The Companies (Amendment) Ordinance, 2018 promulgated on November 02, 2018 thereby amending some of the sections of the Companies Act, 2013. The Ordinance considers various recommendations made by the committee set up by the Ministry of Corporate Affairs to examine de-criminalisation of certain offences under the Act for better compliance purposes and to further liberalise the existing regulatory framework for ease of doing business.
The 2018 Ordinance was passed by the Lok Sabha, though could not be taken up by the Rajya Sabha and which was due to expire on January 21, 2019.
In order to give continuity to the amendments introduced by the 2018 Ordinance, the Companies (Amendment) Ordinance, 2019. amending several provisions of the Companies Act, 2013 (“Act”) was promulgated on January 12, 2019 and is deemed to have come into force on November 2, 2018.
After getting clearance from both the houses, “the Companies (Amendment) Act, 2019” has been notified in the official gazette dated 31st July, 2019 after receiving assent from the president. It amends the Companies Act, 2013.
The provisions of this Act, shall be deemed to have come into force on 2nd November, 2018 except section 6, 7 and 8, clauses (i), (iii) and clause (iv) of section 14, section 20 and 21, section 31, 33, 34 and 35, 37, 38 which shall come into force on such date as the central government may appoint, by notification in the official gazette.
THE MAJOR HIGHLIGHTS UNDERTAKEN THROUGH “THE COMPANIES (AMENDMENT) ACT, 2019 INCLUDE THE FOLLOWING:
- MATTERS TO BE STATED IN PROSPECTUS: The requirement of registration of prospectus with the Registrar of Companies has been done away with. Instead the prospectus would be filed with the Registrar.
- ISSUANCE OF DEMATERIALISED SHARES: Under the Act the term ‘public’ has been omitted under section 29(1)(b) i.e. certain classes of public companies are required to issue shares in dematerialised form only. The Act states this may be prescribed for other classes of unlisted companies as well.
- RE-CATEGORISATION OF CERTAIN OFFENCES: The 2013 Act contains 81 compoundable offences punishable with fine or fine or imprisonment, or both. These offences are heard by courts. The Amendment Act, 2019 re-categorizes 16 of these offences as civil defaults, where adjudicating officers (appointed by the central government) may now levy penalties instead. These offences include: (i) issuance of shares at a discount, and (ii) failure to file annual return. Further, the Act amends the penalties for some other offences.
- CORPORATE SOCIAL RESPONSIBILITY (CSR): Under the Act, if companies which have to provide for CSR, do not fully spent the funds, they must disclose the reasons for non-spending in their annual report. Under the Amendment Act, 2019, any unspent annual CSR funds must be transferred to one of the funds under Schedule 7 of the Act (e.g., PM Relief Fund) within six months of the financial year.
However, if the CSR funds are committed to certain ongoing projects, then the unspent funds will have to be transferred to an Unspent CSR Account within 30 days of the end of the financial year, and spent within three years. Any funds remaining unspent after three years will have to be transferred to one of the funds under Schedule 7 of the Act. Any violation may attract a fine between Rs 50,000 and Rs 25,00,000 and every defaulting officer may be punished with imprisonment of up to three years or fine between Rs 50,000 and Rs 25,00,000, or both.
- DEBARRING AUDITORS: Under the Act, the National Financial Reporting Authority debar a member or firm from practising as a Chartered Accountant for a period between six months to 10 years, for proven misconduct. The Amendment Act amends the punishment to provide for debarment from appointment as an auditor or internal auditor of a company, or performing a company’s valuation, for a period between six months to 10 years.
- COMMENCEMENT OF BUSINESS: The Bill states that a company may not commence business, unless it (i) files a declaration within 180 days of incorporation, confirming that every subscriber to the Memorandum of the company has paid for the shares agreed to be taken by him, and (ii) files a verification of its registered address with the ROC within 30 days of incorporation. If it fails to comply with these provisions and is found not to be carrying out business, its name of the company may be removed from the Register of Companies.
- REGISTRATION OF CHARGES: The Act requires companies to register charges (e.g., mortgages) on their property within 30 days of creation of charge, extendable upto 300 days with the permission of the Registrar of Companies. The Amendment Act, 2019 changes the deadline to 60 days (extendable by 60 days).
- CHANGE IN APPROVING AUTHORITY: Under the Act, change in period of financial year for a company associated with a foreign company, has to be approved by the National Company Law Tribunal. Similarly, any alteration in the incorporation document of a public company which has the effect of converting it to a private company has to be approved by the Tribunal. Under the Amendment Act, 2019, these powers have been transferred to central government.
- COMPOUNDING: Under the Act, a regional director can compound (settle) offences with a penalty of up to five lakh rupees. The Amendment Act, 2019 increases this ceiling to Rs 25 lakh.
- BAR ON HOLDING OFFICE: Under the Act, the central government or certain shareholders can apply to the NCLT for relief against mismanagement of the affairs of the company. The Amendment Act, 2019 states that in such a complaint, the government may also make a case against an officer of the company on the ground that he is not fit to hold office in the company, for reasons such as fraud or negligence. If the NCLT passes an order against the officer, he will not be eligible to hold office in any company for five years.
- BENEFICIAL OWNERSHIP: If a person holds beneficial interest of at least 25% shares in a company or exercises significant influence or control over the company, he is required to make a declaration of his interest. The Amendment Act, 2019 requires every company to take steps to identify an individual who is a significant beneficial owner and require their compliance under the Act.
The major reform under the Amendment Act is the re-categorization of offences enabling technical/procedural lapses to be treated as civil liabilities, the shift to an in-house adjudication mechanism and de-clogging the NCLT. This is expected to drastically reduce the load of NCLT enabling it to concentrate on more pressing and technical matters than mere procedural cases.