Company Law Reforms Under Union Budget 2021

The Hon’ble Finance Minister, Nirmala Sitharaman on February 1, 2021, announced the Union Budget for the financial year 2021-22 (“Budget”) wherein several significant changes in the area of corporate laws were also discussed.

The Budget has laid down the proposed changes to decriminalize the Limited Liability Partnership Act, 2008 (“LLP Act”), increase in the threshold of the definition of small companies under Companies Act, 2013 (“CA 2013”), the introduction of an updated version of the Ministry of Corporate Affairs (“MCA”) and changes in the framework of One Person Company (“OPC”).

Company Law Reforms Under Union Budget 2021

We have herein below discussed each one of the above-mentioned reforms in the corporate laws:

I. Decriminalization of offences under LLP Act

In order to decriminalize the offences under LLP Act, the Company Law Committee has already issued the report on decriminalization of the offences to the MCA on January 4, 2020 (“Report”) which has the proposal to decriminalize 12 offences and omission of 1 penal provision.

The main objective behind taking such a step is to de-clog the courts and/or NCLTs for reducing their burden from the non-serious matters. Apart from this, the Report has also introduced changes in the definition of the business of LLPs aligning the reference with the CA 2013.

II. Amendment to the definition of a small company

The Budget discussing the reforms under corporate laws has further proposed the change in section 2(85) of the CA 2013 which defines the term ‘small company’ as any company other than the public company having paid-up share capital not exceeding 50 lakh rupees and turnover not exceeding 2 crore rupees.

The Budget has proposed to revise the definition of small companies by increasing the thresholds for paid-up share capital to 2 crore rupees and turnover to 20 crore rupees.

III. Amendment to the framework of OPC

The current provisions pertaining to OPC under CA 2013 provides that an OPC cannot convert itself into any other kind of company unless the period of 2 years has elapsed from the date of its incorporation.

If in the event the threshold limit of INR 50 lakhs and the average annual turnover during the relevant period exceeds INR 2 crore then the conversion can take place before the expiry of 2 years.

The Government has now proposed to remove the monetary limit in order to provide flexibility to OPCs for the growth. Along with this, the Government has also proposed to ease the residential requirements for the person setting an OPC from 182 days to 120 days in India.

IV. Updated version of MCA

The corporate reforms in the Budget have also proposed to revamp MCA portal by launching MCA21 version 3.0 in the financial year 2021-22 for the purpose for using data analytics, artificial intelligence and machine learning drive and will also have the provision for additional modules for e-security, e-adjudication, e-consultation and compliance management.

Thus, the implementation of the reforms as discussed above will provide the ease of doing business in India to the start-ups and other business entities.