreciation for a specified number of shares of the company where the settlement of such appreciation may be made by way of cash payment or shares of the company.
Also, presently there are no legalities surrounding around RSU, but they can be understood as the stock vested in the employee which becomes transferable to employee upon meeting some conditions or thresholds. Similar to the ESOP, shares are received after the end of a certain vesting period and upon fulfillment of pre decided conditions.
Bringing RSU’s and SARs under the ambit of law will clear the ambiguities surrounding the issue of shares under these non-monetary compensations schemes and would lead to legitimate and accurate governance and management of the same.
3. Use of Technology
In today’s era when being digital was already in trend, the arrival of Covid has turned the trend into a necessity and has made it all the more essential than earlier to be digitally upgraded and virtually accessible and available. The Committee took cognizance of this fact and accordingly recommended changes to make the Act more tech friendly and user friendly according to the current scenarios;
A) Enabling Virtual Meeting – prescribed companies to be able to hold the EGM and AGM physically, virtually and in hybrid mode.
B) E-enforcement and E-adjudication – suitable changes are suggested in the Act keeping in mind the main objective of the ‘e-courts project’ and to enable for conduct of enforcement related actions in a transparent and non-discretionary manner with a proper trail through electronic platform.
C) Electronic Platform for maintaining Statutory registers – Central Government is recommended to bring into force an electronic platform to provide for compulsory electronic maintenance of statutory registers of the prescribed class of Companies.
4. Mandatory Joint Audit for certain Companies
Time and again, the scope, importance and necessity of Joint Audit are discussed among various academicians and affluent personalities but nothing of the sort has surfaced as yet in full scale.
Currently Joint Audit is at the liberty of the members of the Company under the Companies Act, 2013.
The Committee has recommended for a mandatory joint audit for the prescribed class of Companies.
5. Forensic Audit during Investigation
Forensic Audit though of great relevance given the lack of corporate governance and rising fraud cases among the corporates yet it remains outside the reach of the jurisdiction and legalities of the Companies Act and have found no mention of it in the law governing the corporates.
The Committee recommended to include the concept of Forensic Audit in the Act which may be ordered by the regulators and the law enforcement authorities upon the triggering of the pre-determined event. The Committee is of a view that the trigger event should be clear and uniform across all regulators.
6. Cooling off period before change of Position/designation
A) Before auditors becomes directors: Committee recommended a mandatory 1 year cooling off period from date of cessation, and only after which the Auditor may be permitted to hold the position of Non-executive Directors (NED), Managing Director (MD) or Whole Time Director (WTD) in the Company or holding Company, Subsidiary Company or Associate Companies.
In case where the Auditor is LLP or a Partnership Firm, the restriction shall apply only to the concerning partner who audited the Company.
B) Independent Director becomes Managerial Personnel: Committee recommended a mandatory 1 year cooling off period from date of cessation, and only after which an Independent Director may be permitted to hold the position of Managing Director, Whole Time Director or Manager in the Company or holding Company, Subsidiary Company or Associate Companies.
7. Recognizing SPAC
SPAC or Special Purpose Acquisition Company has escaped the attention of the law makers for years but has proven to be a very powerful tool for the Indian Companies desirous of getting listed on the International Stock Exchanges.
SPAC is a Non-operational Company that is formed with a sole purpose of acquiring a or merging with a target company, the target Company being the Company desirous of getting listed without going through rigorous process and complexities of an Initial Public Offer (IPO).
This particular concept is a little rigid and given the complexities involved it may take an abundance of time, efforts and planning before it is actually implemented.
8. Producer LLP
In the light of the benefits associated with Producer institutions and the benefits with the LLP as against a Company, the Committee has recommended to incorporate the concept of Producer LLP in the LLP Act, 2008.
It has also recommended for a Model LLP Agreement to be included in the Act for Producer LLP to ensure smooth functioning and effortless decision making.
CONCLUSION:
The recommended amendments are definitely going to bring in new Governance and Compliance requirement which may become a hassle and burden for the corporates but it is also going to make the Act more effective to efficiently handle the latest Corporate concepts that are currently in vogue.
This is only the first stage and a lot depends upon the recommendations getting accepted and approved by the Ministry and the process of execution thereafter.
Author Bio
