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Companies (Amendment) Bill, 2019 – Highlights

The Companies Amendment Bill 2019 (“Bill“) that seeks to amend the Companies Act, 2013 (“Act“) has been approved by the Parliament. The Bill will replace the Companies (Second Amendment) Ordinance, 2019 (“Second Amendment Ordinance“) issued by the Ministry of Corporate Affairs (“MCA“) in February 2019. The Companies Amendment Bill 2019 aims to close some of the gaps in the Act on governance and compliance framework.

This article provides a snapshot of the key changes proposed by the Bill:

1. Commencement of business and physical verification of registered office of company:

Commencement of business: The Bill proposes that a company cannot commence any business until (i) a declaration is filed by a director within a period of 180 days of the date of incorporation with the Registrar of Companies (“ROC“) confirming that every subscriber to the memorandum has paid the value of the shares agreed to be taken by him/her; and (b) the company has filed with the ROC a verification of its registered office.

Physical verification of registered office of the company: The Act requires every company to have a registered office. The Companies Amendment Bill 2019 proposes that if the ROC has reasonable cause to believe that the company is not carrying on any business, it may cause a physical verification of the registered office and, if any default is found in complying with the registered office requirements, trigger the deregistration  of the company.  To ensure that companies exist on the ground, the Bill makes it mandatory to have a physical address for the registered office and register the same. 

To tackle the menace of shell companies that are formed mainly to launder money, the Bill proposes making non-maintenance of registered office and non-reporting of commencement of business as grounds for striking off the name of the company from the register of companies.

2. Dematerialization of securities: Under the Act, certain classes of public companies are required to issue shares only in dematerialized form. The Companies Amendment Bill 2019 proposes that the requirement of issuance, holding and transferring of securities in dematerialized form be applicable to other classes of unlisted companies as well. This means that the MCA may now mandate dematerialization of shares for private companies as well. It is to be seen whether the mandate will be applicable to freshly issued shares or will require all existing shares also to be dematerialized by the private companies.

3. Beneficial ownership: Under the Act, 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 Bill introduces a requirement for every company to take steps to identify an individual who is a significant beneficial owner and require such individual to undertake the compliances prescribed under Section 90 of the Act. It would have to be seen as to what steps the company takes to effectively carry out its obligation of identifying the significant beneficial owner. This would be crucial especially in cases where real owners tend to create a web of complex structures to undertake a transaction and to keep their real identity undisclosed. The proposal would help curb such practices and identify the people controlling the corporate entity.

4. Registration of Charges: The Act requires companies to register charges on their property within 30 days of creation of charge, which is extendable to 300 days with the permission of the ROC.  The Bill proposes two categories of charges: (i) the first category would be charges that are created before the commencement of the Companies Amendment Act, 2019 (“Amendment Act“). For these charges, the first deadline of registration would be 300 days extendable up to 6 months from the date of commencement of the Amendment Act (ii) the second category would include charges created after the date of commencement of the Amendment Act. The first deadline as regards registration of the charge created under this category would be within 60 days from the date on which the charge is created extendable by a further period of 60 days.

5. Additional criteria of disqualification for appointment of director: The Act provides grounds for disqualification of a director of a company. The Bill proposes to insert another criterion of disqualification, i.e., if he/she breaches the maximum statutory limit of the number of directorships. Accordingly, a person who holds office as a director of more than 20 companies at the same time (10 companies in the case of public company) shall not be eligible for appointment as a director of a company. It would be pertinent to note that this would lead to automatic vacation of office from all the existing companies of which he would be a director.

6. Change in approving authority: As per the Act: (i) alteration of articles of association having the effect of conversion of a public company into a private company under Section 14 of the Act; and (ii) change in the period of financial year for a subsidiary or an associate company of a foreign company under Section 2(14) of the Act, require the prior approval of the National Company Law Tribunal (“NCLT“). The Bill now proposes that such alteration or change be approved by the Central Government, thereby changing the approving authority. This proposal would ensure de-clogging the NCLT and help expedite approvals.

7. Undesirable persons not to manage company: By way of a new insertion, the Bill proposes to empower the Central Government to initiate a case in the NCLT against any managerial personnel on grounds including fraud, misfeasance and persistent negligence or not conducting the business of the company in accordance with sound business principles or prudent commercial practices. Due to the broadly worded grounds, one may argue that in the case of a failed business model, a charge could be brought against the person in charge on the grounds of ‘not conducting business in accordance with sound business principles or prudent commercial practices’.

8. Enhancing Pecuniary Limit: Under the Act, a regional director (“RD“) could compound offences with a penalty of up to INR 5,00,000. The Bill increases the maximum threshold to INR 25,00,000. Enhancing the pecuniary limit of the RD is in line with the Injeti committee recommendations to decongest the NCLT and bring serious offenders to book faster.

9. Constitution of National Financial Reporting Authority: The Act provides for the constitution of a National Financial Reporting Authority (“NFRA“) to inter alia monitor and enforce compliance with accounting standards and auditing standards, oversee the quality of service rendered by chartered accountants, investigate auditors of prescribed entities and to take disciplinary action against auditors. The NFRA and each of the divisions would have an executive body consisting of a chairperson and an authorized full time member. The divisions would help the NFRA in effectively delivering its mandate including setting standards for professional development, quality monitoring and disciplining of audit firms.  

10. Corporate Social Responsibility: The Act provides that if the company fails to spend the requisite amount designated for corporate social responsibility (“CSR“), the Board shall in its report specify the reasons for not spending it. The Bill proposes to go one step further and provides that if companies are not able to spend the requisite amount, they are required to contribute the unspent money to the funds mentioned in Schedule VII, for instance, Prime Minister’s National Relief Fund or any other fund set up by the Central Government or the State Governments for socio-economic development, within a period of six months of the expiry of the financial year. Further, the Bill proposes that contravening these provisions may attract a fine between INR 50,000 and INR 25,00,000 and every defaulting officer may be punished with imprisonment of up to three years or fine between INR 50,000 and INR 25,00,000 or with both.

11. Power to Debar Auditors: Under the Act, NFRA debars a member or firm from practising as a Chartered Accountant for anywhere between 6 months to 10 years for proven misconduct.  The Bill provides for debarment from appointment as an auditor or internal auditor of a company or performing a company’s valuation for a period between 6 months to 10 years. The new regime broadens the class of professionals who would fall within NFRA’s debarment jurisdiction since valuation of different classes of assets requires specialists and professionals. Further, it specifies the specific activities that the regulator could debar the firm or the member from.

12. Restructuring of corporate offences: The Act contains 81 compoundable offences that are punishable with fine or imprisonment or both. The Bill re-categorizes 16 of these offences as ‘civil defaults’ where the penalty is now in the form of payment of fines. These offences include: (i) issuance of shares at a discount (ii) failure to file annual return and (iii) non-filing of prescribed resolutions and agreements. Further, the Bill amends the penalties for some other offences. This re-categorization aims to lessen the burden of special courts by permitting the authorized adjudicating officers, i.e., the ROC to levy penalties on the defaulting companies instead of the special courts. The remaining 65 offences, due to their potential misuse, will continue to be compoundable under the jurisdiction of the special courts.

The Bill re-categorizes few of the existing penal provisions as civil defaults and promotes better corporate compliance. By making the CSR norms stringent, the Bill emphasizes on the Gandhian principle of ‘legitimate profit not being devoid of social responsibility’. The Bill also remarkably attempts to reduce the burden of the NCLT. With the baton being passed to the Central Government, only time will tell if it expedites or decelerates the approval process.

On the flip side, undertaking physical verification of the registered office imposes additional duty on the ROC which would need further deployment of resources. Additionally, the brunt of being disqualified as a director would be felt more by companies which have fewer directors on their board. These companies would need to undertake the process of appointing a new director despite they having complied with the statutory requirements while appointing the disqualified director. 

Overall the Bill certainly promotes accountability and better corporate compliance.

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