An opportunity lost for corporate law reforms

By Lalit Kumar, J. Sagar Associates
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The announcements forming part of the Atma Nirbhar Bharat Abhiyan (Self-Reliant India Mission) were expected to introduce big and bold reforms. Follow-up actions would shore up the ailing Indian economy, which faces an unprecedented slowdown due to the covid-19 pandemic. Sadly, such expectations of reforms are likely to be unfulfilled. Take for instance, the slew of measures for corporate law reforms announced on 17 May 2020 in Part 5: Government Reforms and Enablers aimed at lifting companies out of the doldrums.

Lalit Kumar, J. Sagar Associates corporate law reforms
Lalit Kumar
Partner
J Sagar Associates

Forming part of the ₹20 trillion (about US$267 billion) stimulus package, the reforms such as the easing of doing business and the decriminalizing of defaults under the Companies Act, 2013, should have been real game changers. Unfortunately, these measures, which have been described as a stimulus package, are no more than routine amendments to the act. Irrespective of covid-19, these measures would, sooner or later, have been announced as part of the pending Companies (Amendment) Bill, 2020.

Work to amend the act through this bill had started long before India was hit by covid-19. This means that the bill is a standalone measure to amend legislation and should not have been cloaked in the guise of big-bang reforms. The act, from its enactment, has been mired in controversy: not only was it full of confusing provisions, but it also included severe penalties for trivial offences. To address these problems, the act has been amended several times since 2013. In addition, the issue of frequent circulars from the Ministry of Corporate Affairs aimed at clarifying the provisions make it all too apparent that the act is a work in progress.

The most recent amendment is the Companies (Amendment) Act, 2019, which was introduced to implement the recommendations of the Company Law Committee set up in July 2018. Shortly after the amendment act was announced in July 2019, it was again felt necessary a review should be undertaken and suggested further provisions to ease the constraints on companies. In September 2019, a committee of experts was once again appointed to recommend further improvements to conducting business. As was the case with the amendment act, the focus of the review was to decriminalize minor, technical and procedural lapses.

The committee’s detailed deliberations were duly submitted with the recommendation that several important issues that needed consultation with the Securities and Exchange Board of India be tabled in the next session for amendments. Except for provisions related to fraud, deceit and illegal deals, accepting and repaying public deposits, financial statements, valuations and AGM-related matters, many criminal offences were reclassified as civil wrongs. Other offences were earmarked for regulation in an alternate framework mechanism, as non-compliance with them constituted neither civil nor criminal offences. Some offences were deemed punishable by fine only, as against imprisonment, and many others were thought suitable for repeal.

The bill to implement these recommendations was introduced in parliament in March 2020 and awaits approval. Except for a few suggestions, every recommendation of the committee is now a part of the bill. In addition to decriminalizing many offences, the key amendments include empowering the government to exempt certain private companies owning listed non-convertible debentures from being treated as listed entities, inserting a new chapter in the act specifically to cover producer companies, and setting up more benches of the National Company Law Appellate Tribunal. A startling development is that all the provisions of the bill are now presented as reforms to remedy the consequences of the covid-19 crisis. Another baffling issue is the non-inclusion in the bill of the recommendation to permit the government to set higher limits for the net worth, turnover, or net profit of companies to facilitate mandatory corporate social responsibility (CSR) contributions.

On the positive side, the bill incorporates some good proposals that were not in the committee’s recommendations. Noteworthy is the provision of a long-time demand for direct listing of securities of Indian companies in permissible foreign jurisdictions; exempting companies with up to ₹5 million (US$67,000) in CSR spending obligations from having to set up a CSR committee, and allowing companies to set off the amount spent in excess of their CSR spending obligations in a particular financial year against such obligations in subsequent years. While it is too early to say whether the stimulus package has delivered on its promises, caution in these uncertain times must develop into more positive and more bold measures to assist businesses desperately hoping for concrete reforms.

Lalit Kumar is a partner at J. Sagar Associates.

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