Government looks at audit system and changes to capital raising in the Companies Act

The corporate affairs ministry is finalising the draft bill to bring in greater clarity on auditor independence norms in light of certain deficiencies in the audit of Infrastructure Leasing & Financial Services Ltd. (IL&FS) for the fiscal year 2018, said one of the persons mentioned above, requesting anonymity.

The people mentioned above say proposals are also expected to make it easier for bankrupt companies to raise capital.

The bill was developed in consultation with other ministries, following the 2022 Company Law Commission report. The bill is likely to be tabled in the winter session of Parliament.

The Company Law Commission in its report proposed to make it clear that an auditor cannot offer any non-audit services directly or indirectly to an audit client or to a group company if the latter is an entity acting in the public interest.

Currently, an audit firm can be disqualified if it has direct or indirect business ties with any of the audit client’s arms or if it directly or indirectly provides any prohibited non-audit service to any of them. This is open to interpretation and litigation.

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According to the second of the three people quoted earlier, the draft law aims to further reduce bureaucracy, more quickly reinstate companies that have been struck off the register upon application filed within a specified time limit, and improve the regulatory framework for mergers and acquisitions of certain types of companies.

To make it easier to do business, declarations submitted by companies will be accepted in certain circumstances where the law currently requires declarations on stamped paper, the person said.

However, one of the proposals in the commission’s report, to allow fractional shares, was not accepted. A fractional share is smaller than a full share, which allows retail investors to access high-value shares and helps companies diversify their ownership.

Emails sent to the ministry on September 7 and September 12 seeking comments remained unanswered at the time of publication.

Separately, the ministry is also working on a draft law amending the Insolvency and Restructuring Code (IBC) to clarify the order of repayment of dues of companies in financial difficulty to statutory bodies.

The IBC preamble treats these claims on an equal footing with the claims of unsecured creditors and below the claims of secured creditors who have encumbrances over the company’s assets.

However, court rulings have led to ambiguity, and the legislation is expected to maintain the pecking order in the preamble. Work is underway to introduce an IBC amendment bill in the winter session of Parliament as well.

Startups, CSR changes

The ministry is also examining the need for regulations to govern large startups, as these entities start from scratch but often grow rapidly in scale and valuations, and some of them tend to shirk their compliance obligations.

Mint On July 11, 2023, the government announced it was considering new rules to govern large startups that exceed a certain size, with the aim of making their governance systems more robust but not making it harder to do business.

Corporate social responsibility (CSR) norms also need to be revised to enable large companies to offer internships to the promised 10 million youth over five years, as announced in the Union Budget for fiscal 2025.

Mint On 6 September, the government announced that it was considering amendments to Schedule 7 of the Companies Act to cover training costs and some CSR internship costs.

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Anjali Malhotra, regulatory partner at business consultancy Nangia Andersen India, said incorporating some of the recommendations of the Company Law Commission in the Bill would be a step forward in adapting the law to contemporary needs.

“Legal recognition of special purpose acquisition companies (SPACs) will enable Indian companies to access global capital markets more efficiently,” Malhotra said. This is a type of company that has no operational business but is created for the specific purpose of acquiring a target company. It is not clear whether this is part of the proposal.

“Creating a centralised electronic platform for maintaining statutory registers will enhance both security and efficiency, simplifying corporate governance,” Malhotra said, referring to the committee’s proposal. Companies must maintain registers in registers containing details of their directors, shareholders, loans, deposits and beneficial owners.