Company Law Committee Report 2022: Key Proposals

The CLC report, 2022 suggests various changes-expedite corporate processes, improve compliance requirements and more.

Independent directors of company boards have significant responsibilities under the Companies Act and are part of various committees, including those related to remuneration. (Photographer: Giulia Marchi/Bloomberg)
Independent directors of company boards have significant responsibilities under the Companies Act and are part of various committees, including those related to remuneration. (Photographer: Giulia Marchi/Bloomberg)

The Company Law Committee recently published a report suggesting various changes to the Companies Act, 2013 to expedite corporate processes, improve compliance requirements, and remove ambiguities from existing provisions.

The CLC was set up on Sept. 18, 2019 to make recommendations to the government to facilitate ease of doing business in India and effective implementation of the related laws.

Stakeholders can share their comments with the regulator.

Here are the key features of the CLC report:

Fractional Shares 

Fractional shares refer to a portion of a share lesser than one unit. Such shares arise due to mergers, issue of bonuses, or rights issues. However, at present, the Companies Act does not allow the holding of fractional shares.

But CLC believes that enabling the holding and trading of fractional shares will, in turn, increase participation of retail investors in the market.

For example, in FY21, over 1.42 crore retail investors entered the market. While retail investors may want to invest in certain companies, they may not have the purchasing power to buy a whole share due to the high price of a single unit. - CLC Report
Allowing holding and trading of fractional shares would enable them to invest precise and predetermined budgeted amounts in companies whose shares are otherwise inaccessible due to high prices.
CLC Report

Keeping this in mind, the CLC has recommended that the Companies Act enable the issuance, holding, and transfer of fractional shares for certain companies. Such shares should only be issued in dematerialized form, it said. For listed companies, such prescriptions may be made in consultation with the market regulator, the CLC report said.

Distressed Companies

Issuing shares at a discount refers to an issue at less than the nominal value or face value of the share, i.e., the value of a share as set out in the books of a company.

Section 53 earlier prohibited the issue of shares at a discount but in 2017, this provision came to be amended. The 2017 amendment permitted companies to issue shares at a discount to their creditors when their debt is converted into shares in pursuance of any statutory resolution plan or debt restructuring scheme.

The CLC report observes that it might cause hardship to distressed companies where the market value of the shares becomes less than the nominal value, thereby leading to difficulties in raising fresh share capital for the revival of the company.

Accordingly, the report urges the government to make an amendment to Section 53 to permit distressed companies to issue shares at a discount in such a manner as may be prescribed.

Facilitating E-Enforcement and E-Adjudication

Section 398 of the Act permits the central government to make rules regarding the filing of applications, documents, inspection, etc., in electronic form.

But an explanation to this provision clarifies that this is not applicable for imposition of fines, other pecuniary penalties, demand, payment of fees or contravention of the provisions in the Act.

This is a roadblock in carrying out certain adjudication-related activities in electronic mode, especially after the advent of Covid-19, which forced all courts and tribunals to be tech-savvy and conduct hearings virtually, the report points out.

In this regard, the CLC report seeks to remove this explanation to Section 398 to further facilitate e-enforcement and e-adjudication.

Audit framework + NFRA

The Companies Act empowers the central government to constitute the National Financial Reporting Authority for matters relating to accounting and auditing standards for companies.

NFRA seeks to protect public interest and the interests of investors, creditors and others associated with the companies or bodies corporate.

At present, NFRA only has powers to take action against "professional or other misconduct" committed by any member or firm of chartered accountants. The CLC has thus recommended that NFRA be empowered to take action against non-compliance with the Companies Act.

It should also be able to initiate appropriate penal action if its orders are not complied with.

The next suggestion that the report makes pertains to funding. Currently, NFRA receives its entire funding from the union government. To augment NFRA's financial autonomy, the CLC has made a proposal — to have an NFRA Fund similar to the Board Fund under the Insolvency and Bankruptcy Code and Competition Fund under the Competition Act.

Also, in an attempt to strengthen the audit framework, the committee suggests that a resigning auditor be mandated to make detailed disclosures before resignation. And it should specifically mention whether such resignation is due to non cooperation from the client company, fraud, severe noncompliance, or diversion of funds.

Further, the report also asks the government to amend the Companies Act, 2013 to enable the central government to mandate joint audits for such class or class of companies as may be prescribed.

M&A Proposals

Treasury shares or reacquired stock refers to previously outstanding stock that is bought back from stockholders by the issuing company. The result is that the total number of outstanding shares on the open market decreases.

Such treasury stock may arise on an amalgamation or merger where the transferee company receives its own shares pursuant to merger of transferor company with itself.

The law states that any treasury shares arising, as a result of a compromise or arrangement, is to be cancelled and extinguished. However, the Act does not contain any provision for cancelling or extinguishing treasury stock that existed before 2013.

Treasury shares are viewed as undesirable from the perspective of corporate governance, since the voting rights in such shares may be used by the directors/promoters of a company to exercise control over the company indirectly, thereby potentially thwarting the interests of minority shareholders.
CLC Report

As the Committee feels that long-term holding of treasury stock is opposed to the principles of shareholder democracy, it has proposed that each company holding treasury stock should report such shares to the central government through a declaration in a prescribed form.

"Thereafter, companies holding treasury stock will be required to completely dispose of such stock within a period of three years and report back to the central government. Such disposal may take place through sale or reduction of capital without invoking provisions of Section 66 of CA-13, considering the peculiarity of the situation and the fact that there would be no outflow of funds from the company."

To make the fast-track merger approval process under Section 233 more robust and simultaneously continue to protect minority shareholder interests, the committee recommends a modified twin test requiring approval by:

  • 75% of the shareholders, present and voting at the meeting.

  • Shareholders to represent more than 50%, in value, of the total number of shares of the company.

Apart from this, the report also makes recommendations to do away with affidavits under the Act, allow companies to hold meetings in electronic and hybrid modes, and to serve documents to their members in electronic form.