Regulatory updates

Rule 3 of the Companies (Registration of Charges) Rules, 2014 (Registration of Charges Rules) requires companies to register the creation or modification of charges and pay stipulated amount for such registration. In case of delay of such registration, additional fees are charged.

MCA, vide a notification dated 27 April 2022 has stated that nothing contained in Rule 3 of the Registration of Charges Rules would apply to any charge required to be created or modified by a banking company under section 77⁴ of the Companies Act, 2013 in favour of the Reserve Bank of India (RBI) when any loan or advance has been provided to it under clause 4(d) of section 17 of RBI Act, 1934.

Effective date: The Rules would be effective from the date of publication in the Official Gazettei.e., 27 April 2022

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4. As per section 77 of the Companies Act, 2013, it is the duty of every company creating a charge within or outside India, on its property or assets or any of its undertakings (tangible or intangible) situated in or outside India, to register the particulars of the charge created by the company and pay prescribed amount of fees within the prescribed time.

To access the text of the notification, please click here

The Ministry of Corporate Affairs (MCA) constituted the Company Law Committee (CLC) to make recommendations to the Government inter aliaon changes aimed at facilitating and promoting greater ease of doing business in India and effective implementation of the Companies Act, 2013, the Limited Liability Partnership Act, 2008 and the Rules made thereunder.

The CLC submitted its latest report to the Government on 21 March 2022. The report has proposed various important amendments to the Companies Act, 2013 and the Limited Liability Partnership Act, 2008. The suggestions aim to ensure ease of compliances, laying strong emphasis on digitisation and also building a robust corporate governance framework including alignment of the law with the provisions of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations). Some of the key recommendations pertaining to the Companies Act, 2013 are:

A. Revised provisions relating to directors and committees of the board

• Provisions pertaining to Independent Directors (ID)
  • Period of appointment: TheCLC reiterated that an ID cannot be appointed for more than two consecutive terms. Further, the period of appointment of IDs cannot exceed the prescribed period of five years for a single term or ten years for two consecutive terms. While calculating this period, any tenure held as an additional director would also be considered.
  • Engagement of IDs as a legal / consulting firm during cooling-off period: Currently,an employee, proprietor or partner of a legal or consulting firm, transacting with a company, could be appointed as an ID in such a company provided that such a transaction amounted to less than 10 per cent of the gross turnover of that firm (threshold). However, upon ceasing to hold office of an ID, there would be a blanket prohibition on the firm to function as a legal or consulting firm regardless of the threshold being met.
    The CLC recommended that the relevant legal or consulting firm should be permitted to continue to render its services as per thresholds even after the ID completed his/her term. Further, CLC recommended to reduce the threshold to 5 per cent instead of the existing limit of 10 per cent of gross turnover of the firm.
• Provisions on disqualification of directors: The Companies Act, 2013 lays down provisions relating to the disqualification and vacation of office of directors of a company. The CLC recommendations are as follows:
  • Vacancy of directorship should only arise due to disqualification under personal capacity, under section 164(1) of the Companies Act, 2013 (and not on account of defaults made by a company under section 164(2)⁵of the Companies Act, 2013)
  • Extend the period of exemption for newly appointed directors from the default made by a company under section 164(2) of the Companies Act, 2013 to two years (instead of the current six months).
  • Rights of nominee directors appointed pursuant to nomination by debenture trustees registered with SEBI should be safeguarded from disqualification under section 164(2) of the Companies Act, 2013.
• Cooling off period for directors and auditors
  • Cooling off period before an auditor becomes a director: There should be a mandatory one-year cooling-off period, from the date of cessation of office, after which an auditor of a company may be permitted to hold the position of a director in the same company or group of companies. Such a restriction would only apply to the concerned partner of an audit firm/LLP that audited the company.
  • Cooling off period before an ID becomes a managerial personnel: There should be a mandatory one-year cooling-off period, from the date of cessation of office, after which an ID may be permitted to hold the position of a managing director, whole-time director, or manager in the same company or group of companies.
• Resignation of Key Managerial Personnel (KMPs) Procedure of resignation of certain KMPs (whose appointments were filed with the RoC) should be aligned with the procedure of resignation of directors under Section 168 of the Companies Act, 2013. This means that a company should file the notice of resignation within 30 days of receipt of such notice, failing which KMPs may directly file the same with the RoC.
• Setting up Risk Management Committee (RMC): To include new provisions in the Companies Act, 2013, for constitution of an RMC for such class of companies, as the CG may prescribe.

B. Reviewing and strengthening the audit framework

• Amendments relating to NFRA: TheCentral Government has constituted the National Financial Reporting Authority (NFRA) for matters relating to accounting and auditing standards for companies. CLC recommendations are as follows:
  • Empower NFRA to take an appropriate action: Empower NFRA to take appropriate action against individuals or firms for non-compliance with the Companies Act, 2013 and requirements thereunder in addition to its existing powers to take action against ‘professional or other misconduct’.
  • Constitution of NFRA fund: An NFRA Fund should be constituted to provide financial autonomy to NFRA.
  • Regulations and supervisory powers: NFRA should be enabled to make certain regulations⁶ and supervisory powers should be granted to the NFRA Chairperson
• Reviewing and strengthening the audit framework and introducing mechanisms to ensure the independence of auditors
  The CLC recommendations are as follows:
  • Non-audit services Enabling provisions should be introduced for the CG to prescribe a differential list of prohibitions on availing non-audit services or total prohibition on availing non-audit services for such class or classes of companies where public interest is inherent.
  • Punishment under Section 143: Section 147 of the Companies Act, 2013 to be amended to cover penal consequences for contravention of Section 143 of the Companies Act, 2013 regarding sub-sections other than sub-section (12). Penal consequences of such sub-sections except sub-section (12) are currently not covered under the Companies Act, 2013.
  • Obligations of the resigning auditor: A resigning auditor should be under an explicit obligation to provide detailed disclosures before resignation and should specifically mention whether such resignation is due to non-cooperation from the company, fraud, severe non-compliance or diversion of funds. However, if the auditor fails to make such disclosures in the resignation statement, then suitable action would be taken against such an auditor. Additionally, the auditor should assure shareholders and stakeholders that in his/her opinion there is nothing in the company’s accounts which needs to brought to their notice, and that his/her decision to resign is an independent decision.
  • Mandatory joint audit for certain companies: The Central Government should have powers to mandate joint audits for such class or classes of companies as it may deem necessary.
  • Auditor of holding company to comment on the true and fair view of each subsidiary company: To amend the Companies Act, 2013 after further examination and public consultation so as to ensure that the auditor of a holding company has been given assurance about the fairness of audit of each subsidiary company by respective auditors. In addition, the auditor of the holding company may be empowered to independently verify the accounts or part of accounts of any subsidiary company.
  • Forensic Audit: The Companies Act, 2013 should enable the CG to prescribe detailed Rules relating to forensic audit through subordinate legislation.
• Standardisation of qualifications by auditors: Enabling provisions should be introduced for the CG to issue a format for auditors to provide the impact of every qualification or an adverse remark on a company’s financial statements for circulation to the board of directors before the financial statements are circulated to the shareholders of a company.

C. Reviewing provisions relating to mergers and acquisitions

• Treasury stock: Companies holding treasury stock would be required to report to CG through a declaration in a prescribed form. Additionally, such a company should dispose off the treasury stock within a period of three years. In case, the company fails to dispose off the treasury shares, then such shares would be considered as cancelled and share capital of the company would be reduced in a prescribed manner and penal action can be initiated against such a company.
• Fast-track mergers: Permit fast-track mergers between a holding company and its subsidiary company or companies other than wholly-owned subsidiaries, if such companies are not listed and meet prescribed conditions.

D. Other matters

The CLC recommendations are as follows:

• Companies, which cease to be associated with a foreign entity, should be allowed to file a fresh application with the CG in a prescribed form to allow them to revert back to the financial year followed under the Companies Act, 2013.
• Enable companies to hold general meetings, i.e., AGMs and EGMs physically, virtually, and in hybrid mode. Where EGM is to be conducted entirely in electronic mode, the notice period for such a meeting should be reduced.
• The CG will prescribe rules for class or classes of companies mandatorily required to serve certain documents in electronic mode only (however, physical documents to be delivered where requested by a shareholder).
• Mandatorily require prescribed class or classes of companies to maintain their statutory registers on an electronic platform in the manner laid down by the CG.
• Free reservesare to be included in the calculation of buy-back of equity shares even though the term has not been specifically included in the proviso to section 68(2)(c) (which clarifies the manner in which the limits for buy back of shares is calculated). Further, only shares on which the shareholders have exercised the stock option should be allowed to be bought back.
• Company law should be amended to enable issuance, holding, transfer of fractional shares, in dematerialised form, for prescribed class or classes of companies in consultation with SEBI (for listed companies), as may be required. Further, Restricted Stock Units (RSUs) and Stock Appreciation Rights (SARs) should be recognised under the Companies Act, 2013, and their issuance should be sufficiently encumbered.
• Distressed companies⁷ should be allowed to issue shares at a discount in such a manner as prescribed by the CG.
• Introduction of an enabling provision to recognise Special Purpose Acquisition Companies (SPACs) under the Companies Act, 2013 and allow entrepreneurs to list a SPAC incorporated in India on domestic and global exchanges.
• Amendments relating to the Investor Education and Protection Fund (IEPF) such as
  • Enabling dividend pertaining to shares that are transferred to IEPF to also be transferred to IEPF at the time of transfer of shares irrespective of the year they pertain to.
  • Purpose for which IEPF may be utilised includes ‘redemption amount towards unclaimed or unpaid preference shares’.
  • Unclaimed money pertaining to shares or securities that have been bought back or cancelled should be allowed to be transferred to IEPF.

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5. Section 164(2) deals with the disqualification of directors on account of lapses made by a company in filing its annual returns and financial statements or default in repayment of deposits or debentures.
6. Regulations that NFRA should be empowered to make include:
     - Form and manner of filing information with NFRA,
     - Place, timing, and procedure to be followed for NFRA meetings.
7. Distressed companies may be categorised as such class or classes of companies that have cash losses (other than those arising out of depreciation or revaluation) for previous three consecutive years or more and fulfil such terms and conditions.