Report of the Committee on Private Companies and Partnerships (2003), chaired by Naresh Chandra

2nd July 2023

3 min read

The report of the committee on regulation of private companies and partnerships was commissioned by the Jaswant Singh of the Department of Company Affairs, Ministry of Finance, to review the regulatory environment under the Companies Act of 1956 and the Indian Partnership Act of 1932, with a particular focus on simplifying the compliance requirements for private companies and partnerships. The committee, chaired by Naresh Chandra, Former Indian Ambassador to the US, found that the Companies Act, rooted in the License Raj era, imposed extensive and often unnecessary regulations on private companies, many of which are small, family-run businesses. Members included C. R. Dua; S. D. Israni; N. V. Iyer; Ashok Kapoor; Rajiv Mehrishi; Kalpana Morparia; Shardul Shroff; and Ashok Haldia (Member-Secretary).

The report recommended introducing a new classification, small private companies, to free these enterprises from burdensome compliance obligations. Small private companies, defined as those having paid-up capital and free reserves of Rs. 50 lakhs or less or annual receipts not exceeding Rs. 5 crores, would be exempt from several provisions of the Companies Act of 1956 such as issuing a prospectus (Section 70) and obtaining government permission for appointing sole-selling agents (Section 294AA), and the required frequency of their board meetings would be reduced. These measures aimed to reduce compliance costs and administrative burdens, thereby promoting efficiency and growth.

The report also addressed managerial remuneration, recommending that decisions on the matter be shifted from government approval to special resolutions by shareholders (Section 310). This change aimed to provide greater autonomy to company boards while ensuring transparency and accountability. For companies undertaking long-gestation projects or those being nursed back to health, further liberalization of remuneration rules was proposed. Simplified exit procedures for defunct companies were also recommended, with a proposed streamlined process to be completed within 120 days, thus addressing the high costs and complexities associated with winding up companies.

Further, the committee highlighted the need for clarity in the part of the definition of a public company concerning private subsidiaries (Section 3[1][iv][c]). Recommendations were made to simplify and rationalize the procedural requirements for various corporate actions, for example by removing the requirement for a certificate of commencement of business (Section 149) and aligning dividend-payment regulations with shareholder approvals (Section 205). The report also emphasized the importance of modernizing the administration of partnership firms, urging state governments to computerize records to facilitate due diligence by financial institutions and third parties. In the absence of state-level action, the central government was advised to consider taking over this responsibility. In essence, the committee’s recommendations aimed to create a more flexible and rational regulatory framework that would balance the need for corporate accountability with the practicalities of business operations. By reducing unnecessary regulatory burdens and enhancing transparency and efficiency, the report sought to foster a conducive environment for the growth and development of private companies and partnerships in India.

The Companies Act of 2013 provides benefits to small companies: relaxed financial disclosures, reduced number of mandatory board meetings, and the ability to submit abridged forms. Instead of comprehensive provisions within the Companies Act, the Insolvency and Bankruptcy Act of 2016 was introduced to simplify exit of companies. The Companies Act also provided for online formation and registration of partnerships and companies with the Ministry of Corporate Affairs.

The Naresh Chandra Committee recommended simplifying regulations for small private companies and partnerships, proposing measures like reduced compliance requirements, streamlined exit procedures, and enhanced clarity in corporate governance. These reforms aimed to balance accountability with operational efficiency, fostering a more supportive environment for business growth and development.

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