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INTRODUCTION

The Government of India has replaced the old Companies Act, 1956 with new Companies Act, 2013 with a view to match the global industry and compliance standards. Since the enactment of the new Act, various amendments have been brought to simply the compliance and disclosure structure. Further, the Ministry of Corporate Affairs (MCA) has constituted a Company Law Committee (CLC) in 2019 to make recommendations that would achieve the Government’s objective of Ease of Doing Business (EODB) for corporates and improving the operational efficiency of the Companies Act, 2013 and the Limited Liability Partnership Act, 2008.

Further to simply the compliance and disclosure requirements, CLC submitted its Report on 21-03-2022 recommending new changes to be brought in the Companies Act, 2013 and LLP Act, 2008. If accepted by the Ministry, it would improve the ease of living for corporates and stakeholders. Given below is the analysis of some of the important recommendations made by CLC in its report. Read: Report of Company Law Committee (2022)

1. REALIGNMENT OF FINANCIAL YEAR: In India, financial year of the Company starts on 1st April and ends on 31st All Companies incorporated in India are required to follow the same. However, certain relaxations are provided to those Companies which are holding, subsidiary or associate of Companies incorporated outside India. With the permission of the Central Government, Indian Company can adopt a different financial year like its foreign group Company. However, at present there is no provision in the Companies Act regarding realignment of financial year if Indian Company ceases to be a holding, subsidiary or associate of foreign Company.

Analysis of Company Law Committee (CLC) Report- Part I

COMMITTEE PROPOSAL: As soon as Indian Company ceases to be a holding, subsidiary or associate of foreign Company, it can apply to the Central Government for realignment of financial year and revert back to the financial year prescribed under the Companies Act, 2013.

2. COMMUNICATION USING ELECTRONIC MODE: Every Company has its own mode of communicating with the members, regulators, general public etc. Section 20 (2) of the Companies Act authorizes Company to provide documents to the members, regulators, general public via registered post, speed post, courier or electronic mode. Considering COVID-19, MCA/SEBI allowed Companies to send Financial Statements/Board Report/Audit Report and other documents to its members only through e-Mail and relaxed the provision of physical dispatch of documents. Even more SEBI clarified that member who does not have valid e-Mail ID can visit Company’s website/BSE website/NSE website to view the necessary documents.

COMMITTEE PROPOSAL: Considering the changing working style, Committee recommends mandatory serving of documents to certain class of Companies using electronic mode only. However, if any member requests physical documents, Company must provide the same against fees as may be decided in any General Meeting.

3. RECOGNITION TO FRACTIONAL SHARE, RESTRICTED STOCK UNIT (RSU) & STOCK APPRECIATION RIGHT (SAR):

A. Fractional Shares: fractional share refers to a portion of share less than one share unit. Fractional share arises as a result of corporate action like merger-amalgamation, bonus issue, rights issue etc. At present, Companies Act does not allow issue of fractional share. Committee felt that enabling the holding and trading of fractional shares will increase retail investor participation in the stock market. At present, retail investors could not buy a whole share due to the higher price of its single share. For e.g. MRF Ltd. If fractional share holding is allowed, retail investors will be able to invest their pre-decided amount in a particular Company.

COMMITTEE PROPOSAL: To enhance the retail participation and to meet the global practices, Committee proposes to amend necessary provisions of the Companies Act thereby allowing retail investors to hold, trade and transfer fractional shares of certain class of Companies.

B. RESTRICTED STOCK UNIT (RSU) & STOCK APPRECIATION RIGHT (SAR): RSU refers to a form of compensation issued by Company to its employees in the form of Company shares. RSU are issued to employees through a vesting option and as per the distribution schedule after they achieve required performance milestone. SAR is a type of employee compensation linked to the Company’s stock price during a predetermined period. Currently, Companies compensate employees through Employee Stock option Plan (ESOP) and Sweat Equity Shares. However, there is no legal recognition to RSU and SAR under the Companies Act. (SAR are recognized under SEBI regulations).

COMMITTEE PROPOSAL: To amend necessary provisions of the Companies Act to give legal recognition to RSU and SAR thereby Companies could issue them under an Employee Benefit Scheme. Issue of RSU and SAR to be allowed only after the approval of shareholders through a Special Resolution. Further, Committee proposes omnibus approval by shareholders thereby fresh approval will not be required before every allotment of shares under these schemes.

4. REPLACEMENT OF AFFIDAVIT WITH SELF-DECLARATION: Affidavit is a statement in writing on oath before a person having authority to administer the oath. Affidavits are printed on stamp paper sworn before a Magistrate or Notary. Companies Act requires Company to furnish affidavits in various cases before the Registrar of Companies, Regional Director, National Company Law Tribunal and National Company Law Appellate Tribunal. For e.g.-

A. Affidavit by Directors regarding insolvency of Company in case of buy back of shares;

B. Affidavit by Directors in case of conversion of Company into One Person Company (OPC);

C. Affidavit by Directors in case of removal of name of the Company.

Over a period of time, it has been the objective of the Government to facilitate trust based system by way of self-declaration in place of affidavit to promote ease of doing business. Many States have already shifted from affidavit to self-declaration thereby enabling swifter delivery of public services to citizens. Self-declaration serves the same purpose as like affidavit. Just difference is that it is not required to be printed on a stamp paper and get it attested by the public officer.

COMMITTEE PROPOSAL: Considering the benefits of self- declaration, it is proposed to amend necessary provisions of the Companies Act thereby replacing the requirement of affidavit with self-declaration except in those cases which involve filing before the Regional Director, National Company Law Tribunal and National Company Law Appellate Tribunal.

DISCLAIMER: The content of this article is intended to provide a general guide to the subject matter. Special advice should be sought about your specific circumstances. The entire content of this document has been prepared on the basis of relevant provisions and on the basis of information available at the time preparation. I assume no responsibility for the consequences of the use of such information.          

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