By: Sharanya Ranga and Deepali Menghwani
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. It repeals and replaces the Companies (Amendment) Ordinance, 2018 (“Ordinance”) that was promulgated on November 2, 2018 but could not be passed by both houses of Parliament within the stipulated period. 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.
Back in 2013, the erstwhile Companies Act, 1956 was substantially overhauled and the Act brought into force various compliances, the non-adherence of which triggered heavy penalties. As the earlier amendment of the Act did not address this aspect, the Ordinance seeks to address this anomaly.
We have provided below a summary of the significant changes brought about by the Ordinance:
1) Re-introduction of the declaration of commencement of business
While this provision was done away with in the earlier amendment to the Act to facilitate ease of doing business, it has been reintroduced in the Ordinance to curb the menace of ‘shell companies’. As per the Ordinance, a company having share capital incorporated after the commencement of the Ordinance has to ensure the following before commencing its business or exercising borrowing powers:
(i) A director has to file a declaration with the Registrar of Companies (Registrar), in such form as may be prescribed, within 180 days from the date of incorporation of the company that every subscriber to its memorandum has paid the value of the shares agreed to be so subscribed.
(ii) The company has to file a verification of its registered office address with the Registrar within 30 days of incorporation in e-Form INC-22. The Ordinance empowers the Registrar to conduct a physical verification of the registered office of the company to ensure that the company is conducting its business/operations and is not a mere ‘paper company’.
Non-compliance of these provisions shall result in a monetary penalty for the company and every officer in default. Further, the Registrar has the power to initiate action for the removal of the company’s name from the register of companies.
2) Time-limits for filing charge documents
The Act provides that a company may register charges within 30 days of creation of charge.
Under the Ordinance, the timelines relating to filing charge documents with the Registrar have been reduced as follows:
(i) In case of charges created before the commencement of the Ordinance, the Registrar shall register charges within 300 days from the date of creation of charge. In case the charge is not registered within this period, then the registration of such charge shall be made within 6 months from date of commencement of the Ordinance on payment of additional fees .
(ii) In case of charges created after the commencement of the Ordinance, the Registrar shall register charges within 60 days of creation of charge or within a period of additional 60 days on payment of ad-valorem fees.
3) Disqualification of director
The Act mandates that a director cannot hold directorships in more than a total of 20 companies, which should not include more than 10 public companies. While this default has been treated as a civil default, non-compliance of this provision will trigger immediate disqualification of the director.
4) De-clogging the National Company Law Tribunals (“NCLT”)
Under the Act, any change in the period of financial year for a company associated with a foreign company and conversion of a public company into a private company had to be approved by the NCLT. These powers have now been transferred to the central government.
Further, the pecuniary jurisdiction of the Regional Director for compounding of offences (punishable only with fine or with imprisonment or fine) has been enhanced to INR 2.5 million (approx. USD 35,000). The earlier limit was INR 0.5 million (approx. USD 7000) and all matters above this limit had to be compounded by the NCLT.
5) Disclosure of significant beneficial ownership
Under the Act, every person who holds the ultimate beneficial interest of at least 10% in the shares of a company, or in capital of a partnership firm or in a trust through a trustee (as the case maybe), and whose name is not entered in the register of members as the holder of such shares, is required to make a declaration of his interest to the company. Considering the importance of such disclosures, the punishment for failure to disclose the significant beneficial ownership is now enhanced to fine or imprisonment upto one year or both.
6) Re-categorisation of certain offences
Certain offences have been de-categorised as defaults carrying civil liabilities as opposed to being acts that were punishable with imprisonment as well. These offences include issuance of shares at a discount, non-filing or delay in filing of annual returns within the due date, non-filing or delay in filing financial statements and contraventions with respect to director identification number.
7) Higher penalty for repeat defaulters
The Ordinance introduces a higher penalty provision for repeat defaulters. If an offence is repeated for the second time or on subsequent occasions within a period of 3 years, twice the penalty as provided for such default under the Act will be levied on the defaulter.
The major reform under the Ordinance is the re-categorization of offences under the Act 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.