The latest Company Law Committee (CLC) Report has proposed vital amendments to the existing Companies Act, 2013 (CA,2013) with a view to match global industry and compliance standards covering various reforms relating to accountability, investor protection and disclosures. The Committee has also expressly sought for recognizing various new concepts which have proven successful globally.
Recognizing Fractional Shares
International Financial Services Centres Authority (IFASCA) Regulations, permit issuance of fractional shares under its regulatory regime in India. With the growing participation of retail investors and intention of Government for increasing their purchasing power, Committee proposed to introduce a concept of fractional shares in CA, 2013, which is widely accepted by many western countries. Presently, CA, 2013 prohibits holding shares in fraction. The Committee has recommended issue of fractional shares only for fresh issue of shares by the company in dematerialized form and not to those cases where fractional shares arise due to any corporate action.
However, this concept may be novel, but it lacks clarity on its purpose and its operational mechanism. It will have ambiguities in implementing them especially at the time of exit. Will stock exchanges have separate platform for trading of fractional shares ? How will Company maintain its register of members, especially, in case of listed companies ? Are the law makers looking at it from perspective fractional investment by retail investors? are few challenges which need to be tackled. Though for small investors who wish to acquire shares of blue-chip company may be benefitted as the amount they would invest to acquire shares in fraction would be much lesser as compared to acquisition in full. However, in essence it would have its own challenges, if it is not addressed timely and correctly.
Stock Appreciation Rights (SARs)
Many Start-ups and other companies, in order to retain employment issue ESOPs. Apart from ESOPs, companies also resort to issuance of Restricted stock units (RSUs) & Stock Appreciation rights (SARs). Till date CA, 2013 was silent on regulatory norms with respect to RSUs and SARs which may lead to regulatory gaps and arbitrage. The Committee is contemplating to bring specific provisions under the CA, 2013 on RSUs and SARs. Also, it is recommended that annual omnibus approval by the shareholders be allowed in order to avoid hardships and better manage timelines. Recognition of SARs and RSUs under CA, 2013 will pave the path for its successful issuance by introducing specific regulatory provisions which will leave no ambiguity in interpretation and operation of such schemes.
Enhancement of distressed companies has been one of the new focal areas of government after introducing IBC. To encourage it further, it proposed to allow issuance of shares of such companies at a discount to Central or State Government or to such class or classes of persons as may be prescribed after satisfying certain norms to be set. This will optimistically allow the Government / other investors to infuse Capital in distressed companies in public interest.
All these years, the government has been strongly advocating an idea of digitization. Apparently, the same has got a lot of traction during the COVID-19 led pandemic. The Committee has proposed several reforms such as conducting general meetings via online or hybrid mode in future, permitting to maintain statutory registers through an electronic form, encouraging E-enforcement and E-adjudication by removing explanation u/s 398 of CA, 2013, empowering Central Government to prescribe rules for classes of companies mandatorily required to serve certain documents in electronic mode only. This will not only provide ease of doing business but will also help in better time management. This will aid to make the judiciary more efficient and construct an easily accessible and cost-effective system.
If the recommendations of the committee become law, it will not only bring clarity but also open lot of possibilities which will help investors to participate in emerging economies.
( Ravi Mehta is MD and Head, Transaction Tax, and Amrita Bhatnagar is Associate Director, Transaction Tax, RBSA Advisors. The views expressed are personal.)