In 2019, the company law panel was formed, and it has a proposal to extend the advisory services till 2023. The Company law committee recommended changes in the Limited liability partnership act and the Companies act that connects to raising capital and strengthening statutory audit and joint audits. It helps retail investors to gain profit by issuing fractional shares. These shares are prohibited now, and there is a proposal to increase these shares. This blog discusses the committee members and amendments about to roll on.
Company law committee members:
The team members are as follows: TK Viswanathan, Lokshabha secretary general, Uday Kotak, chief executive officer and managing director of Kotak Mahindra bank, Shardul Amarchand Mangaldas & Co., executive chairman, Shardul Sharoff, and Amarjit Chopra, former president of chartered accountants of India.
Company law:
Additional capital and restructuring have become the new norm for listed companies. CLC recommend options that pay way to ease of doing business. So, they attributed the concept of discounted shares and fractional shares. The following points explain the discounted shares and fractional shares.
What are Discounted shares?: The committee initiated the option of discounted shares. Discounted shares are issued at a value lesser than the par value. As per section 62 of the companies’ act 2013, the management issue the rights share with a discount to collect additional capital for the business expansion. In companies, sweat shares are issued to the employees and directors at a discount.
What are Fractional shares?: Fractional share is the division of equity shares and not the full share. It is the split of shares due to a merger or acquisition. The new and old shares are divided using a predetermined ratio. Fractional shares help investors to distribute the shares at cheap prices. Fractional shares support small investors to invest and gain money. The diversification terms of investment help to gain small profits from small investments. The concern with the fractional share is that the commission for the shares increases. In India, the owners of fractional shares get dividends but not voting rights. The foreign country that follows the procedure of issuing fractional shares after the acquisition is the UK, USA, Japan and Canada. In the UK, there is a provision in the articles of association that allows the person holding fractional shares to participate in the voting. Japanese company law directs the management to sell the fractional shares by auction and pay the earnings to the shareholders. The shareholders divide the ‘earnings’ as per the ratio of fractional shares. In the US, the brokers of shares decide the trading of fractional shares. The proxy voting by the fractional share owner is at the discretion of the share brokers.
Advantages of fractional shares:
• Small investors invest in big corporates.
• The income from the stock market in India is comparatively lesser than the income in other foreign countries. Approximately the corporate sector backs the GDP with a contribution of 15 per cent. The fractional shares improve the stock market investment.
• In India, the fractional share policy is extensive. The Employee Stock ownership plans govern the rights of the shareholders.
• NSE and IFSC have global partners based on international standards. The entity recently announced fractional share ownership and trading in US stocks. Fractional shares expand the stock market with a broader view.
Partnership act:
The committee recommended changes to the LLP Act, 2008. The companies (Amendment) act of 2002 explains the producer’s act. LLP organisations enjoy certain privileges in India. LLPs need to be audited if their revenue is more than 40 lakhs and their capital is more than 25 lakhs. The producer LLP is the new concept in which companies with activities of production, procurement, harvesting, processing, packing, sale and supply of machinery. It also contributes to providing technical education and promoting interest in manufacturing. If we group the producer institutes and companies, it is easy to encourage them to further production. The global market depends upon manufacturing, technology and the supply chain of products. Amendments are essential to participate in the supply chain of products and impress the global market.
Concerns about joint audit proposal:
A joint audit is two auditors joining hands to analyse the financial statements and produce one report. Currently, this process is followed by public sector companies and banks. ICAI had expressed its interest in writing to MCA. The president, Debashis Mitra, said that ICAI agree with the proposal. Joint audits increase the cost and firm up the transparency of accounts.
In India, the media raises the question of whether the joint audit will mitigate risks. The audit report of the two auditors differs as the auditors deal with a different parts of financial evidence. Moreover, this system increases cost and time. Denmark and Canada discontinued the joint audit system due to inefficiency and cost issues. France has mandatory system for joint audits since 1966. In 2003, a group, operated under ICAI brought forward the joint audit system. There was backfiring as there are implementation issues.
Bottom Line:
CLC committee recommendations support economic development through small investors, capital markets and transparent auditing. The recommendations of CLC have implementation issues. The period prolongs one more year to analyse the company law and partnership act further. Engaging small investors and capital markets increase corporate investment. Joint audits improve transparency and assist to overcome conflicts of interest.
