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1. Foreign Investment Regime to be simplified.
Foreign Investments are classified under different categories and have to comply with different regulations as applicable. At present, a Foreign Portfolio Investor (FPI) is allowed to hold only up to 10% Equity in a Listed Company.
it is proposed to allow full fungibility between FPI and FDI in sectors where 74% or more FDI is allowed. Such fungibility will enable the Individuals to freely manage their Investments and even Portfolio Investors can buy more than 10% equity in a Company by investing through the Foreign Direct Investment (FDI) route.
2. New Platform to be set up by the National e-Governance Services (NESL).
Corporate Frauds and Scams like Satyam have revealed the various ways in which companies tamper, fabricate, and manipulate the Books of Accounts, particularly the liabilities and cash balances. Hence, to cross-check the key numbers of the Companies, the Auditors have to communicate with the respective banks. It is proposed to replace this manual process with an Online reporting mechanism to minimise the risk of number tampering and fabrication.
In pursuance of the same, a new platform will be set up by the National e-Governance Services (NeSL) which is an Information Utility (IU) registered with the Insolvency and Bankruptcy Board of India (IBBI). It is planned to launch a new platform within the next few weeks so that the numbers for the September Quarter can be captured in the same.
The Companies will have to grant their consent to the Banks and the Auditors for uploading the information of funds lying in all the bank accounts as well as the funds borrowed by the company from different financial institutions on the proposed new platform. Once the companies give their consent, the data stored in the Bank servers will be shared with the NeSL in an encrypted form. The Auditors can then verify the same and if the data is mismatched, then the process has to be repeated.
Since no regulation makes it obligatory to grant the consent, an element of moral suasion is expected from the Auditors and Auditee. In case the Companies do not grant their consent, the Auditor may put a qualification or a remark in the Audit report. The access to the information will be restricted to the Auditors to comply with the Bank-Client confidential rules which place a legal obligation on banks and their employees for not to reveal the information of customers to a 3rd Party.
3. The Companies (Amendment) Bill, 2024- likely to come
For improving corporate efficiency and governance standards, it is expected that the government may present the Companies (Amendment) Bill 2024 to Parliament during the ongoing session.
It is expected that the proposed changes will be made to simplify the borrowing process for listed companies, establish a system for courts to enforce a compromise/arrangement for dissenting creditors, refine company auditing procedures, and ease the process for shifting registered offices between states.
The Ministry of Corporate Affairs (MCA) had initially allowed having virtual AGMs and EGMs in 2020 due to the Covid-19 pandemic. This provision is set to remain in effect until September 30, 2024, but it may be extended indefinitely by making amendments to the Companies Act, 2013.
There may be a relaxation in the capital-raising requirements for distressed companies by amending the Companies Act, 2013. To simplify the borrowing process, it is proposed to amend Section 42 of the Companies Act, 2013 to clarify that where a resolution concerning higher borrowing limits has been passed by shareholders of a listed company, such company should not be required to pass a separate resolution in case of breach of the applicable limits. This change would allow listed companies to borrow more efficiently, improving business operations in India.
Additionally, there are plans to implement a stricter Governance Framework for large unlisted companies, particularly in light of recent controversies involving firms like Byju’s. These proposed changes are expected to be included in the forthcoming amendments.
The MCA is also ready with an amendment to the Insolvency and Bankruptcy Code (IBC), 2016. “However, the IBC amendment may not be tabled in the current Parliament session,” a source said. The IBC amendments on the cards include the introduction of cross-border and group insolvency mechanisms. The amendment also includes the removal of the interim moratorium provision for personal guarantors’ assets, the introduction of project-wise insolvency under real estate, and the introduction of a creditor-led resolution plan (CLRP) mechanism, a method to settle cases out-of-court.
4. Penalty on Auditors -BSR & Associates LLP
BSR & Associates LLP, a KPMG affiliate has been fined INR 10 Crores and two auditors of the firm have been debarred for 10 years and 5 years respectively by the National Financial Reporting Authority (NFRA) for lapses in the Audit of Coffee Day Enterprises. Additionally, NFRA fined ₹50 lakh on one partner and ₹25 lakh on another.
It is alleged that the Auditors did not question the business rationale behind the listed company providing loans to a related party under the guise of an advance for purchases, despite the loan amount being more than five times the purchase value. When the Auditors were questioned for their actions, they justified the same by stating the Standards on Auditing (SA)– 600 which allows reliance on the work of subsidiary auditors.
The Standards on Auditing (SA)– 600 deals with the responsibility of the Principal Auditor in relation to the use of/reliance on the work of other Auditors. The Global standards do not allow reliance on the work of other Auditors, whereas in India the Auditors are permitted to rely, hence the concern raised after this is as to what shall be the extent of reliance and to what extent the same be examined if the subsidiary’s Auditor has complied with the Standards on Auditing and there are no suspicions.
Another concern that is raised in the case is the hefty amount of penalty which is being stated as disproportionate to the fees of audit. Due to high risks, the appeal of the Auditing profession is diminishing and the audit firms are becoming stricter while signing up for new audits.
5. Big Reforms to attract manufacturers
Presently, Production Linked Incentive Schemes (PLI) are one of the major motivators for the manufacturing sector in India. However, to become a global manufacturing powerhouse, India must elevate its efforts and explore options beyond the Production Linked Incentive Schemes. To ensure that local manufacturing is bought back significantly, the Government needs to undertake various policy measures and ensure proper implementation of the same to succeed in this plan. Creating Export-oriented Industrial hubs, entering into favourable tax treaties, strengthening the infrastructure for logistics, investment in smart manufacturing facilities are some of the suggested steps for succeeding in this plan.
Currently, there are Production Linked Incentive Schemes for multiple sectors and they drive the ambitions of local manufacturers in India, but it is felt there is a need for more measures to boost the manufacturing sector in India.
6. Women Leaders in the Industry
As per the statistical data, only 1 among the leading 50 companies is led by a woman. Since there are few women leaders in the industry, any blunder by them tends to attract more scrutiny and remains in the memory of the public for a longer period and also creates an atmosphere where future businesswomen are discouraged.
Rupa Kudwa, the Head of Omidyar Network India and former CEO of CRISIL has joined the list of women leaders who have faced regulatory issues. Rupa Kudwa and her husband have been restrained from accessing the market for a year and have also been charged with penalty due to irregularities in the debt schemes of Franklin Templeton.
In the past, Chanda Kochhar who was the CEO of ICICI Bank, had faced charges for money laundering and conflict of Interest, and Chitra Ramkrishna who was the CEO of the National Stock Exchange (NSE) was charged with negligence of duty, had faced the same due to lapses in their business conduct.
It is seen that women leaders pay a heavier price for any public ignominy and it’s difficult to make a comeback thereafter. The concept of the glass cliff which originated in 2005, states that women leaders are overrepresented in risky leadership positions.
When women reach higher ranks in power, they are placed in positions where the risk of falling is high. The Companies need to address whether they are doing the needful to create steady flow of women leaders in the industry.
7. Modification in the proposed regime of Long-Term Capital Gain (LTCG)
In the budget presented in July 2024, the proposal of removing the indexation benefits for unlisted assets including properties and gold was placed. However, soon after the said proposal, it was claimed that this new tax structure could be detrimental to home owners as well as the real estate sector. The proposal is concerning for the homeowners as indexation allows them to take inflation into account while they sell their proprieties and calculate the capital gain thereof.
In light of the above, the Ministry of Finance is likely to grant some relief by modifying the proposed LTCG regime and the modification may include an extension of the effective date of the said regime to FY 2026. The modification will be brought in the Financial Bill.
8. Speeding up the Insolvency Process
Insolvency and Bankruptcy Board of India (IBBI) has issued Guidelines for Committee of Creditors (CoC) with the objective of accelerating the Insolvency process, ensuring coordination between the members of the CoC, resolution of internal disputes between the members of the CoC.
The guidelines further require the CoC to be more vigilant & proactive in its oversight responsibilities and it obligates them with the requirement of regular monitoring of the activities of the Insolvency Professional, reviewing and assessing the Information Memorandum, proactively sharing the financial statements and audit documents, obtaining details of litigations of the Corporate Debtor and recommending measures for safeguarding the interest of the Corporate Debtor.
9. Streamlining the trading of Bonus shares
The Securities Exchange Board of India (SEBI) has issued a Consultation Paper proposing to streamline and reduce timelines of Bonus issues enabling T+2 trading of shares post record date (T Day). Presently, when a company issues Bonus shares, the stocks must be listed within 15 days from the date of Board approval. However, in cases where shareholders’ approval is required to be taken, the stocks must be listed within 2 months from the date of Board approval.
Hence it can be stated that the SEBI (Issue of Capital and Disclosure Requirement) Regulation 2018, prescribes the timelines for the issuance of bonus shares and the process, but it does not specify timelines for crediting bonus shares and making them available for trading after the record date, leading to non-uniformity w.r.t. timelines in which shares are credited and made available for trading in bonus issue.
Thus, it is proposed to prescribe specific timelines for trading of such bonus shares i.e., T+2 which means shares will be available for trading 2 days after the record date. The objective of SEBI is to standardize the process across all issuers, ensuring that all bonus shares are credited and made available for trading within the same timeframe.
10. Faster Rights Issues
The right issue is a method of raising funds by issuing shares to the existing shareholders of the company in proportion to their shareholding in the company. The Securities and Exchange Board of India (SEBI) has issued a Consultation Paper to seek comments from the public and other stakeholders on various proposals for enabling faster Rights Issues with the flexibility of allotment to selective investors.
The proposed amendments include doing away with the current requirement of filing a Draft Letter of Offer with SEBI for issuance of observation, dispensing with the requirement of appointment of a Merchant Banker and reducing the timeline of the Right Issue to 20 days from the date of Board Approval for right issue until the date of closure of exercise.
Presently, it takes approximately 317 days to complete the right issue and when the fast-track method is opted, it takes approximately 126 days to complete it.
As per the statistical data of the last 3 financial years, it has been observed that the funds raised through the right issue are less when compared to the funds raised by opting other methods such as Preferential Issue and Qualified Institutional Placement (QIP).
11. Sharp rise in Sexual Harassment Complaints.
As per the data from the Bombay Stock Exchange (BSE) 30 Companies, there has been an increase of 40.4% in the number of sexual harassment complaints filed during the last financial year. A total of 932 sexual harassment complaints were reported in the last financial year as compared to 664 complaints in the year 2022-23.
The increase in reporting can be attributed to heightened awareness about the Prevention of Sexual Harassment of Women at Workplace (PoSH) law, PoSH Policy, PoSH Committee, and the setting up of a culture that encourages reporting of such cases. The increase in reporting is observed in Banking and technology companies where they have employed young people and a higher number of women. The younger generation is more aware and open to reporting such cases.
12. SBI caution investors in dealing in SME-listed entities
The Small and Medium Enterprises (SMEs) have grown exponentially and have raised more than INR 14,000 Crores in the last decade, of which INR 6,000 Crores has been raised during the financial year 2023-2024. The Securities and Exchange Board of India (SEBI) has stated that after Small and Medium Enterprises (SMEs) get listed, some of the Companies and their promoters undertake activities that showcase an unrealistic image of their business operations to induce investors to buy the securities of the company. After the said image is projected, the companies undertake various corporate actions such as Bonus issues, Preferential Allotments, etc.
It has been that such situations provide an opportunity for the promoters to sell their holdings at a higher price. The Chartered Accountants are required to be more diligent while auditing the SME Listed Companies.
Debock Industries, Varanium Cloud, SecureKloud Technologies, SecUR Credentials, Add-Shop E-Retail, and White Organics Agro are some of the companies against whom the SEBI has taken action in the past.
The SEBI has cautioned investors against unverified social media posts, tips, and rumours on the basis on which such investors have been investing their money.
13. Easy Exit for Businesses
The Statistic of Business closure during the financial year 2021-22 was approximately 499 days, it came down to approximately 195 days in the financial year 2022-23. It has been noted that the time has significantly reduced further and has now come down to approximately 93 days as per the data of Financial 2023-24.
The Process has been expedited due to the introduction of C-PACE, a centralized electronic exit system for faster processes and timely disposal & monitoring of the applications. Due to this system, the physical interaction with the stakeholder has been eliminated and in the last quarter, the time for closure has been further reduced to approximately 80 days.
After undertaking measures for the Ease of Entry, the Ministry of Corporate Affairs has taken steps to make the Exit easier and smoother. The Ease of Exit from failed businesses motivates the entrepreneur to invest their money in more businesses which ultimately benefits the economy and increases employment opportunities.
14. Rejection of Induction of New Directors
It has been noted that many listed companies are now facing rejections at the time of inducting new directors on their boards. As per the Public filings made with the National Stock Exchange, 137 resolutions saw approximately 33% votes against them and these resolutions were approved only because the promoters were significant holders.
Such rejections have increased because of the need for Corporate Governance, the entry of large institutions as investors, and the Proxy Advisory Firms.
Among many other cases, the case of reappointment of Independent Director in Ujjivan Small Finance Bank is notable. In this case, the proposal for the re-appointment of an Independent Director was placed before the shareholder, and a majority of 75% was needed to approve the said re-appointment. However, only 69% approved the said resolution. Even after the resolution did not receive the requisite voting, the same was approved because of the technicality in the provisions of Regulation 25(2A) of the SEBI (Listing Obligation and Disclosure Requirement) Regulations, 2015, which is quoted below:
“The appointment, re-appointment, or removal of an independent director of a listed entity, shall be subject to the approval of shareholders by way of a special resolution.
Provided that where a special resolution for the appointment of an independent director fails to get the requisite majority of votes but the votes cast in favour of the resolution exceed the votes cast against the resolution and the votes cast by the public shareholders in favour of the resolution exceed the votes cast against the resolution, then the appointment of such an independent director shall be deemed to have been made under sub-regulation (2A).”
It has been observed that large money managers and pension funds have internal teams who research and make recommendations at the time of voting on resolutions and many investors depend on Proxy Advisory firms for making the decisions.
15. Clarification on Income-Tax Clearance Certificate (ITCC) on leaving the country -a position that is factually incorrect
As per the Income-tax Act, 1961 (the ‘Act’) persons domiciled in India are required to obtain a tax clearance certificate, in certain circumstances.
Due to some misinformation, it is being erroneously reported that all Indian citizens must obtain an income-tax clearance certificate (ITCC) before leaving the country. This position is factually incorrect and it is clarified that every person is not required to obtain a tax clearance certificate. Only certain persons, in respect of whom circumstances exist which make it necessary to obtain a tax clearance certificate, are required to obtain the said certificate. This position has been in the statute since 2003 and remains unchanged.
In this context, the CBDT, vide its Instruction No. 1/2004, dated 05.02.2004, has specified that the tax clearance certificate may be required to be obtained by persons domiciled in India only in the following circumstances:
- where the person is involved in serious financial irregularities and his presence is necessary in the investigation of cases under the Income-tax Act or the Wealth-tax Act and it is likely that a tax demand will be raised against him, or
- where the person has direct tax arrears exceeding Rs. 10 lakhs outstanding against him which have not been stayed by any authority.
Further, a person can be asked to obtain a tax clearance certificate only after recording the reasons for the same and after getting approval from the Principal Chief Commissioner of income tax or Chief Commissioner of Income-tax.