Union Budget 2021-22 – Impact on the Corporate Law

 

By Akash Kumar Prasad, for Legal Corner LLP. Akash is a fifth year student of NALSAR University of Law and will be graduating in 2021. 

The views expressed here are not to be considered as legal opinion. You may not rely on this article as legal advice. You should reach out to me (chetana@legalcornerllp.com) to get legal advice that is specific to your business needs. 

On 1 February 2021, the Hon’ble Finance Minister presented the Union Budget 2021-22. While the Union Budget for the FY 2021-2022 was focused on infrastructure development, it also brought in several significant changes in the area of corporate laws. Changes have been proposed to decriminalize the LLP Act, 2008, increase in the threshold of the definition for small companies, introduction of an updated version of the MCA, changes in the OPC framework, increase in the FDI limits in an insurance company, etc.

Change in definition of ‘small company’

Section 2(85) of the CA, 2013 defines the term ‘small company’ as any company other than public company having paid up share capital not exceeding fifty lakh rupees and turnover not exceeding two crore rupees. It has been proposed in the Budget, to revise the definition of Small Companies by increasing the thresholds for paid up share capital from “not exceeding fifty lakhs rupees” to “not exceeding two crore rupees” and turnover from “not exceeding two crore” to “not exceeding twenty crore rupees”. The increase in thresholds will bring more than 2 lakh additional companies under the definition of ‘small company’ which can have a lower compliance burden including lower penalties for violations and lower filing requirements. Therefore, this proposal can surely be seen as an important drive for ease of doing business.

Changes to One Person (OPC) Company Network

Rule 6(1) of the Companies (Incorporation) Rules, 2014 provides for mandatory conversion of OPC into a Public Company or a Private Company as where the paid up share capital of an One Person Company exceeds fifty lakh rupees or its average annual turnover during the relevant period exceeds two crore rupees, it shall cease to be entitled to continue as a One Person Company. Now, by the Union Budget, Government has removed the limit of paid up share capital and turnover for conversion of OPC which is mostly done by the start-ups. Another important change for OPC has been proposed by relaxing the eligibility of person for such company. The criterion of 182 days has been reduced to 120 days to allow Non-Resident Indians to operate OPCs in India. These amendments with respect to OPC will give relief to these companies as the threshold limit of paid up share capital and turnover burdened the companies with the burden of conversion. Furthermore, it has also been proposed to allow Non-Resident Indians to operate OPCs in India and also some tax Incentives for start-up and Innovators like claiming tax holiday till March 31, 2022 has been proposed.

Decriminalization of offences under Limited Liability Act, 2008 (LLP Act)

Considering the fact that the Government has completed taking its steps for decriminalization of offences by amending the Companies Act, 2013, Finance Minister in her speech mentioned that it is now the time for decriminalization of the offences under the LLP Act. Having said that, it is important to note that the Government has already started taking tangible steps for giving effect to this proposal. The Company Law Committee (CLC) has presented/issued its Report of the Company Law Committee on Decriminalization of the Limited Liability Partnership Act, 2008 to the Ministry of Corporate Affairs on 4th January, 2021 for decriminalization of certain compoundable offences and shifting them to the In-house Adjudication Mechanism. The said Report proposes to decriminalize 12 offences and 1 penal provision has been proposed to be omitted. The motive behind the same is to de-clog the courts or the NCLTs thereby reducing their burden from non-serious matters. Further, the Report not only contains changes in the LLP Act for decriminalization of offences but also travels much beyond. Some of the other major changes in this regard consists of introduction of explicit provisions for issuance of secured NCDs by LLPs, restricting the merger of LLPs with companies, introduction of accounting standards for certain classes of LLPs, etc. Besides this, the Report also introduces changes in the definition of business of LLPS, alignment of the reference with that of the Companies Act, 2013 (CA, 2013) and much more.

Increased FDI in insurance companies

The main proposal for insurance companies in the Budget is to increase the permissible FDI limits such companies from the current 49% to 74%. Further, the said increased limit has been proposed with several safeguards with respect to ownership and control which includes: majority of Directors on the Board and Key Managerial Persons (KMP) to be resident of India; independent directors- at least 50% of the directors to be independent directors; and specified percentage of profits being retained as general reserve. Further, it is also imperative to mention about the IRDA (Indian Owned and Controlled Guidelines) which currently provides a limit of 49% of foreign shareholding in an Indian insurance company. Considering the aforesaid proposal, the said limit will be changed to reflect the increased limit.

Strengthening of NCLT framework

It has been proposed to strengthen the NCLT framework to ensure faster resolution of cases. In light of the new normal and increased emphasis on Digital India, e-Courts have been proposed to be implemented. Further, with a similar intent and to further provide an alternate mode of debt resolution, a separate framework is also proposed for the cases involving the MSMEs.

Securities Market Code

The Budget has proposed to consolidate the provisions of following laws relating to securities market into a rationalized single Code to be termed as “Securities Market Code”: SEBI Act 1992, Depositories Act 1996, Securities Contracts (Regulation) Act 1956, and Government Securities Act 2007.

Conclusion

Small company status offers relaxation from various provisions of CA 2013 and eases compliance burden on them. As mentioned in the budget speech, the increase in the threshold limit for a small company is likely to benefit 200,000 companies. Changes to the OPC regulatory framework offers motivation to grow without any restriction of paid-up capital and turnover, augmenting foreign capital and technology. Recognition of Start-up Company as a class of company for the purpose of fast track merger allows start-up option to explore restructuring without necessarily going to the National Company Law Tribunal (NCLT) for sanction. Overall, the thrust of budget on company matters aims at facilitating ease of doing business.

If you have any questions, please email me at chetana@legalcornerllp.com . I will be happy to set up a free consultation.