UNION BUDGET 2021: CORPORATE LAW CHANGES

The Union Budget for fiscal year 2021-2022 rests on 6 pillars.

  • Health and Wellbeing
  • Physical & Financial Capital, and Infrastructure
  • Inclusive Development for Aspirational India
  • Reinvigorating Human Capital
  • Innovation and R&D
  • Minimum Government and Maximum Governance

The various aspects touched upon by the Union Budget 2021-22 in the Indian corporate law regime are briefly summarized as follows:

  1. As a measure to directly benefit Start-ups and Innovators, the budget proposes to incentivize the incorporation of One Person Companies (OPCs). In furtherance of the proposal, Companies (Incorporation) Second Amendment Rules, 2021 have been notified and the same shall come into force and effect from April 01, 2021. Key amendments beneficial to the start-ups are as follows:
  • The conversion of private companies into OPCs have been made easier by removing the restrictions on turnover and paid-up share capital. Earlier, private companies having paid up share capital of "INR 50 lakhs" or less and average annual turnover of "INR 2 crores" or less could have converted themselves into OPC;
  • The conversion of OPCs into a public or private company has been simplified. OPCs shall now be required to pass a resolution to alter their memorandum and articles to give effect to the conversion. OPCs to increase their number of members and directors and paid-up share capital as per the provisions of Companies Act 2013;
  • The residency limit for an Indian citizen to set up an OPC has been reduced to 120 days from the existing 182 days to further ease the compliance; and
  • Non-Resident Indians (NRIs) have been allowed to incorporate OPCs in India. The amendment has substituted the following "whether resident in India or otherwise" in place of resident in India.
  1. Proposal has been made to revise the definition under the Companies Act, 2013 for Small Companies by increasing their thresholds for paid up capital to "INR 2 Crores" from the existing "INR 50 lakhs" and the turnover to "INR 20 Crores" from the existing "INR 2 Crores". The Companies (Specification of Definitions Details) Amendment Rules, 2021 has been notified on February 1, 2021 incorporating these changes, shall be effective from April 1, 2021. The move is targeted to benefit more than 2 lakh companies in easing their compliance requirements. Small Companies are generally benefitted under the Companies Act, 2013 by way of certain exemptions considering their small size and to ensure that it does not suffer with the consequences of non-compliances of the stringent provisions of the said Act. The various exemptions granted to small companies includes exemptions from provisions of board meetings, directors' report, cash flow statement, audit report. The Companies Act, 2013 also provides for lesser penalties for any non-compliance by the small companies. With the increase in thresholds as stated above, more and more smaller companies shall be seen to be benefitting from a compliance point of view.
  1. Proposal for decriminalization of the Limited Liability Partnership (LLP) Act, 2008. A report1 has been released by the Ministry of Corporate Affairs (MCA) on January 4, 2021 titled "Report of the Company Law Committee on Decriminalization of the Limited Liability Partnership Act 2008". The report proposes amendments in certain provisions with respect to decriminalization of certain offences under the said Act, which will further incentivize the compliance by entrepreneurs or congenial business climate. The report also addresses the need for certain other amendments so as to further improve ease of doing business for LLPs.
  1. Increasing FDI in Insurance Sector: Proposal has been made to amend the Insurance Act, 1938 to increase the permissible Foreign Direct Investment (FDI) limit from 49% to 74% in Insurance Companies and allow foreign ownership and control with safeguards. Under the new structure, the majority of Directors on the Board and key management persons would be resident Indians, with at least 50% of Directors being Independent Directors, and specified percentage of profits being retained as general reserve. In 2019, the IRDAI (Insurance Regulatory and Development Authority) had notified amendments for 100% FDI in insurance intermediaries. Thus, with this enhanced limit of FDI, the sector will see more capital inflow.
  1. To ensure faster resolution of cases, NCLT framework is proposed to be strengthened, e-Courts system shall be implemented and alternate methods of debt resolution and special framework for MSMEs shall be introduced.
  1. During the coming fiscal 2021-22, the following shall be launched on the Ministry of Corporate Affairs (MCA) website: data analytics, artificial intelligence, machine learning driven MCA21 Version 3.0. This Version 3.0 will have additional modules for e-scrutiny, e-Adjudication, e-Consultation and Compliance Management.
  1. Incentives for Start-ups: In order to incentivise start-ups in the country, the eligibility for claiming tax holiday for start-ups has been proposed to be extended by one more year - till 31st March, 2022. Further, in order to incentivise funding of the start-ups, proposal has been made to extend the capital gains exemption for investment in start-ups by one more year - till 31st March, 2022. Further the recently notified Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2021, makes start-ups eligible for fast-track merger under Section 233 of the Companies Act 2013, with other start-ups or small companies. The same shall come into force on the date of their publication in the Official Gazette.
  1. Infrastructure financing - Development Financial Institution (DFI): For enabling long term debt financing for infrastructure, a professionally managed Development Financial Institution (DFI) will be established. DFI will act as a provider, enabler and catalyst for infrastructure financing. Accordingly, a Bill shall be introduced to set up a DFI. A sum of INR 20 crores is proposed to be released to capitalise this institution. The ambition is to have a lending portfolio of at least INR 5 lakh crores for this DFI in 3 (three) years' time.
  1. Debt Financing of InvITs & REITs by FPI: Debt financing of Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trusts (REITs) by Foreign Portfolio Investors (FPI) will be enabled by making suitable amendments in the Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014 and the Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations, 2014. This will further ease access of finance to InvITS and REITs, thus augmenting funds for infrastructure and real estate sectors. So far, Securities & Exchange Board of India (Foreign Portfolio Investors) Regulations, 2019 (FPI Regulations) allow InvITs and REITs to invest in non-convertible debentures (NCDs) issued by a corporate entity only. Since InvITs and REITs are trusts, FPIs could not subscribe to debt instruments issued by them a couple of years ago as there was no enabling regulation for them to invest.
  1. Attracting foreign investment into infrastructure sector: In the last budget, for attracting foreign investment in the infrastructure sector, 100% tax exemption was granted, subject to certain conditions, to foreign Sovereign Wealth Funds and Pension Funds, on their income from investment in Indian infrastructure. Few of such Funds are facing difficulties in meeting some of these conditions. In order to ensure that a large number of Funds invest in India, there is a proposal to relax some of these conditions relating to prohibition on private funding, restriction on commercial activities, and direct investment in infrastructure.
  1. Financial Capital: Proposal has been made to consolidate the provisions of Securities and Exchange Board of India Act, 1992 (SEBI Act), Depositories Act 1996, Securities Contracts (Regulation) Act, 1956 (SCRA) and Government Securities Act, 2007 into a rationalized single Securities Markets Code. A consolidated code for the securities law is aimed to minimize any overlaps that exists in the extant law and also make the corporate legal framework investor friendly, with all the securities regulations combined in a single code.
  1. Securities and Exchange Board of India (SEBI) will be notified as the regulator for gold exchanges in the country. The proposal aims to infuse transparency in the gold transactions.
  1. In 2021-22 the IPO of LIC shall be floated for which the requisite amendments will be made to the Life Insurance Corporation Act, 1956.
  1. The policy for strategic disinvestment has been approved by the Government. The policy provides a clear roadmap for disinvestment in all strategic and non-strategic sectors. The strategic areas have been defined to include atomic energy, space and defence; transport & telecommunication; power, petroleum, coal & other mineral and banking insurance and financial services. All other sectors are non-strategic. In the strategic areas, only bare minimum Central Public Sector Enterprises (CPSEs)2 will be maintained and the rest will be privatized. In the remaining non-strategic sectors, all CPSEs will be privatized.
  1. An amendment has also been proposed in the Indian Stamp Act, 1899 by way of insertion of new Section - 8G, exempting the imposition of stamp duty on the transfer of business/ assets/ rights in immovable property of a Government company to another Government company by way of strategic sale, disinvestment or demerger. The amendment is included in the Finance Bill, 2021 and is aimed to be effective from or after April 1, 2021.
  1. Minimum Government, Maximum Governance: To have ease of doing business for those who deal with Government or CPSEs, and carry out contracts, a Conciliation Mechanism will be set up and it will be used for quick resolution of contractual disputes. This will instil confidence in private investors and contractors.
  1. Stressed Asset Resolution by setting up a New Structure: The high level of provisioning by public sector banks (PSBs) of their stressed assets calls for measures to clean up the bank books. As per the government, the current Asset Reconstruction Company (ARCs) and Asset Management Company (AMCs) are not adequate to handle the existing stock of bad loans. Additional ARCs and AMCs would be set up to consolidate and take over the existing stressed debt and then manage and dispose of the assets to Alternate Investment Funds (AIFs) and other potential investors for eventual value realization. This is in line with the recommendations of the Project Sashakt (under Mr. Sunil Mehta) which introduced a concept of bad banks to tackle the problems of stressed assets and bad loans in PSBs.

Footnotes

1. http://www.mca.gov.in/Ministry/pdf/Report%20of%20the%20Company%20Law%20Committee%20on%
20Decriminalization%20of%20The%20Limited%20Liability%20Partnership%20Act,%202008.pdf

2. CPSEs are those companies in which the direct holding of the Central Government or other CPSEs is 51% or more.

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