Govt eyes audit regime, capital raising tweaks in Companies Act

The ministry of corporate affairs is giving final shape to the bill to bring more clarity on auditor independence norms, in light of some of the audit lapses seen in the audit of Infrastructure Leasing & Financial Services Ltd. (IL&FS) for FY18, one of the persons cited above said on the condition of anonymity. 

Proposals to make it easier for bankrupt businesses to raise capital are also expected, according to the persons cited above.

The legislation has been drafted after consulting other ministries, following a 2022 report of the Company Law Committee. The bill is likely to be tabled in the winter session of Parliament.

The Company Law Committee, in its report, had proposed to make it absolutely explicit that no kind of non-audit service could be offered by an auditor to an audit client or a group company directly or indirectly if it is a public interest entity.

At present, an audit firm can get disqualified if it has direct or indirect business ties with any of the arms of the audit client, or when it directly or indirectly gives any of them any prohibited non-audit service. This is prone to interpretation and litigation.

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The bill seeks to further cut down red tape, restore expeditiously the companies struck off from the official register if a request is made within a specified period, and streamline the regulatory framework for mergers and acquisitions of certain classes of companies, according to the second of the three people quoted earlier. 

For improving ease of doing business, self-declaration by businesses will be accepted in certain circumstances where currently the law requires affidavits on stamp paper, said the person.

However, one of the proposals in the committee's report for allowing fractional shares has not been accepted. A fractional share is less than a full share, allowing retail investors to access high-value stocks and helping businesses diversify ownership.

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

Separately, the ministry is also working on a bill to amend the Insolvency and Bankruptcy Code (IBC) to further clarify the ranking of a distressed company’s dues to statutory agencies in the order of repayment priority.

IBC’s preamble treats these dues on a par with those of unsecured creditors and below those of secured creditors that have a charge on the assets of the company. 

However, judicial pronouncements have led to ambiguity and the legislation is expected to uphold the pecking order in the preamble. Efforts are on to bring the IBC amendment bill, too, in the winter session of the Parliament.

Startups, CSR changes

The ministry is also looking into the need for a regulatory regime suitable for large startups because these entities begin from scratch, but often grow fast in scale and valuations and some of them are prone to faltering in their compliance obligations. 

Mint had reported on 11 July 2023 that the government was exploring if there was need for a new regulatory regime for large startups that have grown beyond a certain size to make sure their governance systems become more robust without compromising on ease of doing business.

The norms on corporate social responsibility (CSR) also require modifications to allow big businesses to offer internships to a promised 10 million youngsters over five years, as was announced in the Union budget for FY25. 

Mint had reported on 6 September that the government was looking at amendments to Schedule seven of the Companies Act to include the cost of training and part of the internship cost under CSR.

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Anjali Malhotra, partner-regulatory at business advisory firm Nangia Andersen India, said some of the recommendations of the company law committee if included in the bill would be a progressive move to align the law with modern-day needs.

“Legal acknowledgment of Special Purpose Acquisition Companies (SPACs) will enable Indian firms to access global capital markets more efficiently," said Malhotra. This is a type of company that does not have an operating business but is formed with the specific goal of acquiring a target company. It's not clear that if this is part of the proposals.

“Establishment of a centralized electronic platform for maintaining statutory records will enhance both security and efficiency, simplifying corporate governance," said Malhotra, referring to a proposal of the committee. Companies must keep records in registers containing details of their directors, shareholders, loans, deposits, and beneficial owners.