Companies Amendment Act, 2019
August 1, 2019
The Companies (Amendment) Act, 2019 was notified on 31 July 2019 and is deemed to have come into effect from 2 November 2018 i.e. the date on which the Companies (Amendment) Ordinance 2018 was promulgated. However, Sections 6, 7, 8, clauses (i), (iii), and (iv) of Section 14, 20, 31, 33, 34, 35, 37 and 38 have been made effective from 15 August 2019. Section 21, which amends Section 135 of the Principal Act, related to corporate social responsibility compliances, prescribing transfer of unspent CSR amount of ongoing projects to a Fund, punishable with fine and imprisonment has not been notified. The Finance Minister has since reviewed the penal provisions and decided to roll back the criminal liability for violation of CSR provisions. The government is also reviewing other penal provisions under the Principal Act with the view to restructure corporate offences, to relieve Special Courts from adjudicating routine offences as well as de-clog the NCLT through reduction of compounding cases before it.
The Amendment Act provides for the following key amendments:
- The Central Government has been empowered to allow certain companies ( a holding, subsidiary or associate company of a company incorporated outside India) to have a different financial year than one ending on 31st day of March every year [amendment to clause (41) of section 2];
- A new section 10A has been inserted to provide that a company incorporated after the commencement of the 2019 Amendment Act shall not commence business or exercise borrowing powers unless (i) a declaration is filed by a director within 180 days of incorporation, with the Registrar, that every subscriber to the MoA has paid the value of shares agreed to be taken by him; and (ii) the company has filed a verification of its registered office as provided in section 12(2);
- The Registrar has been empowered to initiate action for the removal of name of the company from the register of companies if the company is not carrying on any business or operation from a registered office [amendment to section 12 ];
- Public offer of securities is now required to be made only in dematerialized form by not just public companies but also such class or classes of unlisted companies as may be prescribed. Such unlisted companies can hold or transfer securities only in dematerialised form in the manner laid down in the Depositories Act, 1996 [amendment to Section 29];
- Every company has been obliged to take steps to identify an individual who is a significant beneficial owner in relation to the company to comply with the provisions of section 90 [new sub-section 4A inserted in section 90];
- Corporate Social Responsibility provisions, under section 135, have been amended to clarify that in case of an ongoing project, the unspent amount be transferred to a special account to be spent within three financial years and thereafter be transferred to the Fund specified in Schedule VII. In all other cases, any unspent amount should be transferred to the Fund specified under Schedule VII;
- Provisions related to Prevention of Oppression and Mismanagement, specifically sections 241, 242 and 243, have been amended to empower the Central Government to approach the Tribunal to issue an order against the persons who are connected with the conduct and management of the company, including directors, declaring them as not fit and proper persons, on account of acts committed by them amounting to fraud, misfeasance, negligence, with an intent to defraud creditors or members or in any manner prejudicial to public interest;A person who is not a fit and proper person is barred from holding the office of a director, or any other office connected with the management of any company, for a period of five years from the date of the decision of the Tribunal. Further, such person shall not be entitled to be paid any compensation for the loss or termination of office, notwithstanding any other law, contract, memorandum or articles;
- Jurisdiction of the Regional Director for compounding of offences has been enhanced from Rs. 5 lakh up to Rs.25 lakh [amendment to section 441];
- 16 sections of the Act have been amended to modify the punishment as provided in the said sections from fine to monetary penalties to lessen the burden upon the Special Courts;
- The National Financial Reporting Authority has been empowered to perform its functions through divisions and through an Executive Body [amendment to section 132].
SAM & Co comment
Based on the recommendations received from a committee constituted by the Ministry of Corporate Affairs (MCA) and with the aim to re-categorize certain offences under the Companies Act, 2013 (2013 Act), the Companies (Amendment) Act, 2019 was passed by the Indian Parliament.The Amendment Act, amongst others, (a) re-categorizes certain offences under the 2013 Act, (b) expands the jurisdiction of the regional director, and (c) shifts certain powers from the National Company Law Tribunal (NCLT) to the central government thereby unclogging the NCLT. The offences which are procedural, technical or routine in nature have been shifted from a ‘fine’ regime to a ‘penalty’ regime. For example, the punishment for (a) failure or delay in filing of a notice for alteration of share capital, (b) failure or delay in filing of annual returns, (c) failure or delay in filing of financial statements, and (d) accepting directorship beyond the specified limit, are now subject to ‘penalty’ instead of ‘fine’. Additionally, the central government has been empowered to dispose of applications relating to change of financial year of a company and conversion of a public company into a private company. The jurisdiction of regional director has also been enhanced for compounding of offences.It is expected that these amendments would facilitate in increasing compliance and improving the corporate governance standards in India in the long run and allow for speedy disposal of offences.