Covid-19 and Company Law: The Impact of Digitalisation

[Dharini Shanker is a 1st Year LL.B student at Campus Law Centre, University of Delhi]

The Company Law Committee (“Committee”), set up to make recommendations to the Government for reforms directed at promoting greater ease of business in India and the effective implementation of the Companies Act, 2013 (“Act”), the LLP Act, 2008 and the Rules made thereunder, has submitted its report in March 2022 to the Ministry of Corporate Affairs (“MCA”). The Committee has, among various efforts, endeavoured to make recommendations for the widespread use of electronic communication for transmission, storage, and access of information as a means of strengthening India’s existing company law framework in light of the COVID-19 pandemic. Suggested reforms include allowing certain companies to communicate with their members exclusively in electronic form, allowing companies to hold general meetings in virtual or hybrid mode, creation of an electronic platform for maintenance of statutory registers by companies, and modernising enforcement and adjudication activities through electronic mode.

Through this post, I seek to examine whether the current legislative framework is conducive to digitalisation. I would also be analysing the recommendations made by the Committee in this respect and their impact.

Current Legislative Framework

The Act and the Rules framed thereunder already contain certain provisions for facilitating electronic communication and encouraging digitalisation, subject to various safeguards. Section 173 of the Act prescribes provisions for holding meetings of the board of directors. Clause (2) provides the directors the alternative of attending a meeting through video conferencing or other audio-visual means, as may be prescribed, provided that they contain features for recording and recognising the participation of the directors and the storage of recordings with date and time. However, the Central Government has reserved to itself the authority for determining and specifying matters which are barred from being dealt with in a meeting held through such means. Pertinently, by way of its notification dated 15 June 2021, the MCA omitted all such restrictions, which was a welcomed relaxation during the pandemic. Such a right guaranteed to a director was previously affirmed by the National Company Law Appellate Tribunal (“NCLAT”) in Achintya Kumar Barua v. Ranjit Barthkur wherein it held that “Section 173(2) of the Companies Act, 2013 gives rights to a director to participate in the meeting through video-conferencing or other audio-visual means and the Central Government has notified Rules to enforce this right”.

Rule 3 of the aforementioned Rules lays down several procedures a company has to comply with for convening and conducting board meetings virtually. These include provisions for ensuring sufficient identification and security measures, preparation of minutes of the meeting, provision for storage and safekeeping of recordings of such meetings, roll calls for marking presence, and similar procedures.

Section 120 of the Act provides for the maintenance and inspection of documents, records, and registers in electronic form. The erstwhile Companies Act, 1956 contained references to the maintenance of  records in electronic form, but provisions governing the same were given shape under the present statute with the advent of development in digital technology. Rule 27 of the Companies (Management and Administration) Rules, 2014 stipulates that every listed company or a company having not less than 1000 shareholders, debenture holders, and holders of other securities may maintain its records in an electronic form, in a manner that the board may deem fit. Such records shall be maintained with uniform formatting, which is readable, retrievable, and capable of being reproduced in print. Once dated and signed, they must not be capable of being tampered with or edited, but must be capable of being updated according to the provisions of the Act and Rules. Certain guidelines prescribed in the Information Technology Act, 2000, for example, guidelines on digital signatures under section 15 thereof, also need to be complied with for maintenance of documents in electronic form.

An e-voting mechanism is provided under rule 20 read with section 108 of the Act. Every listed company and company having over 1000 members is required to provide the facility of voting on resolutions through electronic means, provided that a notice indicating the procedure, schedule, and other details are personally sent to all directors, members and auditors and also published on the website of the company, if any, to allow them to exercise their right to vote conveniently, in a secure manner.

Recommendations of the Committee

Section 20 of the Act outlines the various modes in which documents can be served on a company, its officers or the Registrar of Companies (“RoC”). Clause (2) stipulates that documents may be delivered through registered post, speed post, courier or any other mode as may be prescribed. The Committee, in light of various notices and circulars issued by the MCA and the Securities and Exchange Board of India to mitigate adverse effects of COVID-19, has recommended amending section 20 to make provisions for such classes of companies for whom it should be sufficient to serve such documents electronically to all members, subject to suitable safeguards for protection of investor interests. However, upon request by a member, as an investor-friendly measure, the company shall be required to serve documents physically. This recommendation comes across as a double-edged sword and all eventualities will have to be taken into account by the Government while prescribing a statutory framework. While the electronic mode is admittedly the most cost-effective and convenient for delivery, it may not be entirely feasible to completely do away with physical delivery in cases where email addresses of shareholders and members may not be readily available or where their securities have not been converted in the demat form.

The Report further suggested conduct of general meetings virtually. Under section 96 of the Act, every company except a one-person company must hold an annual general meeting (“AGM”) each year. Owing to the advent of the pandemic and nationwide lockdowns, the MCA issued its circulars dated 8 April 2020 and 13 April 2020 allowing companies to conduct AGMs in a hybrid mode, giving members option to attend physically or virtually via video conferencing platforms. Taking into account the multifarious benefits of removing the mandate of physical presence in AGMs, the Committee has recommended that the Government provide measures allowing companies to hold AGMs and extraordinary general meetings in hybrid mode. Virtual meetings can be a boon for members who may be attending from remote locations and their adoption as regular practice may lead to a reduction in the statutory notice period for such meetings. This recommendation of the Committee appears to be influenced by the crisis legislation introduced by other jurisdictions like Singapore and Australia which had allowed entities to conduct general meetings via electronic means, and existing regulatory framework in countries like Japan and South Africa which allow entities to conduct meetings virtually or in a hybrid form even in the absence of exigencies due to a pandemic or otherwise.

The Report has also recommended compulsory maintenance of statutory registers through an electronic form for certain classes of companies. According to the Act and the Rules framed thereunder and as discussed hereinabove, a company is required to maintain records in the form of registers containing information of their dealings, directors, shareholders, and loans. As rightly observed by the Committee, the physical maintenance of such registers is a tedious task and the creation of a single electronic platform backed by the Government to maintain registers would not only ease the regulatory burden upon companies and lessen chances of duplication of efforts, but also streamline the compliance process and make information easily accessible to the stakeholders.

Lastly, the Committee has recommended that the Government omit the explanation to section 398(1) to strengthen e-enforcement and e-adjudication and bring the law in line with the e-Courts Project under the ‘National Policy and Action Plan for Implementation of Information and Communication Technology in the Indian Judiciary’. Section 398 allows the Government to prescribe Rules regarding the filing of applications, documents, and inspections in electronic form. In accordance with the explanation, such rules shall not apply to imposition of fines or penalties or demand or payment of fees  or contravention of any of the provisions of the Act or punishment thereunder. Omission of the explanation will be crucial in removing a major roadblock that exists in carrying out adjudication-related activities in a transparent, traceable and non-discretionary manner through electronic mode.

Concluding Remarks

The proposals and recommendations of the Committee seek to provide ease of statutory compliance by making it cost-effective, transparent, and convenient, thereby promoting the ease of doing business in India and bringing the present regime in line with global practices. The pandemic and the restrictions springing therefrom have permanently altered the conduct of business; however, the same has proven to be a blessing in disguise as it provided an impetus for companies to accelerate digitalisation and adoption of technology, thereby reflecting a paradigm shift in corporate governance. While such practices are de rigueur, they are not free from encumbrances. Security threats, issues related to data protection and unauthorised access are a part and parcel of greater digitalisation and necessitate the creation of a strong framework to safeguard the interests of investors and members of the companies.

Dharini Shanker

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