This article is written by Khyati Basant, from Symbiosis Law School, NOIDA. This article contains a brief description of the new company’s amendment bill, 2020.
Table of Contents
Introduction
Amendment to the Companies Act, 2013 appears to be the Government’s routine activity. The Act has been amended by the Companies Amendment Act, 2015, 2017, 2019 and now, as proposed, in 2020. The purpose of the amendment is different every time ranging from the ease of doing business to corporate life.
It had constituted a Company Law Committee (‘Committee’) on September 18, 2019, with the goal of the government to facilitate greater ease of living for law-abiding corporations. The overall goal of the government and the Committee was to decriminalize some more provisions of the Act based on their gravity and to take other necessary measures to provide the country’s corporations with further ease of living. In November 2019, the Committee tabled its report.
The Committee on Company Law (hereinafter referred to as ‘CLC’) was formed in the background of the government striving hard to facilitate the comfort of corporate living in India and to make some critical changes to the decriminalization of certain offences in furtherance of a similar step taken by the Companies (Amendment) Act 2019.
On 17 March 2020, the Companies (Amendment) Bill 2020 (hereinafter referred to as ‘CAB 2020’) was introduced in the Lok Sabha, which proposed certain amendments to the Companies Act 2013. In the aftermath of the outbreak of the COVID-19 pandemic, on 23 March 2020, Parliament has adjourned sine die, and the bill is yet to be approved, yet it has been stated from recent news media and other reliable outlets that, if necessary, the government is zealous for enforcing the suggested changes promptly through an ordinance. If the structural improvements introduced in CAB 2020 are a step in the right direction needs to be seen by a careful review of the reforms proposed.
Companies Amendment Bill, 2020
For the corporate sector, 2020 seems to have been the year of amendments. With amendments made according to the Rules of Corporate Social Responsibility, Company Incorporation, CARO 2020. The Central Government (CG) re-established another collection of amendments before the Lok Sabha on March 17, 2020, through the Companies (Amendment) Bill, 2020(“CAB, 2020). The CAB, 2020 was based on the Committee on Company Law (“CLC / Committee”), created in September under the chairmanship of Shri Injeti Srinivas. Among other items, the Companies (Amendment) Act, 2020 provides for the following:
- Decriminalize such crimes under the Act in cases of crimes which can be fairly measured and lack any sense of criminality or which do not have a greater public interest;
- Enabling the Central Government to exclude some categories of companies, in consultation with the Securities and Exchange Commission, from the definition of “listed firms,” primarily for debt securities listings; clarifying the authority of a court of law on the grounds of the place of execution of an offence under Section 452 of the Act for the wrongful withholding by its officers or employees of the properties of a company;
- Add a new Chapter XXIA in the Manufacturer Companies Act, which was originally a part of the 1956 Companies Act;
- Creating Regional Corporate Law Appeal Tribunal benches;
- Compensating for the allocation of sufficient remuneration to non-executive directors in the event of earnings being insufficient, by aligning it with the rules on remuneration to executive directors in such cases;
- Relaxing provisions relating to the charge of higher default additional fees on two or more occasions when submitting, filing, registering or recording any document, fact or information as provided for in Section 403;
- Expand the applicability of Section 446B, relating to lower penalties for small and one-person firms, to all sections of the Act that incur monetary penalties and also apply the same benefit to producers and start-up companies;
- Exempting any class of persons from complying with the requirements of Section 89 relating to the declaration of the beneficial interest in shares, and exempt any class of foreign companies or companies outside India from the provisions of Chapter XXII relating to companies outside India;
- Reducing the timelines for requesting rights to speed up such matters under Section 62;
The key takeaways from the Bill
Section 2(52) – Definition of “listed company”
The proposal was put forward to exempt such listed firms and entities to acquire such form of shares from the “private companies” group.
Section 16 – Rectification of name
When a company has been mistakenly identified with a proprietor’s registered trademark and the name is too similar or matches an established trademark, the company must change its name within 3 months of providing the guidance of CG instead of the 6 months given earlier. Further, to decriminalize the offence, if committed by a company, in case of default under this clause, the CG shall allot a new name as per the directives of the ROC to the company and the ROC shall grant a fresh Certificate of Incorporation. Though the company would not be prohibited from eventually changing its name.
Section 62 – Further issue of shares (Rights Issue)
As per the existing provisions, the period for providing an offer letter to the existing shareholders under the rights issue process is 15 days to 30 days, beyond which the offer is deemed to be declined. It is proposed that such a further period be set which may be less than the timeline.
Section 117- Resolutions and agreements to be filed
The section requires resolutions to be filed with ROC. It currently exempts filing resolution in-Form MGT-14 banking companies that provide the loan, pledge, protection relevant to loan in its ordinary course of business. It has been now suggested to apply this exemption to registered NBFCs and HFCs
Section 129A – Periodic annual reports
The CG shall include the following groups or groups of companies:
- Prepare financial periodicals
- Obtain consent from the Regulatory Board
- Total selective analysis of these periodic financial outcomes
- Register a copy with the ROC within 30 days after the applicable time has been finished
Section 135 – Corporate Social Responsibility
The changes proposed are:
- The sum expended more than the criteria will be eligible for set-off for any number of following financial years as may be recommended – Penalty for default in the transfer of unspent money to the respective funds: on the company-twice the amount needed to be transferred or 1 Crore, whichever is less, and on each officer in default-1/10th the amount necessary to be transferred to the respective funds of Rs . 2 lakhs, whichever is less.
- No provision for a CSR Committee where the amount needed to be invested is less than Rs. 50 lakh and the Board of Directors shall exercise the functions of a CSR
Section 149-Company to have a Board of Directors (Independent Directors)
The current regulations specify that Independent Directors (IDs) are not subject to equity awards and are entitled to sitting fees, profit-related compensation and reimbursement of costs incurred in holding meetings as provided for in Section 197(5). The amendments provide for a new insertion and state that if there is no profit or inadequate profits in the company, an ID may receive any other kind of remuneration, excluding the aforementioned.
Section 197-Overall Maximum Managerial Remuneration and Managerial Remuneration in the absence or inadequacy of profits
Section 197(3) was aligned with Section 149(9) to include NEDs and IDs within the scope of remuneration payable following Schedule V in the event of no profits or inadequate profits.
Amendments under the Bill
- Producer companies: Some provisions of the Companies Act, 1956 continue to apply to manufacturer companies under the 2013 Act. These include provisions on membership, meeting conduct and account maintaining. Producer companies include companies engaged in manufacturing, marketing and selling agricultural produce, and selling cottage-industry goods. The Bill removes these provisions and adds a new chapter to the Producer Companies Act with similar provisions.
- Changes in offences: Three changes are made by the Bill. Next, it eliminates the fine for other offences. For example, it removes the penalties which apply for any change in the rights of a class of shareholders made in violation of the Act. Note that where a specific penalty is not mentioned, a penalty of up to Rs 10,000 is prescribed in the Act which may extend to Rs 1,000 per day for a continuing default. Second, incarceration with other cases is excluded. It removes, for example, the three-year imprisonment applicable to a firm for buying back its shares without complying with the law. Third, in certain offences, it reduces the amount of the fine payable. For example, it reduces the maximum fine from five lakh rupees to two lakh rupees for failure to file an annual return with the Registrar of Companies.
- Direct listing in foreign jurisdictions: The Bill empowers the central government to require some groups of public corporations to list groups of securities in foreign jurisdictions (as may be prescribed).
- Exclusion from listed companies: The Bill empowers the central government to exempt companies issuing specified classes of securities from the concept of a “listed company” in consultation with the Securities and Exchange Board of India.
- Remuneration to non-executive directors: The Act provides specific arrangements for providing remuneration to executive directors of a company (including the managing director and other full-time executives) where the corporation receives limited or no earnings in a year. For example, if a company has an effective capital of up to five crore rupees, its executive directors can not receive an annual remuneration exceeding 60 lakh rupees. This clause is expanded by the Bill to non-executive directors including independent directors.
- Beneficial shareholding: According to the Act, if a person has a beneficial interest of at least 10 per cent in a company or has substantial influence or control over the business, he or she is required to make a declaration of his or her interest. In a separate register, the company is required to note the declaration. The Bill empowers the central government to exclude any class of citizens from fulfilling these conditions where it finds it appropriate in the public interest.
- Exemptions from filing resolutions: The Act requires companies to file with the Registrar of Companies certain resolutions. These include the company’s board of directors’ resolutions to borrow money or to issue loans. However, banking firms are exempted from filing resolutions passed on granting loans or providing a loan with guarantees or security. This exemption was applied to listed non-bank financial companies and housing finance firms.
- Corporate Social Responsibility (CSR): The Act requires companies with net worth, turnover or profits above a specified amount to set up CSR committees and spend 2 percent of their average net profits over the last three financial years on their CSR policy. The Bill exempts companies from setting up CSR committees with a CSR liability of up to Rs 50 lakh per year. Furthermore, companies that spend any amount over their CSR obligation in a financial year may, in subsequent financial years, set the excess amount to their CSR obligations.
- Periodic financial reports for non-listed companies: The Bill empowers the central government to allow groups of non-listed companies (as may be prescribed) to prepare and file periodic financial results, and to complete the audit or analysis of such results.
- NCLAT benches: The Bill seeks to create the National Company Law Appellate Tribunal benches. These are normally to sit in New Delhi or any other place that may be notified.
Conclusion
The Bill seeks to introduce some anticipated relaxations that could potentially not only save the costs associated with compliance requirements but also help promote business and trade focus. The Bill appears to reduce the effective burden on start-ups and SMEs by focusing on comparatively harmless non-compliance by new businesses resulting from lack of experience and/or inadequate resources (which may also be relevant for SMEs).
While corporations in India are likely to view the decriminalization of certain offences as a welcome change, some groups at the other end of the spectrum may take the view that the Bill may have gone too far as some of the non-compliance, proposed to be decriminalized, may have had an impact on the wider public interest.
Adding additional NCLT benches and the plan to lift the cap to the full strength of the judges would help to minimize the backlog as well as make it easier for litigants to reach the appeals body. It is important and essential to note that the Bill aims to transfer considerable powers to the Central Government, exercisable as appropriate after consultation with the authorities, to offer exemptions and to give favourable treatment to such groups of corporations as deemed fit under the Act. It will be interesting to note the final form in which the Indian Parliament adopts the Bill and whether any further amendments to the Act are being proposed following the current pandemic.
References
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