Centre finalises Companies Act changes to boost capital access for bankrupt firms, tighten audit rules: Report

The changes build on recommendations from a 2022 report by the Company Law Committee.

The government has likely finalised amendments to the Companies Act, aiming to ease capital access for bankrupt companies and strengthen regulatory oversight of statutory audits, according to a report by Mint, citing three sources familiar with the matter.

The Ministry of Corporate Affairs is preparing the final draft of the bill, which is expected to bring greater clarity to auditor independence norms. This move follows recent audit failures, notably in the case of Infrastructure Leasing & Financial Services Ltd. (IL&FS) for FY18, which raised concerns over the effectiveness of current audit regulations.

The proposed legislation will include provisions to make it easier for bankrupt businesses to raise capital, as well as to streamline the regulatory framework around mergers and acquisitions for specific classes of companies, sources told Mint. The bill, drafted in consultation with other ministries, is likely to be tabled during the winter session of Parliament.

The changes build on recommendations from a 2022 report by the Company Law Committee. The committee had proposed stricter rules to ensure that no auditor providing services to a public interest entity could offer non-audit services, either directly or indirectly, to the same client or any related group company. Under current rules, audit firms can be disqualified for maintaining direct or indirect business ties with any arm of their audit clients, but these rules have been subject to varying interpretations, often leading to litigation.

The forthcoming bill also aims to cut through bureaucratic red tape, expediting the restoration of companies removed from the official register if requested within a specified period. Additionally, it proposes reforms to improve the ease of doing business, such as allowing self-declarations by companies in cases where affidavits on stamp paper are currently required.

However, one significant proposal from the Company Law Committee—to allow fractional shares, which would have enabled retail investors to buy portions of high-value stocks—has not been accepted. Fractional shares could have helped diversify ownership in companies and made stock investments more accessible to smaller investors.

In addition to the Companies Act amendments, the Ministry of Corporate Affairs is also working on changes to the Insolvency and Bankruptcy Code (IBC). The proposed amendments will further clarify the priority of repayments owed by distressed companies to statutory agencies.

Mint's requests for comment from the ministry went unanswered, and Moneycontrol could not independently verify the report.