Companies (Amendment) Act, 2019 - salient features
Bhumesh Verma 22 Aug 2019

Companies (Amendment) Act, 2019 - salient features

The much awaited the Companies (Amendment) Bill, 2019 was passed by the Parliament recently with the objective to augment more transparency/accountability in compliance/business management of the Indian corporate sector and to reinforce the corporate governance regime.

Some outstanding features of the new / amended provisions are de-criminalization of certain offences, rationalization of corporate governance provisions and reduction of the burden on the shoulders of the National Company Law Tribunal (NCLT).

The central government had constituted a high level committee and assigned with the job of reviewing the Companies Act, 2013 (Act) and recommending apt amendments to the Act.

Based on the committee recommendations the central government had passed multiple ordinances related to company amendments in November 04, 2018, January 04, 2019, January 12, 2019 and February 21, 2019 respectively prior to giving effect to the existing Amendment (Bill), 2019.

The following are the major reforms:

a) Empowerment of the central government to sanction the conversion of public companies into private companies and alteration of financial year of a Indian company having Holding/ subsidiary/ Associate Company situated outside India;

b) Hefty penalties are pioneered with the intent to avert the commission of repeated defaults; 

c) Reintroduction of requirement of submitting commencement of business declaration;

d) Establishment of in-house adjudication framework to resolve the compoundable offences;

e) Disqualification of directors for accepting the director position beyond the permissible limits as specified in the Act;

f) Expansion of pecuniary jurisdiction limit of the Regional Director to adjudicate the compound offences; and

g) De-registration of a company on the ground of non-maintenance of a registered office.

The company reforms can be majorly categorized into four heads:

  • De-criminalization of offences
  • Imposition of stringent penalties for repeated defaults
  • Reduction of default cases burden on NCLT.
  • Corporate governance reforms

De-criminalization of offences:

The following is the list of criminal defaults which are re-classified into civil defaults: Penalty will be imposed on:

  • The company and any officer in default who has unlawfully issued shares at a discount (S. 53). 
  • The company and any officer in default for failure/delay in filing notice for alteration of share capital (S. 64). 
  • The company and any officer in default for failure/delay in filing annual return (S. 92). 
  • Every promoter, director, manager or other key managerial personnel who is in default for attachment of a statement of special business in a notice calling for general meeting (S. 102). 
  • Every officer in default for failure to provide a declaration regarding appointment of proxy in a notice calling for general meeting (S. 105).
  • The company and every officer in default including company liquidator for failure/delay in filing certain resolutions (S. 117).
  • The company and every officer in default for failure/delay in filing report on Annual General Meeting conducted by public listed company (S. 121).
  • The company, the managing director and the chief financial officer of the company, directors for failure/delay in filing financial statement (S. 137).
  • Auditor for failure/delay in filing statement by auditor after resignation (S.140)
  • The company and every officer in default for failure/delay by company in informing Director Identification Number (DIN) of director (S. 157).
  • Individual or director of a company in default for contraventions (Non-compliance with Section 152 (Directors Appointment), Section 155 (Duplication of DIN) and Section 156 (Intimation of DIN)) related to DIN (S. 159).
  • Individual for accepting director position in violation of the Act (S. 165).
  • Person in default for allocating managerial remuneration in excess of permissible limits under the Act (S. 197).
  • The company, every director and key managerial personnel of the company who is in default for violating provisions related to appointment of Key Managerial Persons in certain class of companies (S. 203).
  • Director for noncompliance of provisions related to Registration of the offer of scheme involving transfer of shares (S. 238).

Imposition of stringent penalties for repeated defaults:

  • In general the adjudicating officer will provide the defaulter with the opportunity to rectify the default by issuing certain directions.
  • If the defaulter fails to comply with the directions of adjudicating officer and rectify the default then such failure would amount to non-compliance default.
  • With the inception of a new provision a defaulter (who has committed a second or subsequent default in relation to same cause of action within a period of 3 years from the occurrence of last default) will be penalized with an amount equivalent to twice the amount provided for such default under the relevant provision of Act.

Reduction of default cases burden on NCLT:

  • With the objective to condense the burden on the NCLT, the pecuniary jurisdiction limit of the Regional Director (RD) is enhanced in relation to compound offences. Accordingly, the RD pecuniary limit to compound offences is enhanced to a maximum of INR 25 lakhs which was 5 lakhs earlier (S. 441).
  • Prior in order to compound certain offences consent of the special court is mandatory However, such requirement is detached via latest company amendments (S. 441).
  • Corporate Governance Related Reforms
  • Company with share capital is obligated to submit a certificate of business commencement prior to starting its business operations or procurement of a loan in relation to the business commencement (Sec. 10A).
  • The Registrar is empowered to initiate the action to strike off the name of a company provided during the physical verification of such company registered office by Registrar it is identified by Registrar that the company is not carrying any business operations (S. 12).
  • Failure of any company/officer in charge to register the details of the significant beneficial owner (SBO) will expose such company/officer to fine/imprisonment or both (S. 90). It is the responsibility of the company to recognize the SBO – Any failure to recognize SBO would expose such company to punishment.
  • The central government is conferred with the authority to issue requisite regulations in this regard. If any company or person aggrieved by a tribunal order in this regard is provided with the opportunity to submit an application to relax/lift restrictions placed on the company within duration of one year from order date (S. 90).
  • Any person who has accepted the designation of director in excess of limits permissible under the Act will be disqualified to accept/act as a director (S. 164).
  • Corporate Social Responsibility
  • Within a period of six months from the financial year expiry every company is under the obligation to transfer any unspent amounts which is not related to any ongoing project to a Fund specified in the Act.
  • Pursuant to accomplishment of certain prescribed conditions every company is mandated to transfer the unspent amount which is related to any ongoing project into special account (Unspent Corporate Social Responsibility Account) opened with any scheduled bank within 3o days by the financial year end.
  • Funds transferred to the aforesaid special account will have to be spent by the company within a period of 3 years from the date of such transfer – Failure to spend such funds within the 3 year period will obligate the company to transfer such unspent funds to the account designated by the central government.
  • Non-compliance with the CSR provisions will expose the company to a minimum penalty of INR 50,000 to a maximum penalty of INR 25 lakhs and expose officer in default to imprisonment of 3 years/penalty (Minimum INR 50,000 to Maximum INR 5 lakh).
  • In order to make certain that companies will be complying with CSR provisions – The Ministry of Corporate Affairs is empowered with the authority to issue directions to certain class of companies in this regard.

Serious Fraud Investigation Office (SFIO):

  • Any person who is in default may be arrested by officer at rank of Assistant Director or above of SFIO pursuant to S.212 of the Act.
  • Within 24 hours of arrest such officer may have to take the arrested person to any designated Magistrate/Officer.
  • If any SFIO investigation report reflects any commission of fraud by a director, key managerial personnel or other officer in any company by taking undue advantage of such position then the central government has the authority to file disgorgement application against such director, key managerial personnel or other officer in the designated tribunal – Such fraudster may be charged with personal liability with no limitations on liability.

List of some other Amendments:

  • Rules are relaxed to reduce compliance burden and to facilitate the companies to file the prospectus copy with the Registrar rather than the registration of the prospectus with the Registrar of Companies (ROC) (Sec. 26). Accordingly in S.35 of the Act, the phrase (Filing of copy of Prospectus with the Registrar) is included as a replacement to the phrase (Registration of Prospectus with the Registrar).
  • The word ‘Public’ is detached from S.29(1)(b) of the Act to empower the central government to direct certain class of companies to mandatorily issue the securities in de-materialized form.
  • A governing body under the name (National Financial Reporting Authority – NFRA) will be assigned with certain functions and duties as directed by the central government from time to time – NFRA will contain Chairperson and certain number of full time members to perform the NFRA functions/duties (S. 132).
  • No person will be inducted into the NFRA body in the role of auditor or to perform any valuation under the S.247 of Act by NFRA if such person has the track record of professional misconduct (S. 132).
  • If the central government has the reason to believe any officer in charge of a company is indulged in unlawful acts – Then the central government has the authority to submit an application to designated tribunal seeking its decision on eligibility of such officer in charge to continue or not to continue in the office (S. 241).
  • Accordingly the designated tribunal has the authority to decide eligibility of such officer in charge to hold or not to hold such position in relation to conduct/management of company affairs (S. 242).
  • If the designated tribunal decides to expel such officer in charge from holding such position then such officer in charge will be prohibited from holding such position for a period of 5 years from the date of tribunal order (S. 243).
  • Such expelled officer in charge is not eligible to receive any compensation for the loss/termination from the job. The central government has the authority to permit such expelled officer in charge to assume the same position prior to completion of the banned period subject to the written permission of the designated tribunal.

The Companies Act Amendments will certainly:

  • Encourage the companies to put CSR funds to good use for the welfare of the society;
  • Streamline certain procedural aspects to get rid of the roadblocks which are hindering the enforcement of certain vital company provisions;
  • Empower the authorities with right tools to hunt down the fraudsters;
  • Diminish the compliance burden on the NCLT; and
  • Ultimately uplift the corporate governance standards of the corporate sector
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