– MCA’s move to standardise, streamline and digitize

– Payal Agarwal, Senior Executive | Vinod Kothari & Company (payal@vinodkothari.com)

The Report of the Company Law Committee – 2022 (“CLC Report”) has proposed various important amendments to the existing Companies Act, 2013 (“the Act”) and some in the Limited Liability Partnership Act, 2008 (“LLP Act”). The recommendations touch a wide array of elements under the Act – be it the association/ cooling period of directors, auditors, KMPs, etc. or corporate actions such as mergers, transfer of unclaimed monies to IEPF on account of buyback etc., de-clogging of NCLTs for restoration of company’s name after having been dissolved as defunct, setting up of specialized company law Benches of NCLT for dealing with matters of economic importance such as corporate restructuring, and specialized IBC cases or cases involving public interest. The recommendations also seek restoration of some meaningful provisions of the erstwhile CA 1956.While some suggestions pertain to ease of compliances and moving towards digitization with respect to certain compliances of a company, others pertain to building a robust corporate governance framework including alignment of the law with various provisions with SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“Listing Regulations”).
This is the 3rd CLC Report in the series of recommending changes to the 2013 Act, several reforms in the Act had been suggested in past by the CLC Report 2016, Committee to Review Offences Under Act of 2018 and CLC Report 2019. A brief summary of the issues under hand and the recommendations along with proposed amendments have been provided for as an Annexure to the CLC Report itself, and therefore, we find it useful to discuss only some of the recommendations which require analysis.
Applicability
The Committee report, if accepted by the Government, will potentially lead to an Amendment Bill, and therefore, there will be an enactment by a law of the Parliament. Once passed, it is expected that several of the amendments will require extensive rule-making, as there are references in several provisions to “class or classes of companies”. Thus, while we get a broader view of the direction into which the law will move, but as they say, the devil lies in the detail. We will get to know the details, hopefully divine and not devilish, only when the Bill is available for review.

Major recommendations under CLC Report and our analysis

Below we discuss the major recommendations given under the CLC Report and our analysis of the same.

Proposed Amendments	Rationale given under the CLC Report	Our analysis
Relaxing provisions on disqualifications of directors
Vacation of office by director from all companies only in case of disqualification under personal capacity as per Section 164(1) and not on account of lapses made by a company u/s 164(2)	It was felt that the existing provision u/s 167 requiring vacation of office in case of violation of Section 164 leads to the vacation of directorship in otherwise compliant companies if a director commits default under Section 164(2) in another company.	We welcome this proposal, which, though recommended in CLC Report 2016 (Para 11.13)too, could not be enacted into the primary Act earlier. We had, in the past too, supported this view that the vacation should arise only in cases where the disqualification triggers in the personal capacity of the director and not otherwise, as also reflected in our article Disqualification under Section 164 (2): retrospective or prospective?
Relaxation on attracting disqualification by a new director appointed in a company non-compliant u/s 164(2)(b) of the Act proposed to be extended to two years instead of existing six months	The CLC felt that it would be difficult for new directors to join a company that has defaulted in repayment of its deposits, redemption of debentures, or payment of dividends if the impending threat of disqualification after six-months is present, and therefore, found it proper to extend the time upto which disqualification does not arise on a new director on such default. The violation of filing requirements can be sufficiently remedied within a period of six months and therefore, no amendments are proposed on the same.	This is also a welcome proposal, and will encourage new directors to join the board of non-compliant companies and take appropriate actions for remedying the defaults made by the company without the immediate threat of automatic disqualification.
Disqualification u/s 164(2)(b) not to be attracted on the nominee director appointed by the debenture trustee registered with SEBI.	The Committee further noted the representations made by SEBI wherein it was put forth that the automatic vacation of office due to violation of a company u/s 164(2)(b) adversely implicates nominee directors appointed pursuant to the nomination by debenture trustees registered with SEBI, for disqualification under Section 164(2)(b).	This is also a welcoming recommendation, however, while the disqualification is proposed to be relaxed for debenture-trustees, no similar provisions are recommended for nominee directors appointed by banks or other financial institutions etc. which is comparatively more commonly seen rather than nominee directors appointed by debenture trustees.
Engagement of Independent Directors (IDs) as a legal/ consulting firm during cooling-off period
Amendments in Section 149(11) relating to cooling-off period of IDs to harmonize with Section 149(6)(e)(ii)(B) relating to engagement as a legal or consulting firm having transactions with the company and/ or group companies amounting to not more than 10% of gross turnover of the firm.   Further, the turnover is proposed to be limited to 5% instead of the existing limit of 10%	The proviso to existing section 149(11) prohibits engagement of an ID post completion of his tenure, in any capacity, either directly or indirectly. Pursuant to use of words “directly or indirectly” in section 149(11), there is a view/practice that upon ceasing to hold office after two consecutive terms, the person would not be allowed to be associated with the company in any capacity thereby resulting in a blanket prohibition of functioning as a legal or consulting firm regardless of the threshold of ten per cent. The amendments are proposed to harmonise the two provisions.   It was further recommended that the threshold of ten per cent referred to in Section 149(6)(e)(ii)(B) should be reduced to five per cent to increase transparency and reduce the pecuniary relationship of persons appointed as IDs as well as legal advisors or consultants.	IDs are required to be persons having expertise in requisite fields of law, accounting, finance, management, corporate governance etc. Many-a-times, they may be persons practicing in such fields on a professional basis, and engaged in the activity of providing advisory or consulting services to companies, including the company and its group companies wherein such person is acting as an ID, through its firm/ organization.   The proposed amendment u/s 149(11) will lead to relaxations to a firm acting as a legal/ consulting firm having one of the IDs as an employee/ proprietor/ partner. The firm may continue providing such services to the company and its group companies, even during the cooling-off period of the ID subject to the pecuniary interest being within the specified limits.
Amending provisions relating to mergers
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.	The existing threshold of approval by persons holding ninety per cent of total share capital has been considered onerous by stakeholders since the section requires approval by the persons holding ninety per cent of the company’s total share capital and not ninety per cent of shareholders present and voting in the meeting. This threshold is particularly difficult to achieve in listed companies. Therefore, the consent threshold significantly delays the approval process, defeating the section’s essence that seeks to expedite mergers.   Further, such a threshold requirement also means that if the shareholders present at the meeting hold at least ninety per cent of the share capital, irrespective of the majority by number voting against the scheme, it would still be approved. Hence, the interests of minority shareholders have not been adequately protected within this framework.	The amendment proposed for speeding up and easing the requirement of obtaining approval on one hand and protecting minority interest on the other, does not seem to be serving the purpose well.   The fact that the company has served notices on the members to attend and vote, may not be sufficient enough on the company’s part post this proposal becoming effective since if the concerned person fails to show up in the meeting, companies are expected to turn to the doors of each such shareholder for ensuring the presence of the minimum number of members as proposed therein The first arm of approval requires a majority of persons voting and accounting for 75% in value of shareholding, present and voting. However, the second arm requires approval by members representing more than 50% in value of the total shares of the company.   This, supposedly, will lead to more burden on the head of the company, while also delaying the approval process.
Treasury stocks to be disposed off within a period of three years, by way of sale or reduction of share capital without attracting  compliances of section 66 of the Act and report to be filed with the Central Government, otherwise leading to penal consequences	Holding of treasury stocks are prohibited under the Act, however, at present, the manner of and time within which the extinguishment of such shares is required to be done are not provided for. Therefore, the CLC found it appropriate to specify the manner, procedure and has also recommended penal actions including automatic reduction of share capital in case a company fails to dispose off the stocks within the given time.	Enactment of specific provisions will provide more clarity towards implementation by the companies.
Resignation of Key Managerial Personnel (KMPs)
Manner of resignation of certain KMPs (whose appointments were filed with the RoC) to be aligned with the manner of resignation of directors u/s 168 – that is, the company to file the notice of resignation within 30 days of receipt of such notice, failing which KMPs may directly file the same with RoC.	Resignation is treated as a choice to be exercised by the director, and proof of delivery of such information with the company is sufficient to discharge the director of all liabilities in this regard. In light of the same, the CLC deliberated whether similar provisions should be introduced in the Act for mandating filing of resignation tendered by certain KMPs, other than directors, who are entrusted with the company’s day-to-day functioning and whose appointment intimations were filed with the Registry.As such, the CLC felt that the resignation of such a KMP has a significant impact on the company and must therefore be suitably recorded with the RoC.	Unlike directors, who may/ may not be the employees of a company, KMPs are employees of a company entrusted with the day-to-day functioning and affairs of a company. The appointment of a KMP may not be subject to a fixed term as per statutory provisions, but governed as per the terms of agreement mutually agreed upon with the company.   Therefore, where a KMP is given such flexibility of tendering resignation directly with the RoC in case of non-acceptance by the company, the same may lead to adverse consequences for a company.   For example, suppose a fraud was conducted during the tenure of a KMP, and while an internal investigation is being conducted by the company, the KMP tenders his resignation, which, in the most likeliness of the event, will not be accepted by the company. In such cases, the KMP, on expiry of 30 days, will be eligible to tender his resignation to RoC directly. We understand that the same is not the intention of law, and therefore, while we welcome this move of requiring disclosure of resignation, we do not find it appropriate to give the freedom to the KMPs in case of non-acceptance by the company if  such non-acceptance is in accordance with the  terms of employment.

Apart from the aforesaid, there are various other proposals intended towards ensuring enhanced corporate governance, reducing potentials for conflict of interest and strengthening the audit framework, easing compliances by companies, benefitting small investors and the like. A first hand view of the proposals signify a positive impact, however, the final text of the Bill is awaited to evaluate the final outcome. We discuss these below briefly.

Strengthening audit framework to avoid conflict of interest and promote transparency

Audit is a crucial aspect of maintaining the integrity and reliability of a company’s financial statements and economic health. Therefore, it was considered appropriate by the CLC to suggest some amendments to the existing audit framework under the Act.

• Specifying a varying list of prohibited non-audit services rendered by statutory auditors, directly or indirectly, in such companies where public interest is inherently involved, including the group companies, so as to reduce the risk of self-review and potentials for conflict of interest.
• Requirement of specific assurance from the resigning auditor that there is nothing in the company’s accounts which needs to be brought to the notice of the stakeholders. Further, the resigning auditor is required to specifically disclose if the resignation is due to non-cooperation from the auditee company, fraud or severe non-compliance, or diversion of funds. If the same is not informed by the auditor, and comes into notice after such resignation, suitable action can be initiated against such resigning auditor.
• Mandatory joint audit for companies involving public interest with recognition of liability of individual auditors
• Assurance and power to independently verify the fairness of the accounts of the subsidiary company to the auditor of the holding company
• Providing a standard format for qualification or adverse remarks on the financial statements of the company to be given by the auditor
• Mandatory cooling-off period of one year before an auditor becomes director (in any capacity) in the company or any of its group companies, being holding company, subsidiary company, associate company, or fellow subsidiary, to uphold the independence of the auditors.

Enhanced corporate governance provisions and alignment with Listing Regulations

SEBI, vide a series of amendments notified under the Listing Regulations, has taken various steps for a listed entity to ensure an enhanced corporate governance structure. However, for unlisted companies, MCA is the regulator and the Act is of supreme importance for ensuring corporate governance norms, apart from companies belonging to a specific sector where the sectoral regulator has its own set of corporate governance requirements. CLC has proposed some amendments which are generally influenced by the recent amendments under Listing Regulations. These are –

• Mandatory constitution of Risk Management Committee (RMC) by prescribed class or classes of companies, in view of their role in identifying, mitigating and resolving risk. Last year, SEBI has also brought various amendments relating to the role and constitution of RMC, discussed in our article SEBI notifies substantial amendments in Listing Regulations.
• Mandatory cooling off period of one year after cessation of office of an ID before holding any managerial position in the same company or its group company in line with the recent amendments brought in by SEBI and discussed in Revised Regulatory Framework for IDs of listed entities in India

Moving towards digitalisation and ease of compliances for companies

The Covid era has resulted in making the companies as well as the members and other stakeholders adaptive towards a virtual and digital environment and communication. Some relaxations that were granted temporarily as per the need of the hour have now become a rather effortless and more demanding approach. Further, some relaxations are proposed to be brought into existence thereby repealing the onerous requirements that do not hold much importance in today’s compliance environment. While the relaxations are brought in for companies, investors’ interests have not been ignored. The recommendations are as follow –

• Enabling a specified class or classes of companies to serve documents to investors in electronic mode only, with a requirement to serve the physical documents if so demanded by the investor, as an investor friendly measure.
• Prescribing manner for holding AGM and EGM through any mode (physical, virtual and hybrid). Further, for EGMs to be held on virtual mode entirely, reduction in the notice period
• Prescribing a class or classes of companies which shall be required to mandatorily maintain registers electronically in one consolidate platform, thereby, reducing the compliance costs to company on one hand and ease of access to stakeholders on the other
• Replacement of affidavits with self-declaration except for filings to be made with RD, NCLT or NCLAT
• Application for restoration of name to RD instead of NCLT, if applied within three years of striking off of the name of the company
• Enabling distressed companies (being one that has cash losses for three consecutive financial years, fulfilling such conditions as may be prescribed) to issue shares at a discount to the Central Government, State Governments and other prescribed classes of persons, subject to valuation by a registered valuer
• Facilitation of e-enforcement and e-adjudication measures

Insertion of new concepts in the existing Act for varying benefits

The corporate environment is ever changing in nature and so is the need of the corporate structure and the various stakeholders. New concepts are evolving every day, and they need to be sufficiently captured in the existing Act so as to provide them legal recognition. Recommendations made in line with such requirements are as follows –

• Recommendation for enabling issuance, holding and transfer of fractional shares for a class or classes of companies, to be issued in dematerialised form only – with a view to benefit small retail investors
• Incorporation of provisions regulating Restricted Stock Units (RSUs) and Stock Appreciation Rights (SARs) thereby filling regulatory gaps under the existing Act
• Incorporating separate set of provisions for incorporation of Special Purpose Acquisition Vehicles (SPACs) in India since the existing regulatory regime is not sufficient to facilitate their incorporation in view of certain provisions, discussed elaborately in our article, An overview of SPACs and related concerns in India.

Clarification on the existing provisions of the Act

Some recommendations under CLC Report have been specifically included with the intent of clarifying the already existing provisions of law, such as –

• Clarity on transfer to unclaimed dividend to IEPF along with the unclaimed shares simultaneously without holding the same for six years
• Amount unclaimed on shares bought back/ cancelled by the company also required to be transferred to IEPF
• For the purpose of buyback, specified securities to include only such stock options which have been exercised by the employee.
• Free reserves to be considered for the purpose of calculation of thresholds under buy back.
• Levy of penalty for violation of Section 188 of the Act still a ground for disqualification of director.
• The tenure of an independent director to include his tenure as an additional director in the same company.

Concluding Remarks

The CLC Report brings in a heap of recommendations, and while most of them are very significant, a handful of them are such that do not appear to be practically feasible or serving the purposes with which they have been proposed. Various clarifications and recommendations are a result of representations made by eminent industry experts including regulators such as SEBI. We are hopeful on most of the recommendations made by CLC and appreciate this move in bringing more clarity under the existing law as well as enhancing the corporate governance requirements applicable to an unlisted company, keeping in pace with the changing needs of time.

Having said that, whether the intent enunciated under the CLC Report is actually captured or not can only be seen once the text of amendment is released in the form of the Bill to be presented before both the Houses of Parliament for its approval.