India: The Companies (Amendment) Act, 2019

Last Updated: 28 August 2019
Article by Krrishan Singhania, Sarjana Pandey and Raghav Beriwala

The Companies Act, 2013 was brought to solidify the law identifying companies in India by replacing the erstwhile Companies Act, 1956. In order to survey the current arrangements of the Act and make relevant laws for corporate offences and to ensure better corporate ccompliances, the Government of India comprised a Committee in July 2018 for reviewing the burdensome compliances under the Act as well to take the perspective of various stakeholders regarding recategorizing of offences under the Act. The said Committee, in the wake of taking the perspectives of the relevant stakeholders, presented its Report in August 2018 which prescribed that the current thoroughness of the law should proceed for genuine offences, while the breaches that are basically technical or procedural in nature might be moved to in-house adjudicating process rather than approaching the National Company Law Tribunal (NCLT). The Companies (Amendment) Ordinance, 2018 which was promulgated on 2nd November 2018 and to supplant the Ordinance, a bill, the Companies (Amendment) Bill, 2018 was presented and passed in the Lok Sabha, however the same was not taken to the Rajya Sabha. The Companies (Amendment) Bill, 2019 was introduced and passed in both the Lok Sabha and Rajya Sabha. The Companies (Amendment) Act, 2019 received the assent of the President on 31st July, 2019. The article in brief discusses about the key amendments made to the Act and the effects of the same

AMENDMENTS

Additional Powers to Central Government: As per the new amendments the authority to grant orders under Section 2(41) and Section 14 of the Act has been shifted from Tribunal to the Central Government. The amendment gives the power to the Central Government to alter the financial year of a company under section 2(41). According to amendment, if there should be an occurrence of Indian company having Holding/subsidiary/Associate Company situated outside India, it is permitted to the change the financial year of such company with the approval of the Central Government rather than that of the Tribunal. The amendment bestows the Central Government with the power to provide approval for alterations having the effect of conversion of a public company into a private company under section 14 which previously was with the tribunal.

Time to Register Charges Decreased: The time to register charges under section 77 of the Act has been decreased from 300 days to 60 days. The amendment provides for an extension of another 60 days for registration of charges, if the application for the same is made before the Registrar. This change is aimed to achieve better compliance as well as to reduce the time-frame for registration of charges. After the amendment the creditor will now be at a risk if the company does not get their charges registered, as the creditor won't be able to enforce them against the company. However, if the company does not registers the charge within the prescribed time period, the creditor under section 78 of the act can make an application to the registrar for registering the charges as prescribed under the section.

Insertion of the term 'any person' u/s 86: This change widens the ambit of responsibility of registration of charges u/s 77. The amendment enables the registrar to go after the company, its officers and any other person who he believes did not provide material or false information required for registration of charges and would make them liable to be punished under section 447 of the act.

Increase of company's responsibility u/s 90: Sub-section 4A has been included in the act after the amendment which makes it a mandatory responsibility of the company to take necessary steps to identify an individual who is a significant beneficial owner in relation to the company and require him to comply with the provisions of this section. This brings in an additional responsibility on the company under the act which prescribes that it is not only the duty of the person with beneficial interest to disclose and comply with these provisions but even the responsibility of the company to figure out the people with beneficial interest and to make sure that they comply with such provision or they themselves can be held liable for the same.

Constitution of National Financial Reporting Authority (NFRA) u/s 132: The NFRA shall perform its functions through such divisions as may be prescribed by the Central Government to perform its functions. A chairperson and some full-time members as required to perform the functions will constitute the executive body of NFRA. The amendment also inserted another clause in sub-section 4 debarring the member or the firm from being appointed as an auditor or internal auditor or undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate; or performing any valuation as provided under section 247 for a minimum period of six months or such higher period not exceeding ten years as may be determined by the National Financial Reporting Authority.

Insertion of section 242(4A): This provision gives powers to the tribunal to decide whether a person is fit to be a director in any company, if he is found liable under section 241(3) which has also been added in the act after the amendment. Also, the inserted section 241(1A) post the amendment states that such a person cannot hold office of a director or any other office connected with the conduct and management of the affairs of any company for a period of five years from the date of the said decision.

Addition of the term 'any other person': The adjudicating officer has the power to impose penalty under section 454 even on individuals who are not a part of the company. The phrase 'any other person' gives the adjudicating officer the power to impose penalty on the person who may not be part of the company but are responsible for the default.

Increase in fines: The amendment brings in certain changes in the amount of penalty. The penalties have been increased under most sections. The changes are as follows:-

Section

Particulars

Pre-amendment (in Rs)

Post-amendment (in Rs)

191

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

25,000 - 1,00,000

1,00,000

197

Overall Maximum Managerial Remuneration and Managerial Remuneration in Case of Absence or Inadequacy of Profits

1,00,000 - 5,00,000

Individual - 1,00,000

Company - 5,00,000

238

Registration of Offer of Schemes Involving Transfer of Shares.

25,000 - 5,00,000

1,00,000

441

Compounding of Certain Offences

5,00,000

25,00,000

447

Punishment for fraud

20,00,000

50,00,000

Stricter compliances regarding signatories of the MoA

According to section 10(A), the signatories of the MoA have to file a declaration that they have paid the money for the shares they had subscribed for, within 180 days of the company's incorporation. This will ensure that the signatories of the Memorandum of Association pay-up the money in time. This provision has been introduced as it was observed that the directors did not pay up for the amount they signed up for commencing their business. There had been instances where these directors had defrauded the public by collecting money through issuing financial instruments and not paying a nickel from their pockets to invest in the company. It had also been observed that the director signed up for a huge amount which he is going to invest as a signatory to attract investments but actually, he never intended to invest that kind of time. This provision ensures that the signatories pay what they signed up for before commencing the business.


According to section 12(9), the registrar may order a physical verification of the company's registered office. As, we know the concept of shell companies or paper companies, these companies only exist on paper and many a times these are created to defraud the public. This provision ensures that the address of the registered office mentioned in the application submitted to the Registrar of Companies exists. The amendment provides the registrar the authority to send an official to examine the physical presence of such a company.

Also, if the directors fail to comply with these amendments then according to Section 248 (1d) and (1e), the Registrar of Companies can strike off the company's name from the register of companies.

Corporate Social Responsibility u/s 135

Corporate Social Responsibility has been one of the most debated amendments introduced for newly incorporated companies. The amendment states that even if the company hasn't completed three years from the date of incorporation, it is liable to pay an amount of 2% of the average profits of the preceding years.

The amendment mandates that the money which has not been spent on an ongoing project by a company to be transferred to a fund specified under Schedule VII of the act within a period of six months of the expiry of the financial year, and incase the money is being spent on an ongoing project then it has to be transferred to a special account namely Unspent Corporate Social Responsibility Account in a scheduled bank within thirty days. The money deposited has to be utilized towards the Corporate Social Responsibility Policy within a period of three financial years from the date of the transfer. If, the company fails to do so then, it has to transfer that money to a Fund specified under Schedule VII of the act within thirty days of the completion of the third financial year.

The laws towards Corporate Social Responsibility have been made stricter for better compliances. The change brings in newly incorporated companies under the ambit of Corporate Social Responsibility. The intention being that the policy of Corporate Social Responsibility applies to those companies which have a net worth of rupees five hundred crore or turnover of rupees one thousand crore or a net profit of rupees five crore or more during the immediately preceding financial year. As these companies as an organization are doing well, hence, they must do something in return for the society as well. If we put it in simple terms, these policies only apply to large-size organizations and hence, if a huge company is incorporated in India, they would be covered under the Corporate Social Responsibility policy from the very first day. The amendment is also very clear about the treatment of the unspent money. The law-makers have tried to close all doors for big corporate to get away from their Corporate Social Responsibility.

The amendment has introduced a fine which may extend upto 25,00,000 for the company. The officer in default could face a jail-term of 3 years or a fine which may range from 50,000 to 5,00,000 or both.

This is a huge and impactful decision brought forward by the law-makers. A person in default of this provision can face imprisonment which may extend upto 3 years puts a lot of risk on the directors and employees of the company. This is a very odd change under the amendment as it can be observed that the law-makers have removed jail-terms for most of the offences, but have introduced a fine and a imprisonment in case of Corporate Social Responsibility. This shows us the law-makers want the corporates to take Corporate Social Responsibility seriously, and fulfill their Corporate Social Responsibility in the best of their ability.

Removal of punishment of imprisonment for various offences

The recent amendment removes certain offences committed under the act from the punishment of imprisonment:

Section

Particulars

92

Failure/delay in filing of annual return

137(3)

Delay in filing of financial statement

159

Contraventions related to DIN

53(3)

Issue of shares at a discount

This is a huge step taken by the law-makers wherein they have removed imprisonment as a form of punishment for various offences. It is a huge relief for the business community, as we have seen that the managing director is responsible for each and every action of the company. The directors or employees who are a part of the company are working to earn profits, and would not like to go to jail for certain procedural defaults. The managing directors, whole-time directors and the key managerial person could be liable for a jail term if the company was in contravention with the provisions. The key managerial personnel may not be the person who has committed the act, but still can be held responsible and may end up going to jail. This is similar to the debate going on as whether to remove imprisonment as a punishment in taxation laws, wherein it the chartered accountants who are responsible for filing of the taxes, but if something goes wrong, it is the directors or key managerial personnel of the company who would end up in jail. The offences which no longer attract imprisonment are not a wrong which cannot be rectified by paying compensation.

White collar crimes are not recognized in India unlike the United States, wherein there are separate jails for white-collar crimes. Hence, putting a business person in jail for contravening certain procedural laws with people who have committed far graver offences is not justifiable.

Adjudicating of penalties u/s 454

The amendment ensures better compliance of the default and prescribes stiffer penalties in case of repeated defaults.

- Section 454(3): The adjudicating officer shall also have the power to give the direction of making good the default at the time of levying penalty.

- Section 454(8): As per the new amendment default would occur when the company or the officer in default would fail to comply with the order of the adjudicating officer or Regional Director (RD) as the case may be.

- Section 454A: A new section has been inserted which provides that where a penalty in relation to a default has been imposed on a person under the provisions of Companies Act 2013, and the person commits the same default within a period of three years from the date of order imposing such penalty, passed by the adjudicating officer or RD as the case may be, he shall be liable for the second and every subsequent defaults for an amount equal to twice the amount provided for such default under the relevant provision of CA 2013.

Compounding of Certain Offences u/s 441

The jurisdiction of the RD has been enlarged by increasing the pecuniary limits up to which he can compound offences under section 441.

- Section 441(1)(b)- The power of the Regional Director to compound an offence has widened. The threshold has been increased from 5,00,000 to 25,00,000. Thus, a Regional Director can compound an offence whose fine is upto 25,00,000. This change is concurrent to the changes made in the amount of penalty under various sections.

- Section 441(6)(a)- This provision stated that permission is required of the Special Court for compounding of offences. But this has become redundant after the amendment.

Conclusion

The Companies (Amendment) Act, 2019 has brought a lot of significant changes to the act. The law-makers have stressed upon topics like Corporate Social Responsibility and imprisonment as a punishment for various offences. Under the amendments in the act, the Central Government has been bestowed with greater authority in comparison to the previous act. However, the government is being faced by stark criticism from the corporate sector in India due to the onerous CSR amendments proposed in the amendments. The Ministry of Corporate Affairs (MCA) have recently notified several sections amended by the Companies (Amendment) Act, 2019 except the provisions relating to implementation of section 21 pertaining to the CSR amendments. As the CSR amendments have not been notified by the MCA, the provisions pertaining to the same have assumed status quo and that the CSR will now be charged voluntarily as well as the non spending of the 2 per cent of the net profit on CSR will also not amount to criminal offence. It is possible that the CSR amendments may not be notified at all as the recommendations made by the high level panel on CSR headed by MCA Secretary Injeti Srinivas was submitted to the ministry after the parliament had passed the Companies (Amendment) Bill, 2019 and the government might rethink its stance over the CSR provisions as one of the recommendations suggested in the report includes non- compliance of the CSR should be treated as a civil offence rather than a criminal offence.

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