Budget 2021: Company Law Reforms On The Horizon

The budget announcements made on Feb. 1, 2021, have wide ramifications and significantly affect many segments of the economy. This column coves changes proposed in the Finance Minister’s speech under the ‘Company Matters’ heading. Covered in paras 79 to 83 of her speech, these changes are touching multiple aspects, relating to both substantive and procedural dimensions of the companies law, and are sought to be delineated here.

Decriminalisation Of Offences By LLPs

Close on the heels of decriminalisation of offences under the Companies Act in 2020, the Finance Minister has announced decriminalisation of 12 compoundable offences under the limited liability partnership law. This is in line with the 2021 Company Law Committee chaired by Rajesh Verma, which had urged that resolution of such offences be through an in-house adjudication mechanism where the jurisdictional Registrar of Companies acts as the adjudication officer. This is a welcome move as it dilutes the violation from the current status as criminal offences to compoundable infractions that possess no mala fide intentions.

These offences cover non-compliance of provisions such as those relating to the maintenance of books of account and audit, filing of annual returns, a default in complying with the orders of the National Company Law Tribunal relating to schemes for compromise or arrangements, reconstruction, or amalgamation. Not only does this move is expected to promote ease of doing business but also this will reduce the burden on the justice dispensation system generally and NCLT specifically.

Following up from the Minister’s announcement, the MCA has notified its initiative to create a class of LLPs – called ‘Small LLPs’ – that would be subject to lesser compliances, lesser fee and lesser penalties in the event of default to incentivise corporatisation of micro and small partnerships into a more beneficial LLP structure.

Expanding The Scope Of Small Company

Sprucing up scope for the incorporation of small companies, effective April 1, 2021, the threshold limits for qualifying as a small company is proposed to be changed to cover companies having paid-up capital up to Rs 2 crore or having turnover up to Rs 20 crore from earlier limits of Rs 50 lakh and Rs 2 crore, respectively. The immediate effect of the change is that compliance burden under various provisions shall stand substantially reduced; a move aimed towards achieving an overall balance between regulatory oversight and ease of doing business for small business. This measure is expected to obviate the growing MSMEs on compliance and instead focus their energies on business expansion.

One Person Companies

A measure clearly intended to benefit startups and innovators, is the incentivisation of incorporation and growth of one-person companies. It appears that the urgency on this proposal was so overwhelming that it was swiftly acted upon and executed through notification issued by the Ministry of Corporate Affairs within few hours after the budget announcements.

The concept of OPCs was introduced in the 2013 law to allow one person to incorporate a company; a move whose genesis can be traced to recommendations of the JJ Irani Committee in 2005 which had urged that the entrepreneurial capabilities of individuals be given an outlet for participation in economic activity, without mandating such participation through an association of persons or partnership firms.

Through the budget, the earlier condition that a company would lose its status as an OPC (which in turn meant requiring it to compulsorily convert to either a private or a public company) if its annual turnover and paid-up share capital exceeded Rs 2 crore and Rs 50 lakh, respectively, has been dispensed with. Furthermore, the statutory lock-in period of 2 years from the date of incorporation that existed against the conversion of OPCs has also been removed, allowing voluntary conversion of OPCs into a public or a private company (except into a charitable company), on fulfilling meeting requirement of a minimum number of members as applicable.

In addition, pivoting India for realising increased investment limits from its diaspora, Non-Resident Indians have been allowed to form OPCs in India (as per budget proposals) along with a reduction in the period of stay for NRIs to 120 days to determine their residency status for this purpose. Both proposals have been executed in terms of the notification issued by the MCA on the budget day itself. This amendment opens up a fresh avenue for foreign investors in the form of an operative OPC without the overhanging condition of maintaining a turnover/paid-up capital limit.

These relaxations add to the advantages that OPCs enjoy in terms of exemptions from stringent legal compliances for holding a general meeting, board meetings, mandatory rotation of auditors, etc., that apply to other companies.

Faster Resolution of Cases

Multiple announcements have been made in this respect, which are enumerated below:

There is a clear proposal for strengthening the framework of the NCLT and sketching alternate methods of debt resolution for the speedy resolution of cases. This implies that we can expect the introduction of an Alternate Dispute Resolution mechanism in such disputes, which shall be a welcome measure as ADR reduces the propensity to opt for litigation and also dilutes the acrimony between the contesting parties. The 2021 amendment to the arbitration law passed by the Parliament to, among other changes, revise the required qualifications for accreditation of arbitrators so as to promote India as a hub of international commercial arbitration by attracting eminent arbitrators to the country.
A Special Resolution Framework for MSMEs is expected to be unveiled, under the Insolvency and Bankruptcy Code regime. While the details of the special resolution framework are to be announced, it can be expected to assuage the MSME fraternity’s disappointment towards the lack of mention of its predominant sectors in the Kamath Committee Report of September 2020 on Resolution Framework for Covid-19 related Stress. To recall, the Kamath Committee had selected 26 specific sectors (such as automobile manufacturing, aviation, real Estate, power, etc.) where the pervasive impact of Covid-19 was felt and had recommended financial parameters to be factored in the resolution plan under the RBI’s Prudential Framework on Resolution of Stressed Assets. The MSMEs would eagerly await the special framework as it would address the disputes which have arisen on account of significant business disruption owing to the pandemic.
As a related measure to expedite the debt recovery process, the budget announced easing up an alternative route of debt recovery for NBFCs under the SARFAESI law. NBFCs with a minimum asset size of Rs 100 crore will be allowed to initiate loans of Rs 20 lakh from the previous Rs 50 lakh threshold. This measure comes as a respite for NBFCs in the pandemic era when loan defaults have been raising.
Another related measure towards faster resolution of cases is implementing ‘MCA 21 Version 3.0’ equipped with data analytics, artificial intelligence, etc. in the 2021-22 financial year. This will enable an electronic interface with the MCA, thereby facilitate scrutiny, adjudication, consultation, and compliance management. The project is designed to strengthen enforcement and promote ease of doing business, for instance, the e-adjudication module has been conceptualized to manage the increased volume of adjudication proceedings by RoC facilitating end-to-end digitisation of adjudication for the ease of users.

Interestingly, these measures appear to be complementing the idea presented in the Economic Survey 2020-21 which has advocated for the withdrawal of regulatory forbearance adopted by RBI in the wake of the pandemic to prevent spillovers from financial sector failures. The Economic Survey has advocated that continued reforms coupled with a rollback of forbearance would incentivise banks to take risks by restructuring stressed assets even if they are unviable. Discontinuing the suspension of IBC, a time-tested legal instrument designed to systematically deal with distress, beyond the scheduled March 31, 2021, could be the next feasible step for the government.

Mergers and Amalgamation Of Startup Companies

Though not spelled out in the budget speech, a noteworthy development relates to allowing startups to enter into a simplified scheme of business reorganisation. In terms of an amendment notified on the budget day itself, a private company by incorporation and recognised as ‘startup company’ by the Ministry of Commerce can carry out mergers and amalgamations with one or more startup companies or with small companies. The governing rules have been amended to extend the fast-track process to startup mergers.

Conclusion

Even though the ‘company matters’ section occupied little space in the Finance Minister’s speech and perhaps got overwhelmed by the larger economic revival measures, that does not take away in any manner the significance of these proposals, which are wide-ranging and carry huge potential to thrust the vigour in the entrepreneurial spirit of countrymen besides addressing the ease of business index. Each of these measures is logical, coherent, and fits well in the larger motto of ‘minimum government maximum governance’ of the incumbent government. To illustrate, decriminalisation of minor violations under the LLP framework was a logical yet critical ask.

The same is the case as regards expansion of the scope of small companies and thrust to OPCs which shall facilitate budding entrepreneurial ambitions of the citizens as they aspire to grow further without inhibiting their business acumen by additional procedures applicable to larger companies. In fact, OPCs allow individuals to hedge their potential liabilities and thus create more opportunities for those who have admirable business ideas but carry a limited risk appetite or seek to hedge the risk of failures. Now that the government has done its bit, it is up to the citizens of India now to embark on the tide of economic revival and growth.

Mukesh Butani is Partner, BMR Legal, assisted by Madhura Bhat (Senior Associate). Views are personal.

The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team.