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Feb 6, 2016

Company Law Committee recommendations proposed in Companies Act, 2013 with respect to start-UPS & SME

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he Companies Law Committee constituted by the Ministry of Corporate Affairs with the mandate of (a) making recommendations on issues arising from the implementation of the Companies Act, 2013 (‘Act’), and (b) examining the recommendations received from the Bankruptcy Law Reforms Committee, the High Level Committee on Corporate Social Responsibility, the Law Commission of India and other agencies, has submitted its report to the Ministry.

 

The report suggests an overhaul of the Act and rules made thereunder by amending around 78 section. While the Committee has succeeded to a large extent in identifying irrelevant provisions and provisions which needs further clarity but the proposed amendments in the disclosure regime as championed by the Act and compliance requirements, gives a clear signal that the Committee has worked under the pressure of Indian Inc.

The Committee apart from removing ambiguity and bringing clarity in the provisions of the Act has also suggested various measures for promoting ease of doing business and start-ups.

Some of the suggestions of the Committee which can have impact on the Start-ups and SME sector are outlined below:

 

S.No. Provision Key Changes Impact
Chapter-I: Definitions
1 Turnover To revise the definition of ‘turnover’ as “the gross amount of revenue recognised in the profit and loss account from the sale, supply, or distribution of goods or on account of services rendered, or both, by the company during a financial year.” Removes ambiguity
2 Small Company For ascertaining the limits of small company, the words ‘last profit and loss account’ may be replaced with the words ‘last audited profit and loss account’. Removes ambiguity
Chapter-II: Incorporation of Companies
3 Incorporation of Companies
  • More flexibility should be provided while registering a company using the integrated incorporation form i.e. INC-29
  • Requirement of submitting additional documents should be rationalized
  • Affidavits wherever possible should be replaced by declarations
Will ease the process of incorporation and the Ministry can adopt INC-29 as single mode of incorporating a company  
4 Memorandum No need to amend the object clause of memorandum of association for carrying various type of activities Will facilitate ease of doing business.
5 Registered Office A company can have permanent registered within 30 days of incorporation instead of current period of 15 days Will bring procedural ease
6 Authentication of documents, proceedings & contracts Section 21 to be amended to allow ‘any employee’ of the company duly authorised by the Board’ to authenticate company’s documents. Will facilitate ease of doing business as lot of companies were facing problem in authorizing its officer for signing documents at local level
Chapter-III: Prospectus & Allotment of Securities
7 PrivatePlacement
  • Requirement of preparing private placement offer letter for allotting the shares to be dispensed with
  • The requirement of minimuminvestment size of Rs 20000 in terms of face value to be delinked with face value. 
  • Amount received in the offer can’t be used till the return of allotment is filed.
Willbring procedural ease and restrict back dated allotment of shares.
Chapter IV: Share Capital & Debentures
8 Allotment of shares for cash Genuine debt (including External Commercial Borrowings) converted into shares should be treated as allotment for cash and recommended appropriate modification of Form PAS-3. Removes ambiguity
9 Issue of sweat equity shares The Committee recommended that start-ups, who may require such instruments, may be permitted to issue sweat equity shares beyond twenty-five percent and up to fifty percent of the paid up equity share capital. Will facilitate start-ups and SME to retain and acquire talent
10 Issue of employee stock options. The Committee felt that, in order to encourage start-ups, this rule may be relaxed to enable issuance of ESOPs to promoters who may be working as employees or employee directors or whole time directors which would help the promoters to gain from increase in future valuation of the company without in any way impacting finances of the company during its initial years. Restriction to issue ESOP’s to promoters or promoters directors is relaxed to promote ease of doing business for startups, but the same is not defined that who will be considered as startups.
11 Preferential Allotments
  • In case of convertible instruments, the conversion price can be determined at the time of conversion and not at the time of issue , as currently required
  • Preferential allotment of partly paid-up shares also should also be allowed.
Practical approach is suggested  as it was impractical to determine the conversion price of security upfront which is going to convert say after a period of 5 or 10 years as there will be difference in value of the company currently and in future 
12 Issue of Debentures In case a company has issued debentures that it is required to create a Debenture Redemption Reserve (DRR) every year. The Committee has suggested that the companies should be allowed to set aside DRR on step down basis with reference to the redemption schedule for next one year. Will bring huge relief and ease of raising funds
Chapter V: Acceptance of Deposits by Companies
13 Prohibition on acceptance of deposits by companies
  • In case a company accepts deposit, it shall now be required to maintain a deposit of 20% of the amount of deposits maturing during that financial year only and not 15% of the amount of its deposits maturing during a financial year and the next financial year.
  • With a view to ease raising of funds for start-ups without additional compliance costs, the Committee recommended that limits with regard to raising of deposits from members for ‘Start-ups’ which are private companies may be removed for the first five years from their incorporation by using section 462 of the Act.
  • Outstanding advances not be treated as deposits even after 365 days, if they are received in the ordinary course of business, as evidenced by a written contract and during normal business cycle subject to disclosure of details of such outstanding amounts in the financial statements.
  • The Committee recommended to exclude debentures compulsorily convertible into shares of the company within ten years instead of five years from definition of deposit
  • The Committee recommended that Deposits Rules to exclude amounts directly received by a company from Alternate Investment Funds, Domestic Venture Capital Funds and Mutual Funds registered with SEBI, from the definition of deposits.
  • The Committee, therefore, recommended that convertible notes, convertible into equity or repayable within 5 years from the date of issue, if issued to a person with a minimum investment size of Rupees Twenty Five lakh brought in a single tranche, should not be treated as deposits under the Companies Act, 2013. Further, safeguards to prevent misuse may be finalised in consultation with RBI.
  • The Committee suggested that it should not be mandatory to send individual circulars to members of the company under Rule 4(1) if an advertisement has been issued by a company for acceptance of deposits from public and also when the same is placed on the website of the company.
  • Will reduce the cost of borrowing

 

  • Company can have access to larger pool of resources
  • Will facilitate ease of doing business 
Chapter- VI: Registration of Charges
14 Duty to register charges, etc. Company will not be required to register certain liens or securities or pledges like hypothecation of vehicle for vehicle loan, need not to be registered. Will bring procedural ease
Chapter- VII: Management & Administration
15 Annual Return
  • Separate form of annual return with less disclosures to be prescribed for small companies and one Person Company. 

 

  • Requirement of giving extract of annual return in the Board’s report  to be dispensed with
  • The Committee suggested expanding the scope of certification of annual return and so Company Secretaries in employment should be allowed to certify annual returns.
Will bring procedural ease and reduce disclosure burden.
16 Holding of Annual General Meeting Private limited companies and wholly owned subsidiaries of unlisted companies should be allowed to convene the AGMs at any place in India provided approval of 100% shareholders is obtained in advance,
  • Will facilitate ease of doing business.
  • It is further suggested the since start-up have lot of foreign investors therefore they should be allowed to hold AGM/EGM outside India in the country of its investor.
Chapter-IX: Accounts of Companies
17 Consolidated Financial Statements The Committee recommended that in such cases, where a Consolidated Financial Statement is statutorily required to be prepared as per the law of the jurisdiction in which the overseas subsidiary is established and is placed on the website in the statutory format, there should be no requirement for standalone financial statements of the step down subsidiaries to be placed on the website Will ease procedural requirements
18 Board’s Reports, etc.
  • Disclosures to in the Directors report to be reduced
  • Disclosures under section 188 & 186 if made in the financial statement need not be disclosed additionally in the Directors report
  • Separate format of report to be introduced for small companies
Will bring procedural ease and reduce disclosure burden.
Chapter-X: Audit & Auditors
19 Appointment of Auditors No need to ratify the appointment of auditor every year if once appointed for a term of 5 years. Will ease procedural requirements but can also give auditors a free hand for a period of 5 years
20 Powers and duties of auditors and auditing standards Reporting of adequacy of internal financial controls obligations of auditors should be with reference to the financial statements only. Will ease procedural requirements
Chapter-XI: Appointment & Qualification of Directors
21 Number of Independent Directors Joint Venture Companies, wholly-owned subsidiaries and dormant companies that fall within the purview of Section 455 of the Act to be excluded from the requirement of appointing an independent director. Will ease procedural requirements
22 Resident Director The definition of resident in India shall be modified and of requirement of resident in India for a period of 182 days in the preceding calendar year should be changed to current financial year and that the requirement of appointing a resident director should apply after 6 months of incorporation. The requirement will become more practical especially for foreign companies and will also bring ease in  procedural requirements
23 Disqualifications from appointment as, and vacation of office of director The requirement to vacate the office by a director in case the company fails to submit its annual return and financial statement for 3 year or in case of fails to redeem deposits , debenture or interest thereon or fails to pay dividend thereon , shall be dispensed with and this failure continues for one year or more shall be dispensed with. Will ease procedural requirements
24 Resignation of Director The Committee recommended that it would be appropriate if an option of intimating resignation to the Registrar was given to the Director instead of making it mandatory. Will ease procedural requirements
Chapter-XII: Meetings of Board & its Powers
25 Interested directors: exemptions from Section 174(3) to private companies Exemption to be provided under Section 174(3) to enable participating interested directors for the purposes of quorum, using Section 462 of the Act. Will provide flexibility and ease procedural requirements
26 Loans to Directors, etc. The Committee recommended, that it may be considered to allow companies to advance a loan to any other person in whom director is interested subject to prior approval of the company by a special resolution. Will allow movement of funds
Chapter-XXI: Companies Authorized to register under the Act
27 Companies capable of being registered
  • Process for conversion of LLP into a company should be made simpler
  • Requirement of obtaining of NOC from Registrar of Firm by partnership firms at the time of conversion into a Company shall be dispensed with.
More LLP will convert into Company when they go beyond a particular size and removal of NOC will bring unorganized sector into organized one.
Chapter-XXII: Registration Offices and Fees
28 Fees for filing Fees for filing may be reduced to zero or fees prescribed for small companies to be halved. Further the additional fees to be paid in case of delay in filing any form shall be substantially enhanced by upto ten times Will reduce compliance burden and increase self-compliance. Further companies will become more vigilant and avoid back dated filings