Government eases Company Act, big relief for startups


While unveiling the last tranche of government’s Rs 20 lakh crore economic stimulus package on 17thMay, 2020, the Union Finance Minister NirmalaSitharaman announced the decision to bring in an Ordinance to decriminalize various sections of the Companies Act which was approved by the Cabinet in the first week of March.

Section 447 of the Companies Act says, “Without prejudice to any liability including repayment of any debt under this Act or any other law for the time being in force, any person who is found to be guilty of fraud shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud.”

Minor technical and procedural defaults will be decriminalised which include shortcomings in CSR (Corporate Social Responsibility) reporting, inadequacies in board reports, filing defaults and delay in holding AGMs (Annual General Meetings). The government has also decided to drop seven compoundable offences and five will be dealt under an alternative framework through the ordinance mode. The compoundable offence can be tried under internal adjudication mechanism rather than going to courts and this will free up spaces in the criminal courts and National Company Law Tribunal (NCLT).

This reform lowers the stress on National Company Law Tribunal which is presently over-burdened. It also reduces the timing compliance cost for smaller companies as it used to take long time to get rid of minor violations. Experts and investors said that the amended Company Act will help local startups and entrepreneur in raising funds and attracting more risk-averse capital. Otherwise, the criminality of minor offences and non-compliance under the Act was hurting valuations during fundraising and deterring risk-averse local investors from backing companies.

Atul Pandey, partner at law firm Shaitan& Co. welcomed this move from the point of view of a startup because many companies have been facing hindrance due to existing non-compliances and ensuing criminal liability, which was also having an impact on the valuation of such companies. Pandey believed that It would weed out minor non-compliance issues and abet in raising funds from the domestic market, specifically from investors who have a low risk appetite.

SiddarthPai, managing partner at 3one4 Capital, said, “As a startup, the first couple of rounds of funding which are pre-institutional investors, there’s usually some sort of errors that happen and those get caught later. Valuation of startups have gone down significantly because of accumulated fines, penalties which keep on compounding.” He believed that this move would result in better governance of startups as investors would be willing to take director seats and startups will also be able to attract higher quality independent directors. In return, this would encourage more domestic money to come into India’s startup sector.

Union Finance Minister NirmalaSitharaman also said publicly listed companies in India will be allowed to list directly in foreign jurisdictions, and private companies, which list their non-convertible debentures on stock exchanges, will not be regarded as listed companies. So, the move to allow private companies to list debentures on stock markets will assist startups in the NBFC space — which usually raise capital from other NBFCs or banks — in tapping public markets for debt.

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