The Company Law Committee (CLC) released its report on March 21, 2022, recommending potential amendments to various provisions of the Companies Act, 2013.

The report contemplates a significant overhaul of the Act by easing compliance burdens, recognizing/introducing various concepts (such as fractional shares, restricted stock units, stock appreciation rights) and clarifying certain ambiguities in the present Act.

A few key highlights of the CLC recommendations are provided below:

Recognition of fractional shares

The Act currently contemplates shares being dealt with in whole numbers and for a specified face-value (eg. Section 4 of the Act - a person can hold a minimum of one share; Schedule I (Table-F) of the Act also restricts a company from recognizing fractional shares).

As per the CLC recommendations, the present framework under the Act can be amended to include provisions that allow issuance, holding and transfer of fractional shares.

The CLC has also recommended that such dealings in fractional shares must be in dematerialized form only. Further, the recommendation is only applicable to fresh issuance of fractional shares and not in cases where fractional shares get created for the time being on account of any corporate action such as mergers or amalgamation.

For listed companies, the CLC has recommended that the provisions for fractional shares may be made after consultation with the Securities and Exchange Board of India (SEBI).

It is also pertinent to note that in jurisdictions such as the USA, investors are allowed to hold fractional shares. The International Financial Services Centre Authority has recently permitted trading in fractional shares under its regulatory sandbox regime in India.

This change, if implemented, would, to a large extent, eliminate the need for corporate actions (such as stock split/bonus issue) which companies undertake with the sole purpose of reducing per share price, thereby encouraging retail participation.

It is to be acknowledged that privately held companies also face similar issues, especially at the time of issuance of Employee Stock Options (ESOPs). With fractional shares not being permitted and a high per share price being applicable, periodical vesting and exercise of options becomes challenging. Companies then typically resort to increasing the number of shares (through a stock split or bonus issuance) and consequently reducing the per share price.

However, more clarity is to be provided on whether further issue would include issuance on exercise of ESOPs and how issuance of fractional shares would be implemented under ESOPs.

Recognition of special purpose acquisition companies

Special purpose acquisition companies (SPACs) are companies that do not have an operating business and have been formed with the specific objective of acquiring a target company. SPACs are also used for indirect listing of existing businesses/companies and offer privately held companies an alternative to access public markets without an initial public offering (IPO).

In recent times, SPAC transactions have gained significance globally. In the Indian market, there has also been a transaction of an Indian company listing through SPAC at NASDAQ. This transaction was also assessed by CLC in its report.

The CLC has recommended that the Act recognize SPAC transactions and include enabling provisions under the Act. However, a SPAC transaction would substantially be regulated by SEBI (in case of any domestic listing). On this point, the CLC report does mention that the Primary Market Advisor Committee of the SEBI is actively examining the possibility of introducing a framework for regulating SPACs in India.

Given the presence of multiple unicorn/pre-IPO start-up companies in India, SPACs have the potential to be an attractive way for these companies to access public markets. However, the suitability of SPACs for such transactions would depend entirely on the proposed regulatory framework.

Other recommendations

The CLC has asserted various other recommendations to further update the provisions of the Act, including the following:

(a) Allowing companies to re-align their financial year: Presently, the Act allows a holding company or a subsidiary of a company incorporated outside India to follow a different financial year for consolidation of its accounts by making an application to the Central government. However, the Act does not provide for a situation where the company ceases to be a holding or subsidiary company of a foreign company. Hence, the CLC has recommended that such companies can return to the format for the financial year as under the Act by obtaining approval from the Central government.

(b) Tenure of independent directors: The CLC has clarified that the tenure of five years for an independent director starts from the date of appointment as an additional director and not from the date of regularization. Hence, the tenure of an independent director before regularization cannot be excluded while calculating the entire tenure.

(c) Prohibition on conversion of co-operative society into a company: The CLC has recommended that co-operative societies should not be allowed to be converted into companies under the Act. The Act clearly excludes a registered co-operative society from the umbrella of a body corporate. However, Section 366 allows the registration of a limited liability partnership, partnership firm or co-operative society as a company under the Act. The CLC noted that co-operative societies are formed on the basis of co-operative principles and are not motivated by earning profit.

These recommendations appear to be a welcome move towards achieving ease of doing business in India. However, the manner of adoption of these recommendations by the regulator and the specific framework implemented would determine the acceptance by the Indian markets.

While the regulatory framework for these recommendations is highly anticipated, it could be challenging for the regulator to appropriately achieve the intent and objectives of these recommendations without increasing compliance and reporting burden.

Christopher Rao and Puneet Prabhakar are Associate Partners and Pravin Sankalp is an Associate at the Bengaluru offices of Krishnamurthy & Co.