Background
The Company Law Committee (“Committee”) has recently proposed a set of amendments to the Companies Act, 2013 (“Act”), with a multi-pronged intention of streamlining processes under the Act, identifying regulatory inconsistencies and gaps, and recommending concepts and provisions that may facilitate the larger goal of ease of doing business for corporates and their stakeholders. This note sets out the key amendments proposed by the Committee, as well as their background and potential implications.

Proposed Amendments
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Introduction to new concepts

Issuance and holding of fractional shares
Under the Act, the holding of ‘fractional shares’ – i.e., portions of shares that are each less than one share unit – is currently not permitted. Considering the increasing participation of retail investors in the Indian market, the Committee has observed that such investors may want to invest in certain companies while not possessing the purchasing power required to buy whole shares due to the high price of shares. Consequently, and keeping in mind global and domestic practices (including a recent authorisation by the International Financial Services Centres Authority (“IFSCA”) in India for the trading of fractional shares within its regulatory sandbox regime), the Committee has proposed enabling the issuance, holding and transfer of fractional shares in dematerialized form for a prescribed class of companies. This recommendation only relates to fresh issuances of fractional shares and not to cases where such shares may be created on account of any ‘corporate actions’ (such as mergers, bonus issues or rights issues). This proposal is in line with global trends, however, this move requires a number of changes in the existing provisions of the Act, to safeguard and effectively implement shareholders’ rights of fractional shareholders. It will be interesting to see the manner in which various shareholders’ rights will playout and the class of companies that will be permitted to issue the fractional shares.

Issuance and holding of RSUs and SARs
The Committee also seeks the recognition of Restricted Stock Units (“RSUs”) (i.e., schemes that entitle employees to hold shares of the company at the end of a certain period and on the satisfaction of certain parameters) and Stock Appreciation Rights (“SARs”) (i.e., right to receive the benefit in the form of cash, shares or both) under the Act. While SARs have been covered under the relevant Securities and Exchange Board of India (“SEBI”) regulations for
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listed companies, there are no comparable provisions in place for RSUs. In order to prevent regulatory gaps, the Committee has recommended that both RSUs and SARs be recognized and regulated under the Act and enabling provision to issue them should be laid out (similar to the Employee Stock Option Scheme).

This will be a beneficial move and will more generally streamline the practice and the process followed by various companies (especially the start-ups).

1.3 Special Purpose Acquisition Companies

‘Special Purpose Acquisition Companies’ (“SPACs”) or ‘blank-cheque companies’ are companies that do not have any operating business, and which are usually formed with the objective of raising money via listing on a stock exchange, domestic or foreign and then consequently acquiring a business. The target company therefore benefits from getting listed without itself having to undertake the formalities of an initial public offering through an arguably less cumbersome process.

While the incorporation of SPACs in India is not permitted under the current legal framework, SPACs are being recognised across multiple jurisdictions and are steadily gaining popularity in global financial transactions – in a recent case, ReNew Power Private Limited (an Indian renewable energy company) was indirectly listed on the NASDAQ stock exchange in the United States last year through a foreign incorporated SPAC holding company. The IFSCA in India has already permitted and comprehensively regulated the listing of SPACs in International Financial Services Centres in the country, and the Committee has now recommended that similar enabling provisions be introduced in the Act for India-incorporated SPACs to be allowed to list on domestic and foreign exchanges. Such a move, especially in the context of cross- border listings, would require a significant consideration by the Government of potential issues spanning from the navigation of Indian foreign exchange regulations to existing SEBI restrictions.

SEBI is already in the process of notifying a framework with respect to SPAC listing in India and enabling provisions under the Act will foster a parallel regime for listing.

1.4 Raising capital in distressed companies
The Act presently does not permit the issuance of shares at a discount (i.e., an issue at less than the nominal or face value of a share) other than in the specific situation of a company issuing discounted shares to its creditors in terms of certain statutory resolution plans or debt restructuring schemes. Under the Companies Act, 1956, companies were allowed to issue shares at a discount after obtaining approval from the Company Law Board. The Committee has recommended that distressed companies should also be allowed to issue shares at a discount to the Central or State Government or certain class of prescribed persons. For this purpose, ‘distressed companies’ would be defined as companies that have cash losses (other than those arising out of depreciation or revaluation) for the previous three consecutive years or more and fulfil certain defined terms and conditions. This relaxation would allow for an alternate form of revival for such distressed companies, prior to being referred to insolvency, especially in the context of widespread post-pandemic losses across businesses.

1.5 Provisions on Disqualification and Vacation of Directorship
The Committee has proposed that the requirement of vacation of directorship due to
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disqualification should be limited only to instances of personal incapacity of the concerned director (Section 164(1) of the Act) and not on account of lapses by the company in the filing of its financial statements and annual returns, or defaults in the repayment of debentures or deposits by the company, for the specified periods of time (Section 164(2) (a) and (b) of the Act, respectively). Currently, a director who is liable for disqualification under Section 164(2) of the Act is required to vacate his office in all other companies that he holds a directorship in (which may all be companies that have been compliant under the Act), while remaining a director in the company which is in default. The Committee has considered this to be onerous in relation to the functioning and business of the compliant companies, especially in situations where the director was appointed to such companies by a SEBI-registered debenture trustee as a nominee director.
The Committee has also recommended that any new directors who are appointed to companies that are in default under Section 164(2)(b) of the Act should be allowed a relaxation against the applicability of the provision to their own directorship, for a period of two years rather than the current period of six months.
It has been proposed that the above changes be considered for Limited Liability Partnerships (“LLPs”) as well, since similar provisions are proposed to be extended to them under the Limited Liability Partnership Act, 2008 (“LLP Act”).

1.6 Changes proposed to the merger related provisions
Under the Act, currently holding treasury shares is prohibited. Treasury shares may arise on an amalgamation or merger of the company with its wholly owned subsidiary where the company receives its own shares pursuant to the merger/amalgamation. In practice, at the time of merger, such shares are cancelled. The Committee has suggested provisions with respect to disposal and disclosure of such treasury shares. Any company holding such treasury stock should disclose the same to the Central Government and also fully dispose of such stock within a period of three years (either through the sale or reduction of capital, and without invoking the provisions of Section 66 of the Act which deals with reduction of capital).

The existing norms also require a fast-track scheme of merger to be approved by persons holding 90% of total share capital of the company. The Committee has instead recommended a twin test to strengthen the process of fast-track merger under Section 233 of the Act (since the existing threshold is quite onerous, especially in companies with larger public holding), requiring approval of the scheme from a majority of persons (i) 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 percent, in value, of the total number of shares of the company. This seeks to fasten the internal approvals for such scheme, while safeguarding the interest of the minority shareholders.

1.7 Audit Framework
The Committee has recommended several amendments to the Act to strengthen the audit framework, given the crucial role played by auditors in corporate governance. These include the following proposals:
(i) For a period of one year following the cessation of office by an auditor, such auditor should not be permitted to hold the position of a non-executive director, managing director, whole time director in the relevant company or its holding, subsidiary and

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(ii) Under Section 144 of the Act, there is a prohibition on auditors from rendering certain non-audit services to companies. The Committee has proposed that such services be permitted for certain specified companies, for example, for companies where public interest is not inherent;
(iii) An explicit obligation should exist on auditors to make detailed disclosures upon their resignation, including a specific mention of whether such resignation is due to non- cooperation from the auditee company, fraud, severe non-compliance or diversion of funds; and
(iv) The Central Government should consider introducing a format for auditors that would require a description on the impact of qualifications and adverse remarks that are included in financial statements by the auditors (as presently, such remarks do not sufficiently elaborate on the corresponding negative effect on the economic health or functioning of the company).

1.8 Changes to NIDHI companies and LLPs
In addition to the above changes, the Committee has proposed certain amendments to the provisions applicable to NIDHI companies to ensure higher due diligence and stricter scrutiny. Further, the Committee has recommended introduction of ‘Producer’ LLPs (i.e., LLPs for persons engaged in activities connected with primary produce, such as farmers and persons engaged in handloom, handicraft or other cottage industries, and who are usually organized in the form of co-operative societies) within the LLP Act, as it would serve a more desirable option for small producers with a range of relaxations in the conduct of their affairs.

2 Clarifications to the Act

The Committee has recommended several clarifications on certain provisions of the Act to standardize their applicability in practice, such as:

2.1 Calculation of the buy-back threshold – While companies are permitted to buy-back shares and certain other securities from their shareholders, they can only do so to the extent of a specified percentage (being 25%) of the aggregate of their paid-up capital and free reserves. There has been some confusion regarding whether – in the case of a buy-back of equity shares – the 25% threshold should be calculated against the aggregate referred to above (which includes the free reserves of the company), or whether the free reserves should be excluded from the calculation. On clarifying that the former approach should be taken, the Committee has recommended that this be explicitly set out in the relevant provision.

2.2 Tenure of Independent Directors – The Committee has clarified that an Independent Director’s (“ID’s”) tenure of 5 years (as prescribed in Section 149(10) of the Act) should include the period during which the ID may have functioned as an additional director, prior to his or her appointment by the shareholders. Further, the Committee has also emphasized that the tenure of IDs (which is capped at two successive terms of five years each, and is then required to be followed by a cooling-off period of three years prior to any appointment as an ID) should be fixed regardless of whether the two terms are held in actuality for a period less than ten years – for example, in a case where the ID resigns prior to the completion of either term.

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2.3 Streamlining of financial year: Companies should be permitted to realign their financial year with the one followed under the Act, in situations where they cease to be holding, subsidiary or associates of foreign entities (and therefore may have followed the financial year of such foreign entity).

2.4 Substitution of affidavits with self-declarations: In a number of situations under the Act where companies are required to furnish affidavits to authorities (other than in cases where the affidavits are needed in judicial or quasi-judicial proceedings before the National Company Law Tribunal), the requirement for an affidavit should be replaced with self-declarations (which do not need any stamp paper or attestation).

3 Go Green Initiatives
The Committee has recommended the below amendments to the existing regime to introduce and facilitate digitization, pursuant to the challenges posed by the COVID-19 pandemic and ensuing shift to electronic conduct of activities:

• E-enforcement and e-adjudication – In light of difficulties posed by the COVID-19 pandemic, the Committee has recommended Central Government to make rules for conducting enforcement-related actions in a transparent and non-discretionary manner with a proper trail through an electronic platform.

• Electronic platform for statutory registers – The Committee has proposed that the Central Government should set up an electronic platform for maintenance, storage and updation of registers which the companies are required to mandatorily maintain. Such a single consolidated e-platform will make the sharing and viewing of information easier, secure and transparent for all the stakeholders.

• Communication in electronic form – The Act currently prescribes serving of documents through registered post, speed post, courier or any other electronic mode. The Committee has suggested that the Central Government prescribe rules with suitable safeguards to protect the interest of investors, for certain classes of companies for whom it shall be mandatory to serve documents to all their members in electronic mode only for the compliance with the Act.

• General Meetings in hybrid mode – The Committee has recommended that companies should be enabled to hold their annual general meetings, extra-ordinary general meetings in a virtual, physical and a hybrid mode.

Impact

There are a number of other clarificatory amendments suggested by the Committee that will remove smaller ambiguities in the Act which have continued since its implementation. The Committee appears to have undertaken an in-depth analysis of the provisions of the Act and the proposals are in line with easing compliance by corporates and establishing a secure corporate governance framework. In relation to some of the more conceptual recommendations (which will necessitate an interplay between different regulatory regimes), it will be interesting to see if these will come into effect in actuality, and if so, the manner in which they will be regulated.