Report of The Company Law Committee (2022) recommends various changes to the Companies Act, 2013 to recognise new concepts, expedite corporate processes, improve compliance requirements, and remove ambiguities from existing provisions. The Report also includes recommendations to enable producer organisations to incorporate under the Limited Liability Partnership Act, 2008.
1. This Report is in pursuance and continuation of the avowed objective of the Central Government to promote greater ease of doing business for law-abiding corporates in the country. During its detailed discussions and analysis, the Committee also sought to streamline the operation of certain provisions of the Companies Act, 2013 through clarificatory amendments and other drafting changes.
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2. The Report proposes amendments to bring Indian company law in tune with globally recognised best practices and improve ease of living for corporates and stakeholders.
3. The main recommendations of the Committee regarding the Companies Act, 2013, as included in Chapter I of the Report, are as follows:
I. Allowing certain companies to revert to the financial year followed in India;
II. Facilitating certain companies to communicate with their members in only electronic form;
III. Recognising issuance and holding of fractional shares, Restricted Stock Units and Stock Appreciation Rights;
IV. Easing the requirement of raising capital in distressed companies;
V. Replacing the requirement of furnishing affidavits with the filing of selfcertification/ declaration;
VI. Clarifying the inclusion of ‘free reserves’while determining the limit for buying back of a company’s equity shares;
VII. Prohibiting companies from recording trusts on their register of members;
VIII. Allowing companies to hold general meetings in virtual, physical or hybrid modes;
IX. Creating an electronic platform for maintenance of statutory registers by companies;
X. Clarifying provisions relating to Investor Education and Protection Fund;
XI. Strengthening the National Financial Reporting Authority;
XII. Reviewing and strengthening the audit framework and introducing mechanisms to ensure the independence of auditors;
XIII. Standardising the manner for auditors to provide qualifications;
XIV. Recognising and providing an enabling framework for the constitution of Risk Management Committees;
XV. Clarifying the tenure of independent directors;
XVI. Revising provisions relating to the disqualification and vacation of the office of directors;
XVII. Clarifying the procedure for the resignation of key managerial personnel;
XVIII. Strengthening the provisions relating to mergers and amalgamations;
XIX. Easing the restoration of struck off companies by enabling the Regional Director to allow restoration of names of companies in certain instances;
XX. Recognising Special Purpose Acquisition Companies and allowing such companies, which are incorporated in India, to list on permitted exchanges;
XXI. Prohibiting the conversion of co-operative societies into a company;
XXII. Modernising enforcement and adjudication activities through electronic mode;
XXIII. Strengthening the incorporation and governance framework for Nidhis;
XXIV. Removing ambiguities from present provisions under the Companies Act, 2013 through changes of drafting & consequential nature.
4. In addition to the above, Chapter II of the Report recommends enabling the incorporation of Producer Limited Liability Partnerships under the Limited Liability Partnership Act, 2008 to ease incorporation and compliance requirements for producer organisations.
5. I am confident that the Committee’s recommendations will further give a fillip to honest, law-abiding corporates and other stakeholders in the country whilst consolidating and strengthening the provisions of the Companies Act, 2013 and the Limited Liability Partnership Act, 2008.
SUMMARY OF RECOMMENDATIONS
Changes to Companies Act, 2013 (CA-13)
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S No |
Issue | Observations and Recommendations of the Committee |
Proposed amendments to CA- 13* |
| 1 | Allowing companies to re-align their FY |
Companies that cease to be associated with a foreign entity should be empowered to file a fresh application with the Central Government in a prescribed form to allow them to revert to the FY followed in India. | Amendment to Section 2(41) to permit companies to realign their FY where they cease to be associated with a foreign entity subject to an application to the Central Government. |
| 2 | Facilitating communication in electronic form |
Certain companies should be mandated to serve certain documents in electronic mode only. The fees borne by a company’s members while requesting such documents may be determined at any general meeting of the company. Postal delivery of documents should remain available where members have specifically requested to receive such documents also in physical form. | ♦ Amendment to Section 20 to introduce an overriding provision enabling the Central Government to prescribe rules for classes of companies mandatorily required to serve certain documents in electronic mode only.
♦ Amendment to the proviso to Section 20 (2) to allow companies to stipulate the concerned fees at any general meeting. |
| 3
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Recognising issuance and holding of fractional shares, RSUs and SARs |
CA-13 should be amended to enable issuance, holding, transfer of fractional shares, in dematerialised form, for prescribed classes of companies in consultation with SEBI (for listed companies), as may be required.
RSUs and SARs should be recognised under CA-13, and their issuance should be sufficiently encumbered. |
♦ Insertion of a section in Chapter IV to permit issuance, holding, transfer of equity shares less than one unit for prescribed classes of companies.
♦ Amendment to Section 62 (1) to allow additional employee compensation schemes linked to the value of the share capital of a company. |
| 4 | Easing the requirement of raising capital in distressed companies |
Distressed companies should be allowed to issue shares at a discount, notwithstanding the prohibition under Section 53 of CA-13. For this purpose, distressed companies may be categorised as such class or classes of companies as prescribed by the Central Government. |
Amendment to Section 53 (2A) to permit distressed companies to issue shares at a discount in such manner as may be prescribed, notwithstanding the prohibition under Section 53 (1). |
| 5 | Replacing affidavits with self-declaration |
The requirement of furnishing affidavits should be replaced with filing declarations under the provisions of CA-13 and Rules made thereunder, except for those provisions involving filing affidavits before the NCLT, NCLAT and RD. The Central Government may prescribe the format for filing such declarations. | ♦ Amendment to Section 68 (6) to permit a company to file a self-declaration in place of an affidavit when purchasing its own shares.
♦ Amendment to Section 374 (c) to permit a company to file a self-declaration in place of an affidavit when seeking registration under Part I of Chapter XXI. |
| 6
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Clarifying provisions on buy-back of securities |
‘Free reserves’ should be explicitly included in calculating the buy-back of equity shares.
For companies that grant stock options (such as ESOPs), only those options, which the shareholders have exercised, can be bought back by the company. |
♦ Amendment to the proviso to Section 68 (2) to explicitly include ‘free reserves’ while calculating the threshold of twenty-five per cent in case of buy-back of equity shares.
♦ Amendment to the Explanation to Section 68 clarifying that only those stock options which have been exercised can be bought back by the company. |
| 7 | Specific prohibition on the inclusion of trusts on the register of members | CA-13 should include a provision that expressly prohibits companies from entering notice of any trust, express, implied, or constructive on their register of members. | Insertion of a new Section in Chapter VII to expressly prohibit companies from entering notice of any trust, express, implied, or constructive on their register of members. |
| 8 | Holding general meetings through the use of technology |
CA-13 should enable companies to hold general meetings, i.e., AGMs and EGMs physically, virtually, and in hybrid mode. Where the meeting is to be conducted entirely in electronic mode, the notice period for such meetings should be reduced to such period as may be prescribed by the Central Government. | ♦ Amendment to Section 96 to enable companies to hold AGMs in electronic mode in such manner as may be prescribed.
♦ Amendment to Section 100 to enable companies to hold EGMs in electronic mode in such manner as may be prescribed. ♦ Insertion of a proviso in Section 101 to provide that a general meeting held in electronic mode may be called by giving such notice as may be prescribed. |
| 9 | Maintaining statutory registers through an electronic platform |
Certain companies should be required to mandatorily maintain their registers on an electronic platform in the manner laid down by the Central Government. For this purpose, the Central Government may set up an electronic facility.
The Central Government may direct the company to share the information held on such |
♦ Amendment to Section 120 to mandate that prescribed class or classes of companies maintain registers on an electronic facility provided by the Central Government.
♦ Central Government may be allowed to direct the company to share information held on the statutory registers in certain enforcement-related |
| 10 | IEPF related changes in sections 124 and 125 of CA-13 |
In Section 124(5), after the words “such transfer”, the words “along with any dividend, which has not been paid or claimed” should be inserted to clarify that unclaimed dividend and interest, if any, concerning the shares referred to in sub-section (6) must also be transferred to the IEPF in a timely manner.
In Section 125(3)(a), after the words “matured debentures,” the words “redemption amount towards unpaid or unclaimed preference shares” should be inserted. In line with the practice followed by other Indian regulators, the IEPF Authority should also be empowered to delegate its functions to its member, officer, or any other person to ease administration. Amount owed to shareholders who did not claim such amount paid to them after their shares and securities were bought back or cancelled by companies under Section 68 for seven years or more should be allowed to be transferred to the IEPF. |
♦ Amendment to Section 124(5) to include a reference to dividends and interest accrued upon such dividend, in respect of the shares referred to sub-section (6).
♦ Amendment to Section 125(3)(a) to include “redemption amount towards unpaid or unclaimed preference shares” as a purpose for which the fund may be utilised. ♦ Amendment to Section 125 empowering the IEPF authority to delegate functions to its member, officer, or any other person, subject to such conditions, if any, as may be specified. ♦ Suitable amendments to Sections 125(2) and 125(3) to allow unclaimed amounts with respect to shares bought back/cancelled to be transferred to the IEPF. |
| 11 | Strengthening NFRA |
NFRA should be empowered to take appropriate action against the auditor for non-compliance with CA-13 and requirements thereunder that do not qualify as ‘professional or other misconduct’. NFRA should also be empowered to take appropriate penal action if its orders are not complied with.
Suitable amendments should be made to CA-13 for the constitution of a NFRA Fund. The accounts of the proposed NFRA Fund should be maintained in such form as prescribed by the Central Government in consultation with the CAG. The accounts of the proposed NFRA Fund should also be audited by the CAG and laid before each House of Parliament. NFRA should be empowered to make regulations for specific matters that should be outlined in CA-13. In accordance with principles of good governance and accountability by the Central Government, such powers should be sufficiently encumbered with safeguards. Section 132 of CA-13 should be amended to provide the NFRA Chairperson with general superintendence and direction powers. |
Amendment of Section 132 to:
♦ Provide that the NFRA Chairperson shall have the powers of general superintendence, direction, and control regarding all administrative matters of the Authority. ♦ Empower NFRA to take action against the auditor for non-compliance with CA-13 and requirements thereunder that do not qualify as ‘professional or other misconduct’. Additionally, to empower NFRA to take appropriate penal action if its orders are not complied with. ♦ The constitution of the NFRA Fund and the administration of such a fund. ♦ Empower NFRA to make regulations concerning specific matters consistent with CA-13 and the Rules made thereunder. |
| 12 | Strengthening the audit framework | CA-13 should enable the Central Government to prescribe a differential list of prohibitions on availing non-audit services for certain classes of companies.
Section 147 of CA-13 should be amended to cover penal consequences for contravention of sub-sections of Section 143 other than sub-section (12). A resigning auditor should be under an explicit obligation to make detailed disclosures before resignation and should specifically mention whether such resignation is due to non- cooperation from the client company, fraud or severe non-compliance, or diversion of funds. Moreover, if such information comes to light after the resignation of an auditor but has not been disclosed in the resignation statement, suitable action may be taken against the resigning auditor. Additionally, the auditor should be mandated to provide assurance about the company’s accounts and independence of her decision to resign.
CA-13 should enable the Central Government to mandate joint audits for such classes of companies as it may deem necessary. CA-13 should enable the Central Government to order forensic audits in cases of investigation under Chapter XIV in such manner as may be prescribed. |
♦ Amendment to Section 139 to empower the Central Government to mandate joint audits for such companies as may be prescribed.
♦ Amendment of Section 140 to provide that a resigning auditor make disclosures concerning non-cooperation from the client company, fraud or severe non-compliance, or diversion of funds, as well as her assurance on the company’s accounts and her decision to resign. The amendment should also provide a penalty if she fails to make such disclosures. ♦ Amendment to Section 144 to restrict certain companies from availing any non-audit services. ♦ Amendment to Section 147 to cover penal consequences for contravention of sub-sections of Section 143 other than sub-section (12). ♦ Amendment to Chapter XIV to recognise the concept of forensic audit in such cases, and subject to such Rules, as may be prescribed by the Central Government. |
| 13 | Standardising qualifications by auditors |
There should be a format for auditors to provide the impact of every qualification or adverse remark on the company’s financial statements for circulation to the Board before the same is passed on to shareholders. | Amendment to Section 143 enabling an auditor to prepare an impact statement for each qualification, reservation or adverse remark on the company’s financial statements. |
| 14 | Setting up of RMCs |
As may be prescribed by the Central Government, certain classes of companies should be mandated to establish RMCs. |
Insertion of a Section in Chapter XII to mandate certain companies to establish an RMC and provide for the composition and function of such an RMC. |
| 15 | Clarifying the tenure of an ID |
The period during which the ID functioned as an additional director before her regularisation should be included while computing the total tenure of the ID. The total tenure should not exceed the prescribed five years for a single term or ten years for two consecutive terms, as the case may be, under any circumstances.
The threshold laid down in Section 149(6)(e)(ii)(B) concerning association with a company should be imported to Section 149(11). Further, the threshold of ten per cent should be brought down to five per cent to promote flexibility and ease of doing business for concerned stakeholders. |
♦ Amendment to Section 149 to provide that an ID’s total tenure would include her tenure as an additional director immediately preceding her regularisation as an ID.
♦ Amendments to Section 149 (6) and Section 149 (11) to introduce a five per cent threshold to cap the maximum revenue that may be generated by a legal or a consulting firm in certain circumstances. |
| 16 | Revising provisions on disqualification and vacation of directors’ office | Under Section 167(1)(a), the vacation of directorship should be limited to disqualifications triggered due to personal incapacity. The relaxation period for new directors under Section 164(2)(b) should be extended to two years from the date of appointment. A new proviso should be inserted in Section 164(2) to provide that the disqualification referred to in clause (b) should not apply to the nominee directors appointed by debenture trustees registered with SEBI. Similar changes should be extended to LLPs through a notification under Section 67 of the LLP Act, 2008. | ♦ Deletion of the reference to Section 164(2), which relates to disqualification triggered on the grounds of default by companies where the director holds her position, from Section 167(1)(a).
♦ Deletion of the proviso to Section 167(1)(a) concerning disqualification under Section 164(2). ♦ Amendment to the proviso to Section 164(2) to relax the disqualification trigger from six months to two years for freshly appointed directors of companies that are in default of Section 164(2)(b) ♦ Amendment to Section 164(2) to clarify that the grounds of disqualifications do not apply to nominee directors appointed by debenture trustees registered with SEBI. ♦ Amendment to the LLP Act, 2008 through a notification under Section 67 of the LLP Act. |
| 17 | Cooling-off period before auditors become directors |
There should be a mandatory one-year cooling-off period, from the date of cessation of office, after which an auditor of a company may be permitted to hold the position of director in the same company or group of companies. In the case of an audit firm structured as a partnership/LLP, such a restriction should only operate concerning the partner that audited the company. | Amendment to Section 164(1) to provide that a person shall not be eligible to become a company’s director if she has been the auditor of the company in the last one year. The amendment shall also provide that such a restriction will only apply to the auditing partner in the case of an audit firm structured as a partnership/LLP. |
| 18 | Cooling-off period before an ID becomes a managerial person | There should be a mandatory one-year cooling-off period, from the date of cessation of office, after which an ID may be permitted to hold the position of an MD, WTD, or manager in the same company or group of companies. | Amendment to Section 196(3) to provide that a person shall not be eligible to become a company’s MD, WTD, or manager if she has been an ID of the company in the last one year. |
| 19 | Clarifying the manner of the resignation of certain KMPs | Companies should be obligated to notify the RoC of resignations tendered by certain KMPs whose appointment intimation was filed with the RoC. In cases where the company fails to intimate the RoC within 30 days, the KMPs should be allowed to file their resignations directly with the RoC. The date on which such resignation of KMPs should come into effect may be harmonised with Section 168 concerning resignation by directors. | Insertion of a Section in Chapter XIII to provide the procedure of resignation by certain KMPs. |
| 20 | Reviewing provisions on merger and amalgamation |
Each company holding treasury stock should report such shares through a declaration. Such companies shall dispose of their entire treasury stock within three years. The disposal of such shares may take place in any mechanism devised by the company without the intervention of the NCLT. Appropriate penal action may be initiated when a company fails to dispose of their treasury stock within the prescribed timeline.
A twin test requiring approval by (i) majority of persons present and voting at the meeting accounting for seventy-five per cent, in value, of the shareholding of persons present and voting; and (ii) representing more than fifty per cent, in value, of the total number of shares of the company, should be mandated for approval of fast-track mergers under Section 233. Section 233(12) should be amended to empower the Central Government to make Rules concerning the invocation of Section 233 for compromise or arrangements under Section 230(1) and division or transfer under Section 232(1)(b). Special Benches of the NCLT should be allowed to be constituted by the Central Government to deal with matters of economic importance relating to mergers and amalgamation or corporate restructuring or specialised IBC cases. |
♦ Insertion of a proviso to Section 232 to provide that treasury stock held before the commencement of CA-13 should be dealt with and extinguished in such manner as may be prescribed.
♦ Amendment to Section 233 to include a twin test requiring approval by (i) majority of persons present and voting at the meeting accounting for seventy-five per cent, in value, of the shareholding of persons present and voting; and (ii) representing more than fifty per cent, in value, of the total number of shares of the company for approval of fast-track mergers. ♦ Amendment to Section 233 to provide the Central Government Rule-making powers for matters related to the invocation of the Section in certain circumstances. ♦ Amendment to Section 419 to enable the Central Government to constitute special Benches of the NCLT, which may deal with specific powers and functions of the NCLT, as may be prescribed. |
| 21 | Easing restoration of struck off companies |
In cases where aggrieved persons apply for restoration within three years under Section 252(1), the application should be filed before the RD. | Amendment to Section 252 to provide that a person aggrieved by the striking-off of a company may appeal, within a period of three years, to the RD instead of the NCLT. |
| 22 | Recognising SPACs |
There should be an enabling provision under CA-13 to recognise SPACs and allow entrepreneurs to list a SPAC incorporated in India on domestic and global exchanges. 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 also be laid down in CA-13. | Insertion of a new chapter for the recognition and regulation of SPACs. |
| 23 | Prohibiting conversion of a cooperative society into a company |
Section 366 of CA-13 should not permit the conversion of co-operative societies into a company. | Deletion of a reference to co-operative societies in Section 366 concerning companies capable of being registered. |
| 24 | Facilitating e- enforcement and e-adjudication |
The Explanation under Section 398 of CA-13 should be omitted to enable the Central Government to make Rules for electronically imposing fines, penalties, and payment of fees. | Deletion of the Explanation to Section 398 to further facilitate e-enforcement and e-adjudication. |
| 25 | Stricter regulation of Nidhis henceforth |
Provisions on Nidhis should be revised to regulate incorporation and functioning of Nidhis more stringently. | Chapter XXVI to be amended to include more stringent and robust provisions for incorporating and regulating Nidhis. |
| 26 | Drafting and clarificatory changes |
In Section 24(2) of CA-13, concerning the power of the Securities and Exchange Board to regulate the issue and transfer of securities, the words “and the matters delegated to it under proviso to sub-section (1) of section 458” should be omitted.
In the first proviso to Section 136(1) concerning sending copies of audited financial statements to members, separate schemes may be provided for (i) AGMs and (ii) any other general meetings. “Penalty in relation to Section 188” should be included as a ground for disqualification under Section 164(1)(g). In the proviso to Section 187(1) concerning investments by a company, for the words “subsidiary company”, the words “subsidiary company or joint venture” should be substituted. Additionally, there should be an amendment to allow a holding company to be the only member in its WOS should be carried out in Section 187. Similar relaxations may also be given in the case of a WOS in which the entire shareholding is held by the holding company along with one or more of its WOSs. In Section 248(6) concerning removing the name of a company from the register of companies, for the words “before passing an order under sub-section (5)”, the words “before publishing the notice under sub-section (5)” needs to be substituted. In Section 446B concerning lesser penalties for certain companies, for the words “which shall not be more than”, the word “of” should be substituted. The quorum requirements for general meetings of Producer Companies should be relaxed |
♦Amendment to Section 24(2) to omit the reference to ♦ Amendment to the first proviso to Section 136(1) to provide separate schemes when sending copies of audited financial statements for (i) AGMs and (ii) any other general meetings. ♦ Amendment to Section 164(1)(g) to clarify the position concerning related party transactions as a ground for disqualification of ♦ Amendment to Section 187(1) concerning holding assets to include joint ventures and to allow holding companies to be the only member in its WOS and providing similar relaxations in the case of a WOS in which the entire shareholding is held by the holding company along with one or more of its WOSs. ♦ Amendment to Section 248(6) to include publishing of notice of striking-off by the RoC ♦ Amendment to Section 446B to clarify penalties for one-person, small, start-ups, and Producer Companies ♦ Amendment to Section 378Y and 378ZA(9), which presently lays down the quorum requirement for general meetings of Producer Companies as one-fourth of the total members. The threshold is sought to be relaxed to one-fourth of the members or one hundred members, whichever is lesser |
Changes to the LLP Act, 2008
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1. |
New concept of producer LLPs |
To enable producer institutions to take advantage of the light touch regime under the LLP Act, 2008, Producer LLPs should be allowed to be incorporated under such Act. This should be supported by a model LLP Agreement for guiding the decisions of the Producer LLP and ensuring smooth functioning. |
A new chapter is proposed to be inserted in the LLP Act, 2008. |
*This column only reflects the primary amendments proposed to be carried out in pursuance of the recommendations of the Committee. In addition to these provisions, consequential amendments to attendant provisions in the CA-13 and the Rules framed thereunder may be suitably evaluated.
