India: Highlights Of The Companies (Amendment) Act, 2019

  1. INTRODUCTION

On July 31, 2019, the Ministry of Corporate Affairs introduced the Companies (Amendment) Act, 2019 (the "Amendment").[1] The Amendment considers changes brought in by the Companies (Amendment) Ordinance, 2018, (the "2018 Ordinance"), the Companies (Amendment) Ordinance Act, 2019 and the Companies (Amendment) Second Ordinance, 2019 (the "2019 Ordinances") to further amend the Companies Act, 2013 (the "Act").

The Amendment has reinforced the 2018 Ordinance and 2019 Ordinances and introduced new changes as discussed below. While all provisions are deemed to have come into force from November 2, 2018, Sections 6, 7 ,8, 14(i), 14 (iii), 14(iv), ,20, 31, 33, 34 ,35, 37 and 38 of the Amendment have come into force on August 15, 2019[2] and only Section 21 remains to be notified.

  1. KEY CHANGES

The key changes are as follows:

2.1. Commencement of business

A new provision introduced by the 2018 Ordinance, promulgated again by 2019 Ordinances and now fortified through Section 3 of the Amendment that is, Section 10A of the Act, restricts a company which is incorporated after the commencement of the Amendment and having a share capital, from commencing any business or exercise any borrowing powers unless a declaration is filed by a director of such company with the Registrar of Companies (the "RoC").

Such declaration has to be filed with the RoC within 180 days from the incorporation of the company, stating that every subscriber to the memorandum has paid the value of the shares agreed to be taken by him on the date of filing such declaration and such company shall have filed a verification of its registered office in accordance with Section 12(2) of the Act.. Further, any default in complying with the requirements of this provision shall make the company liable to a penalty of INR 50,000 and every officer in default (the "OID") shall be liable to a penalty of INR 1,000 for each day during which such default continues, subject to a maximum amount of INR 1,00,000.

Further, the amendment to Section 12 of the Act empowers the RoC to cause physical verification of the registered office of company, where the RoC has reasonable cause to believe that the company is not carrying on any business or operations in contravention of Section 10A of the Act , and is now empowered to initiate action for the removal of the name of such defaulting company from the register of companies.

2.2. Shifting of powers from the National Company Law Tribunal (the "NCLT") to the Central Government

As per Section 2 and Section 5 of the Amendment, the applications are now required to be filed with the Central Government instead of the NCLT in the following cases:

(a) for adopting a different financial year by a company or body corporate, which is a holding company, or a subsidiary or associate company of a company incorporated outside India and is required to follow a different financial year for consolidation of its accounts outside India;

(b) for any alteration having the effect of conversion of a public company into a private company.

2.3. Matters to be stated in the prospectus

An amendment to Section 35 (2)(c) of the Act, inserted by Section 8 of the Amendment, removes the requirement of delivering a copy of the prospectus to the RoC for the purpose of registration, now the prospectus is just required to be filed with RoC instead.

2.4. Dematerialisation of securities

As per Section 29 (1A) of the Act, inserted by Section 7 of the Amendment, the requirement of public offer of securities to be in dematerialised form is not just limited to public companies, and the list has been expanded to include such class or classes of unlisted companies as may be prescribed.

2.5. Provisions relating to penalties

Changes in penal provisions introduced by the 2018 Ordinance, promulgated again by 2019 Ordinances and now fortified by the Amendment have been made effective for the following non-compliances:

S. No.

Failure to comply with

Penalty

Prohibition on Issue of Shares at Discount

Company: amount equal to the amount raised through the issue of shares at a discount or INR 5,00,000 whichever is less;

refund all monies received with interest at the rate of 12% per annum, from the date of issue of such shares

OIDs: amount equal to the amount raised through issue of shares at a discount, or INR 5,00,000, whichever is less

Notice to be given to the RoC for Alteration of Share Capital

Company & OIDs: INR 1,000 for each day during which such default continues, or INR 5,00,000 whichever is less

Filing of Annual return

Company & OIDs: INR 50,000 and in case of continuing failure, with a further penalty of INR 100 for each day after the first during which such failure continues, subject to a maximum of INR 5,00,000

Statement to be Annexed to Notice

OIDs: INR 50,000, or 5 times the amount of benefits accrued

Notice calling a meeting which provide for voting by proxy

OIDs: INR 5,000

Resolutions and Agreements to be Filed

Company: INR 1,00,000, and in case of continuing failure, INR 500 for each day after the first during which such failure continues, subject to a maximum of INR 25,00,000

OIDs & Liquidator: INR 50,000 and in case of continuing failure, with further penalty of INR 500 for each day after the first during which such failure continues, subject to a maximum of INR 5,00,000

Report on Annual General Meeting

Company: INR 1,00,000, and in case of continuing failure, with a further penalty of INR 500 for each day after the first during which such failure continues subject to a maximum of INR 5,00,000

OIDs: INR 25,000 and in case of continuing failure, with a further penalty of INR 500 for each day after the first during which such failure continues, subject to a maximum of INR 1,00,000

Copy of Financial Statement to be Filed with the RoC

OIDs: INR 1,00,000, and in case of continuing failure, with further penalty of INR 100 for each day after the first during which such failure continues, subject to a maximum of INR 5,00,000

Company to Inform Director Identification Number to the RoC

Company: INR 25,000 and in case of continuing failure, with further penalty of INR 100 for each day after the first during which such failure continues, subject to a maximum of INR 1,00,000

OIDs: INR 25,000 and in case of continuing failure, with further penalty of INR 100 for each day after the first during which such failure continues, subject to a maximum of INR 1,00,000

Penalty for Default of Section 152, 155 & 156

OIDs: INR 50,000 and where the default is a continuing one, with a further penalty which may extend to INR 500 for each day after the first during which such default continues

Payment to Director for Loss of Office, etc., in Connection with Transfer of Undertaking, Property or Shares

Director: INR 1,00,000

Appointment of Key Managerial Personnel

Company: INR 5,00,000

OID: INR 50,000 and where the default is a continuing one, with a further penalty of INR 1,000 for each day after the first during which such default continues but not exceeding INR 5,00,000

Registration of Offer of Schemes Involving Transfer of Shares

Director: INR 1,00,000

Penalty for repeated default

An amount equal to twice the amount of penalty provided for such default under the relevant provisions of this Act

2.6. Registration of charges

The requirement of registration of a charge within 30 days of its creation with the RoC remains unchanged.

Section 11 of the Amendment states, that in case of charges which was created prior to the commencement of the Amendment, the RoC may, upon an application by the company, allow registration of such charges to be made within 300 days of its creation, and provides for a further extension of up to 6 months from the date of the commencement of the Amendment, on payment of additional fees as may be prescribed for different classes of companies.

Further, in case of charges created on or after the commencement of the Amendment, the RoC may, on an application by the company, allow registration of such charges to be made within 60 days of its creation, which may further be extended to another 60 days on payment of ad valorem fees.

2.7. Register of significant beneficial owners in a company

Section 90 (4A) of the Act, introduces a new subsection where every company is mandated to take necessary steps to identify an individual who is a significant beneficial owner in relation to such company, and require such individuals to comply with the provisions with respect to registration of significant beneficial owners in the company.

The Central Government has further been empowered to make rules in this regard.[3]

2.8. Corporate Social Responsibility ("CSR")

Section 8 of the Amendment has introduced new changes Section 135 of the Act, where in relation to an entity, for the purpose of calculation 2% of average profits for 3 immediately preceding financial years, in cases where an entity has not completed 3 years, the profit for immediately preceding financial year shall be taken.

The Amendment now requires companies who do not fully spend their CSR funds to disclose the reasons for the non-spending in their annual report and unless the unspent amount relates to any ongoing project the amount is to be transferred to a Fund specified in Schedule VII, within a period of 6 months of the expiry of the financial year.

Any amount unspent for any ongoing project, is to be transferred within a period of 30 days from the end of the financial year to a special account opened by the company in any scheduled bank as 'Unspent Corporate Social Responsibility Account', and such amount shall be spent by the company pursuant of its obligation towards the CSR policy within a period of 3 financial years from the date of such transfer.

Failing to spend the amount in the Unspent Corporate Social Responsibility Account within 3 financial years, the company shall transfer the same to a fund specified in Schedule VII, within a period of 30 days from the date of completion of the third financial year.

Upon contravention of this mandate, a fine of INR 50,000 would be imposed on the company, which may extend to INR 25,00,000 and OIDs shall be punished with imprisonment of up to 3 years or with fine of INR 50,000 which may extend to INR 5,00,000, or with both.

2.9. Prevention of oppression and mismanagement

New subsections to Section 241 of the Act, have been introduced, where if the Central Government is of the opinion that there exist circumstances where:

(a) any person concerned in the conduct and management of the affairs of a company is guilty of fraud, misfeasance, persistent negligence or default in carrying out his obligations and functions under the law or of breach of trust; or

(b) the business of a company is not or has not been conducted and managed by such person in accordance with sound business principles or prudent commercial practices; or

(c) a company is or has been conducted and managed by such person in a manner which is likely to cause, or has caused, serious injury or damage to the interest of the trade, industry or business to which such company pertains; or

(d) the business of a company is or has been conducted and managed by such person with intent to defraud its creditors, members or any other person or otherwise for a fraudulent or unlawful purpose or in a manner prejudicial to public interest;

the Central Government is empowered to initiate a case against such person and refer the same to the NCLT with a request that the NCLT may inquire into the case and record a decision as to whether or not such person is a fit and proper person to hold the office of director or any other office connected with the conduct and management of any company.

If the NCLT rules that the person is not a fit and proper person then the person shall not hold the office of a director or any other office connected with the conduct and management of the affairs of any company for 5 years from the date of the decision and further would not be entitled to any compensation for the loss or termination of office.

2.10. Compounding of offences

As per Section 39 of the Amendment, any offence which is punishable under the Act with imprisonment only or with imprisonment and also with fine shall not be compoundable notwithstanding anything contained in the Code of Criminal Procedure, 1973.

Section 441 of the Act has been amended to provide that the Regional Director or any officer so authorized by the Central Government shall now have the power to compound (settle) offences wherein the penalty is up to INR 25,00,000.

INDUSLAW VIEW

Changes introduced by 2018 Ordinance and 2019 Ordinances have now been crystallized by the Amendment. The Amendment has also re-categorized offences as civil defaults, where adjudicating officers (appointed by the central government) may now levy penalties instead. The changes are brought in with the view to fill critical gaps in the corporate governance & compliance framework.

The change in the CSR agenda has now mandated companies to spend towards CSR activities within a specific time frame failing which the unspent annual CSR funds shall have to be deposited in a special 'Unspent Corporate Social Responsibility Account' for 3 years and thereafter, if unspent, be transferred to one of the funds under Schedule VII of the Act.

The changes are expected to lead to greater compliance by companies, de-clogging of the NCLT and provide effective enforcement. Statistics show that around 60% of the 40,000 cases are pending in courts[4] regarding sections with respect to procedural lapses that are proposed to be shifted to in-house adjudication mechanism which would incentivise compliance for companies. Therefore, the compounding cases load on the NCLT may come down significantly.


[3] For more information on the rules, please refer to our InfoLex Article: "New Company Rules Tighten Reporting Of Significant Beneficial Ownership" available at

https://www.induslaw.com/app/webroot/publications/pdf/alerts-2019/Significant_Beneficial_Owner_Rules 2019.pdf

[4] http://pib.nic.in/newsite/PrintRelease.aspx?relid=188765

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