The limit on sweat equity for startups could be raised to 50% from 25% of paid up capital, improving the incentives for innovators and giving a boost to the Startup India initiative.
A committee set up by the government to review issues arising out of implementation of the Companies Act, 2013 has suggested changes to improve ease of doing business, encourage startups and harmonise various laws.
The committee in its report has suggested that the government may also allow issuance of ESOPs to promoters working as employees or whole time directors of startups, which would help promoters to gain from increase in future valuation.
The Companies Act, 2013 currently restricts issue of ESOPs to promoters or promoter directors even if they are employees of the company. With a view to ease raising of funds for startups without additional compliance costs, the limits with regard to raising of deposits from members for 'startup' companies may be removed for the first five years from their incorporation.
At present, private companies are permitted to accept deposits from their members which do not exceed 100% of their paid-up capital and free reserves.
"Major amendments have been recommended to Companies Act 2013 to encourage startups. An overhaul of the Act in tandem with government's Start-Up India vision is likely to be done soon," said Anshul Jain, partner at law firm Luthra & Luthra Law Offices.
"Other major recommendations include reducing the penalties on auditors, audit rotation relaxations, easing provision for loan to directors, and no approval from government for managerial remuneration of key personals," he said.
The committee has also recommended that there should not be any need for approval from central government for managerial remuneration for key managerial persons if it has got the approval of shareholders. Provisions related to loan to directors have also been proposed to be relaxed. In a major relief to auditors, the committee has suggested several fines and penalties related to non-compliance of filing be eased. The auditor rotation policy mandated every three years should be applicable from AGM to AGM instead of the calendar year, the committee has recommended.
The committee has also recommended removal of insurance deposit clause for companies raising deposits from public. The change has been recommended as no insurance company provides deposit insurance products in the country.
Also, companies that had defaulted on payments will now be allowed to raise money again from public in case they have made the due payments. A certain cool off period may be prescribed, the committee has suggested.
The committee has also suggested introducing a register of beneficial owners by mandating it in the Companies Act so that actual beneficiaries of transaction cannot undertake any money laundering or tax evasion.
Easing for procedures and filing requirements have also been recommended for one person and smaller companies.
The Companies Act review panel consisted of the secretary and joint secretary of corporate affairs ministry along with presidents of Institute of Chartered Accountants of India, Institute of Company Secretaries of India and Institute of Cost Accountants of India.