Report of ten members Company Law Committee (CLC) headed by Shri Tapan Ray which was set up on 04-06-2015 to make recommendations to the Government on issues arising on the implementation of the Companies Act, 2013 as well as the recommendations received from the Bankruptcy Law Reforms Committee, the High Level Committee on Corporate Social Responsibility (CSR), the Law Commission and other agencies. It is notable the Institute of Chartered Accountants (ICAI), Institute of Company Secretaries of India (ICSI) and Institute of Cost Accountants of India was also part of the committee through its Presidents.

STRUCTURE AND OVERVIEW OF THE REPORT

The report is divided into two parts:
Part I proposed amendments in the Companies Act, 2013, and
Part II proposed amendments to Rules issued under the Act.

The recommendations in Part I of the report have been divided into sections, broadly sequenced as per the scheme of the Chapters in the Companies Act, 2013.

The Committee’s recommendations would result in changes in 78 sections, and more than one hundred changes in the Act.

In relation to definitions of certain terms used in the Act, the Committee recommends changes/improvements to the following definitions among others: Associate Company, Debentures, Financial Year, Holding Company, Interested Director, Key managerial personnel, Net worth, Related Party, Small Company, Subsidiary Company and Turnover. These modifications have been proposed to remove ambiguities and make the definitions more objective. The amendments proposed to the provisions relating to incorporation of companies relate to allowing unrestricted object clause in the memorandum of association, and certain filing and registration related requirements. These amendments have been proposed to make the process of incorporation simpler and provide greater flexibility for carrying out business.

In so far as the chapters relating to raising of capital are concerned, the recommendations of the Committee are aimed at simplifying the disclosure regime, streamlining the private placement mechanism and synchronising the provisions of the Act with the regulations issued by other sectoral regulators. While the changes proposed in relation to these provisions are expected to help businesses in raising capital, they also take into account the interests of all stakeholders by ensuring that adequate disclosures and appropriate safeguards against misuse are retained. The amendments relating to provisions dealing with registration of charges are aimed at providing some relaxations so as to facilitate the ease of doing business.

The recommendations of the Committee relating to declaration and payment of dividend are aimed at harmonising the provisions in the Act and Rules to provide correct interpretation and for addressing some loopholes to ensure that businesses do not misuse the provisions to pay out dividend out of the company’s capital. The Committee has also suggested changes to the provisions relating to accounts and audit to improve transparency and the quality of information in relation to the financial position of the company. These recommendations also address ambiguities in relation to calculation of profits for determination of a company’s ‘corporate social responsibility’ obligations.

The Committee’s recommendations on corporate governance (Chapter VII- ‘Management and Administration’, Chapter XI- ‘Appointment and Qualifications of Directors’, Chapter XII- ‘Meetings of Board and Its Powers’ and Chapter XIII- ‘Appointment and Remuneration of Managerial Personnel’) are aimed at striking the right balance among objectives such as improving corporate governance, incentivising individuals to take up positions of responsibility, and reducing the cost of compliance. These recommendations touch upon a wide range of issues and concepts including independent directors, nomination and remuneration committee, audit committee, disclosure of interests, loans and investments, managerial remuneration, and insider trading.

The remaining recommendations proposing amendments to the Act deal with issues relating to compromises and arrangements, registered valuers, companies incorporated outside India, registration offices and fees, Nidhis, National Company Law Tribunal, Special Courts and Penalties.

The Committee has also, as part of its deliberations recommended certain changes specifically for encouraging start-ups. In addition, there are certain recommendations which, though being changed/modified for other classes of companies, would create a positive environment for start-ups. These recommendations relate to incorporation, raising of capital, and certain compliances. Specifically, the recommendations have been made for reducing compliance burden on account of the private placement procedure (paragraph 3.3 to 3.12 of Part I of the report), excluding convertible notes raised by start-ups from the definition of deposits (paragraph 5.5 of Part II of the report), simplifying the procedure to convert an LLP into a company (paragraph 14.2 of Part II of the report), addressing concerns with regard to insider trading provisions (paragraph 12.23 of Part I of the report), allowing start-ups to raise deposits for its initial five years without any upper limits (paragraph 5.5 of Part I of the report), allowing start-ups to issue ESOPs to promoters working as employees (paragraph 4.11 of Part I of the report), rules regarding availability of names are being made liberal to allow for more innovative names (paragraph 2.13 to 2.15 of Part II of the report), relaxing the requirement for foreign nationals to be managing directors/whole time directors (paragraph 13.14 of Part I of the report), increasing the thresholds for private companies to comply with having an Independent Director, Audit Committee, Nomination & Remuneration Committee (paragraph 12.9 of Part I and 12.3 of Part II of the report), doing away with the requirement for Government approval for managerial remuneration (paragraph 13.5 of Part I of the report), and increasing the limits with regard to sweat equity that can be issued by a company from 25% of paid up capital to 50% (paragraph 4.10 of Part II of the report).

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