This article is written by Chandrasmita Priyadarshini, from Kiit School Of Law, Bhubaneshwar. This exhaustive article covers the details of the amendments of the Companies Act, 2013 due to the budget 2021-2022 and the importance of a budget.
Table of Contents
On 1 February 2021, the Hon’ble Finance Minister Nirmala Sitharaman presented the Union Budget 2021-22. Due to Covid-19 severe lockdown was imposed at the end of March 2020 to control the pandemic and prevent the citizens from getting affected. Also, this pandemic caused devastation in the economy of the country. Many economists predicted the same and advised the budget 2021- 2022 to be framed accordingly. The condition was worse as the condition of the Indian economy was worse even before the pandemic. This budget was prepared by keeping in mind the revival of the economy which was a priority as this pandemic has drastically affected our country’s economy. In order to do so, the budget must provide a check on the government’s public expenditure to revive the severe contraction in revenues and expenditures required to save lives and livelihoods.
Due to structural factors of increasing deficits and debt prevailing in fiscal areas, it could be seen how the economy is already slowing down and attempts must be made to reclaim the earlier growth of the economy. The budget speech given by our Finance Minister, it referred to various proposals that would help the companies conduct their business in a simplified manner. These amendments by the budget are to be notified by the Ministry of Corporate Affairs to the specific provisions of the Companies Act, 2013, as to the Amendment rules of 2021 which shall come to effect from 1st April 2021. This is very essential to the economy but it must be seen how effectively it is implemented.
Budget and its importance
For a few years, it is seen that India has been engaged in development across various regimes. This Union budget 2021-2022 aims to improve the economy, and able economic gains to financial systems to build a stable economy for the future which might prove to be path-breaking. For the success of any business, a well-thought-out budget is a primary step, in the same way, the Union budget acts as the structure as to how the finances of the country are to be utilized smoothly to improve the economy of the country along with successful budget allocation.
Features of a successful budget allocate time to create and manage budgets of each process, prepare and review each business plan and regularly monitor their financial situation and performance of their business. Budgeting means identification of capital, estimation of expenditure, and anticipation of incoming revenue. The budget makes it easy to measure the performance against expenditure and ensure the resources which are available for the initiatives that will enhance the growth and development of each field. The importance of a budget is that it helps to concentrate on cash flow, reduces cost, enhances profits, and increases returns on investment. Budgeting is the reason for any success. It helps in planning ahead and keeping a check on finances. If there is no budget, there won’t be any control on expenditure, any form of planning, in this case, it will be futile, and hence, without planning there will be no business objectives that can be achieved. A budget is a plan to control the business finances to ensure that the business can fund its current commitments, enable the business to meet its objective, make confident financial decisions, and make sure that the business has money for future projects. The Union Budget of India for the fiscal year 2021-2022 focused on ease of living and steady economic growth. This aim is to bring India back on track which was heavily affected due to the pandemic.
Amendments to the Companies Act, 2013
The amendments that were brought by the union budget 2021-2022 are mentioned below:-
Amendment in the definition of small companies
Section 85 of the Companies Act, 2013 defines a small company which is now amended by the Union budget 2021-2022 increasing the threshold limits of such small companies. In the speech of the Hon’ble Finance Minister, the Ministry of Corporate Affairs was asked to notify the changes to the Companies Amendment Rules, 2021 wherein the threshold was increased. As per these Amendment rules, the companies having paid-up capital up to two crores or having turnover up to Rs twenty crores shall be considered as small companies. Before the amendment, paid-up capital was fifty lakh rupees or higher and turnover was two crores provided that these shall not apply to any holding or subsidiary company. By the notification of this amendment, various companies would be eligible to enjoy the benefits of a small company hence, business would be easier and lenient for those companies. Resulting in the reduction of burden for compliance under the Companies Act, 2013 for these companies who didn’t fall under the ambit of small companies before this amendment.
Start-up companies to enter into the scheme of merger, acquisition, and amalgamation
As notified by the Ministry of Corporate Affairs To the Companies Amendment Rules, 2021 as inserted in the new Sub-rule (1A) under Rule 25 of the Companies ( Compromises, Arrangements, and Amalgamations) Rules, 2016 which allows merger and amalgamation between a) two or more start-up companies b) one or more start-up companies or with one or more small companies. As per Section 233(1) of the Companies Act, 2013 a scheme of merger or amalgamation may be entered into between two or more small companies or between a holding company and its wholly-owned subsidiary company or such other class or classes of companies as may be prescribed.
Section 2(40) of the Companies Act, 2013 defines a start-up company as Any entity so incorporated or registered in India, not for more than five years of whose turnover must not be more than 25 crores in any preceding financial year. This company must not split or reconstruct any business that is already in existence or such a company must work towards the development, commercialization of services driven by technology or intellectual property. Any such company will cease to be a startup company if the turnover for previous years of that company exceeds twenty-five crore or it has completed 5 years from the date of incorporation/ registration. A start-up gets a certificate from the Inter-Ministerial Board only then they are eligible for tax benefits.
Restrictions eased for one-person companies
These incentives proposed by the Finance Minister benefit the startups, small companies, and the innovators relating to one-person companies to help them grow without any restriction on the paid-up capital and turnover, permitting them to convert to any other type of company at any time reducing the residency limits. For any NRI the period of stay in India for determination of residency limit for the purpose of forming an OPC is reduced from 182 days to 120 days. Amendment has been made in Rule 3 of the Companies (incorporation rules) allowing non-resident Indians to incorporate OPC in India. This amendment aims to boost startup companies and various foreign investments in India from NRIs as this can result in improving the economy of India.
As when NRIs incorporate OPC in India indirectly it will contribute to the revival of the economy of the country. The new process for conversion of OPCs as prescribed in the amendment is ‘any One Person Company that can be converted into a Private or Public Company, other than a company registered under section 8 of the Act, after increasing the minimum number of members and directors to 2 or 7 members and 2 or 3 directors, as possible. The OPC needs to file e-Form No-INC-6 for its conversion into Private or Public Company, along with fees as provided in the Companies (Registration offices and fees) Rules, 2014 by attaching specified documents. Also does away with a statutory lock-in period of 2 years before voluntary conversion of OPC to other companies. The liberal approach followed in these conversions. Private companies are allowed to convert into OPCs by passing a special resolution in the general meeting with the restriction of having paid-up share capital of Rs. 50 lakh or less and average annual turnover of Rs. 2 Cr. or less to convert into OPC is removed.
Decriminalization of LLPs
Limited liability partnerships are viewed as an alternate corporate business vehicle that will provide the benefits of limited liability but allow its members the flexibility of organizing their internal structure as a partnership based on a mutually arrived agreement. The LLP form would enable entrepreneurs, professionals, and enterprises providing services of any kind or engaged in scientific and technical disciplines, to form commercially efficient vehicles suited to their requirements. Owing to flexibility in its structure and operation, the LLP would also be a suitable vehicle for small enterprises and for investment by venture capital. The Hon’ble Finance Minister in her speech has proposed to decriminalize the procedural and technical compoundable offenses under Limited Liability Partnership Act, 2008. The above proposal is already under public consultation.
The decriminalization of procedural and technical compoundable offenses under the Companies Act, 2013 has already been made effective as the Finance Minister said that the Ministry of corporate affairs has already on January 4, 2021, titled “Report of the Company Law Committee on Decriminalization of the Limited Liability Partnership Act 2008”, completed the process of decriminalization of certain offenses under the Companies Act and now similar changes have been proposed towards the Limited Liabilities Partnerships to ease of doing business by corporate and LLPs in India which was the need of the current scenario. The proposal is in line with the recommendations made by the Company Law Committee report issued in Jan ‘2021 wherein it had proposed decriminalization of 12 offenses involving minor, technical, or procedural nature of violations that may not harm the public interest.”
Strengthening of NCLT framework
The Hon’ble Finance Minister in her budget speech proposed to strengthen the NCLT framework to ensure faster resolution of cases. In order to promote Digital India, e-Courts were proposed to be implemented. Further, it was proposed to provide an alternate mode of debt resolution, a separate framework is also proposed for the cases involving the MSMEs.
The union budget 2021- 2022 definitely has a clear focus on the development of ease and quality of life. The real challenge is the implementation of the schemes for social welfare, healthcare, infrastructure development, industrial development, agriculture, and rural development. The relaxations in the above-mentioned thresholds will benefit companies by easing their compliance requirements. Besides various proposals of the Union Budget for the fiscal year 2021-2022, the corporate law proposals, as can be observed from the above-mentioned discussions, have been introduced to allow ease of doing business. While the changes have been proposed, the final set of changes once in place will allow witnessing the ease of doing business as intended by the Government. Though these proposed legislative amendments to be made pursuant to this proposal are not part of the Finance Bill, 2021.
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