Budget

Budget 2021’s Impact on the Companies Act of 2013: Recent Updates

By amending the definition of a small business and the setting up or incorporation rules for one-person firms in India, the  Union Budget  2021-2022 has the most influence on the Company Act of 2013.

Existing definition: a small company is defined as a corporation that is not a public business and meets the following criteria:

(I) A paid-up share capital of not more than 50 lakh rupees; and

(II) Turnover that does not exceed 2 crore rupees according to the profit and loss statement for the previous financial year.

Proposed definition: Small company is defined as a company that is not a public corporation that meets the following criteria: –

(I) A paid-up share capital of not more than 2 crore rupees; and

(II) Turnover that does not exceed 20 crore rupees according to the profit and loss statement for the previous financial year.

A proposal has been made to revise the definition of Small Companies under the Companies Act, 2013 by increasing their paid-up capital thresholds to “INR 2 Crores” from the existing “INR 50 lakhs” and their turnover thresholds to “INR 20 Crores” from the existing “INR 2 Crores.” The Companies (Specification of Definitions Details) Amendment Rules, 2021, which incorporate these changes, were notified on February 1, 2021, and will be effective on April 1, 2021.

The move is intended to benefit over 2 lakh businesses by easing their compliance needs. Small companies are generally benefitted under the Companies Act, 2013 by way of certain exemptions due to their small size and to ensure that they do not suffer the consequences of non-compliance with the said Act’s stringent provisions. Exemptions granted to small businesses include exemptions from provisions governing board meetings, directors’ reports, cash flow statements, and audit reports. The Companies Act of 2013 also provides for lower penalties for small businesses that fail to comply. With the above-mentioned increase in thresholds, smaller and smaller businesses will benefit from a compliance standpoint.

  • One-Person Company Amendments

The finance minister said concerning one person company (OPC) “as a further step which immediately helps start-ups and innovators, she propose to incentivize the incorporation of one-person companies (opcs) by providing opcs to develop without any limitations on paid-up capital and turnover, enabling their transformation into any other type of company at any time, decreasing the residency limit for The time it takes for an Indian citizen to establish an OPC has been reduced from 182 days to 120 days, and non-resident Indians (NRIs) can now incorporate OPCs in India.”

The following adjustments have been made to allow One Person Company to develop without constraints under the second amendment rules 2021, which will take effect on April 1, 2021: –

Before we go into the new revisions, let’s define OPC. According to the Companies Act of 2013, section 2 (62) “one person company” defines a corporation with only one member; The Companies Act of 2013 established the revolutionary new idea of “One Person Company” (OPC).

The OPC concept was first proposed by Dr. JJ Irani’s expert group in 2005.

Incorporating One-Person company New rules :

  1. Existing provisions: For an establishment person resident in India or Indian citizen shall be eligible to incorporate a one-person company.
  2. Proposed provisions: – The person needs to be a resident in India or otherwise shall be available to incorporate a one-person company. It just means now non-Indian residents are entitled to incorporate OPC in India. It will unlock doors to Nri’s to invest in India without any interest for more agreements and investment. Now the only signal person who is not an Indian resident can look ahead for their investments in India.
  3. Change in definition of Resident of India in Union Budget 2021-22 has changed the mandatory residency limit for the status of Indian resident. The residency limit has been reduced by 62 days from 182 to 120.
  4. Existing provisions: – Resident in India means a person who has stayed in India for a time not less than 182 days during the directly leading financial year.
  5. Proposed provisions: – resident in India means a person who has stayed in India for a period not less than 120 days during the immediately preceding financial year.

Mandatory Conversion of OPC :

  1. Existing provisions: – where a one-person company’s paid-up share capital exceeds fifty lakh rupees or its average annual turnover during the relevant period exceeds two crore rupees, the company must convert itself into a public company or a private company with a minimum of two directors and members in order to continue as a one-person company.
  2. Proposed provisions: – the limit of paid-up share capital and turnover for conversion of OPC has been rejected.

  • Conversion of OPC into Private or Public Company

Since the aforementioned amendment to the Companies (Incorporation) Rules, 2014 removed the requirement of a paid-up capital of Rupees Fifty Lakhs or less and a turnover of Rupees Two Crore or less for the converting of an OPC, now any Resident or Non-Resident who has remained in India for more than 120 days and has incorporated an OPC can convert it into a Private or Public Company other than a Section 8 Company. The aforementioned announcement results in a change to Rule 6 of the Companies (Incorporation) Rules, 2014, as shown below:

Process for Conversion of OPC into Private or Public company

  1. The One Person Company must amend its memorandum and articles by passing a special resolution in accordance with subsection (3) of Section 122 of the Act to give effect to the conversion and modify the plan.
  2. A-One Person Company may be converted into a Private Company or Public Company, other than a company registered under Section 8 of the Act, by raising the minimum number of members and directors to two or seven members and two or three directors, as the case may be, and retaining the minimum paid-up capital as required by the Act for such class of company, and by complying with the Act’s needs for such class of company.
  3. The company shall submit an application in e-Form No.INC-6 for its converting into a Private or Public Company, other than under Section 8 of the Act, along with the fees specified in the Companies (Registration Offices and Fees) Rules, 2014, by attaching the following documents:

(a) Modified MOA and AOA

(b Resolution’s Copy

(c) The list of proposed members and its directors along with consent

(d) Creditors Lists

(e) The most advanced audited balance sheet and profit and loss account.

  1. When the Registrar is happy that the requirements stated herein have been met, he or she will approve the form and issue the Certificate.

As a result of the aforementioned amendment, the requirement to file INC-5 has been eliminated, and the format of INC-6 has been changed.

  • Merger or Amalgamation of Startup Companies

Previously, a scheme of arrangement could be entered into with two or more small companies or among a holding company and its entirely subsidiary company under Section 233 of the Companies Act, 2013, but due to an amendment in the Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016, a scheme of fast track merger can now be entered into by the following companies:

a) two or more small businesses

b) A holding company and its entirely subsidiary company

c) Two or more start-up companies

d) One or more start-up companies in partnership with one or more small companies.

* “Start-up company” implies a private company incorporated under the Companies Act, 2013 of the Companies Act, 1956 and identified as such by the Department for Promotion of Industry and Internal Trade in accordance with update number G.S.R. 127 (E), dated the 19th of February, 2019.

  • Proposal for the decriminalization of the (LLP) Act, 2008

The Limited Liability Partnership (LLP) Act, 2008, is proposed to be decriminalized. On January 4, 2021, the Ministry of Corporate Affairs (MCA) issued a report1 titled “Report of the Company Law Committee on Decriminalization of the Limited Liability Partnership Act 2008.” The report proposes amendments to certain provisions of the said Act regarding the decriminalization of certain offenses, which will further incentivize compliance by entrepreneurs or a favorable business climate. The report also addresses the need for additional changes to improve the ease of doing business for LLPs.

  • Increasing FDI in Insurance Sector:

A proposal has been made to amend the Insurance Act of 1938 to increase the permissible Foreign Direct Investment (FDI) limit in Insurance Companies from 49 percent to 74 percent and to allow international ownership and control with safeguards. The large percentage of Directors on the Board and key management personnel would be resident Indians under the new framework, with at least 50% of Directors being Independent Directors and a specified percentage of profits being retained as general reserve. The IRDAI (Insurance Regulatory and Development Authority) notified legislative changes to allow 100 percent FDI in insurance intermediaries in 2019. As a result of the increased FDI limit, the sector will see more capital inflows.

  • Generating foreign investment into the infrastructure sector:

In the previous union budget, foreign Sovereign Wealth Funds and Pension Funds were granted a 100 percent tax exemption on their income from investments in Indian infrastructure, subject to certain conditions. Some of these Funds are having difficulty meeting some of these conditions. To encourage a large number of Funds to invest in India, there is a proposal to relax some of the restrictions on private funding, commercial activities, and direct investment in infrastructure.

  • Stressed Asset Resolution through the Establishment of a New Structure:

The high level of provisioning for stressed assets by public sector banks (PSBs) necessitates measures to clean up the bank books. According to the government, the current Asset Reconstruction Companies (ARCs) and Asset Management Companies (AMCs) are insufficient to handle the existing bad loan stock. Additional ARCs and AMCs would be established to consolidate and assume existing stressed debt, as well as manage and dispose of assets to Alternate Investment Funds (AIFs) and other potential investors for eventual value realization.

  • Stressed Asset Resolution through the Establishment of a New Structure:

The high level of provisioning of stressed assets by public sector banks (PSBs) necessitates measures to clean up the bank books. According to the government, the current Asset Reconstruction Companies (ARCs) and Asset Management Companies (AMCs) are insufficient to handle the existing bad loan stock. Additional ARCs and AMCs would be established to consolidate and assume existing stressed debt, as well as manage and dispose of assets to Alternate Investment Funds (AIFs) and other potential investors for eventual value realization.

  • The Government has authorized the strategic disinvestment policy

The policy lays out a detailed plan for disinvestment in both strategic and non-strategic sectors. Atomic energy, space, and defense; transportation and telecommunications; power, petroleum, coal, and other minerals; and banking, insurance, and financial services have been identified as strategic areas. All other industries are non-strategic. Only the bare minimum of Central Public Sector Enterprises (CPSEs)2 will be retained in strategic areas, with the remainder privatized. All CPSEs will be privatized in the remaining non-strategic sectors.

  • Financial Capital:

A proposal has been made to combine the provisions of the Securities and Exchange Board of India Act of 1992 (SEBI Act), the Depositories Act of 1996, the Securities Contracts (Regulation) Act of 1956 (SCRA), and the Government Securities Act of 2007 into a single Securities Markets Code. With all securities laws combined in a single code, a unified code for securities law aims to minimize any conflicts in existing law while also making the corporate legal implementation investor-friendly.

  • Infrastructure financing – Development Financial Institution (DFI):

A professionally managed Development Financial Institution (DFI) will be established to enable long-term debt financing for infrastructure. The DFI will serve as an infrastructure financing provider, enabler, and catalyst. As a result, legislation to establish a DFI will be introduced. It is proposed that INR 20 crores be released to capitalize this institution. The goal for this DFI is to have a lending portfolio of at least INR 5 lakh crores in three (three) years.

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