The Companies Act of 2013 (Principal Act) was passed after due consideration.
However, in spite of the intense scrutiny of the Act by the standing committee
before its enactment, the Act is undergoing rapid and notable changes. The
Companies (Amendment) Act, 2019 (Amended Act), which received the Assent of
President on 31st July 2019, aims at clinching efficient accountability and
better enforcement with a view to strengthening the corporate governance norms.
The Amended Act seeks to incorporate the amendments suggested by the Companies
(Amendment) Second ordinance, 2019 which was promulgated by the President on
21st February 2019. It has also introduced a total of twelve amendments in
eleven sections of the Principal Act, apart from the amendments notified by the
Companies (Amendment) Second ordinance, 2019.
Some of the noteworthy changes in the Amended Act are as follows:
Corporate Social Responsibility (CSR):
The Amended Act introduced by
Hon’ble Finance and Corporate Affairs Minister, Nirmala Sitharaman focuses on
strengthening the idea of Corporate Social Responsibility. Earlier, a company
which undertook CSR was required to give only the justification in their annual
report, in case the company fails to spend the assigned amount for the CSR
activities. However, the Amended Act went a step further by mandating the
companies to transfer the unutilized amount for CSR activities to the funds
mentioned under seventh schedule of the Act, not beyond six months of the
respective Financial Year.
Along with this, an insertion has been made to section 135, which states that
any unemployed amount pursuant to any ongoing project by the company shall be
transferred to a special account to be named as Unspent Corporate Social
within 30 days from the end of that respective
Financial Year. Failure to abide by the provisions may attract penalty ranging
from 50 thousand to 25 lakh rupees.
It is apparent from the above stated amendment that the government is now trying
to hold private sectors more accountable for their responsibilities towards the
society. The new provisions will lead to raising revenues by penalising the
companies for not spending the entire CSR amount. The same is expected to serve
a heavy blow on the listed companies as the amended provision has now made it
impossible for the companies to escape their responsibility under section 135 of
the Amended Act, by providing fabricated justifications.
A Sigh of Relief for Tribunal:
The Amended Act also attempts to de-clog
the Tribunals which are flooded with plethora of cases. Offences like failure to
file annual return, issuing of shares at discount etc., which were earlier
classified as criminal offences under the Act are now re-categorised. Such
offences are now considered as merely procedural and technical defaults of minor
nature and hence, can only attract civil liability. Apart from this, the Amended
Act also seeks to widen the jurisdiction of Regional Director to compound
offences as per section 441 of the Amended Act. Under the Principal Act, the
regional director was empowered to settle offences with penalty of up to 5 lakh
rupees. Further, the Amended Act seeks to increase this threshold to 25 lakh
Also, the power to grant the approval for the conversion of a public company
into a private company, which earlier rested with the Tribunal, now lies with
the Central Government under second proviso of sub-section (1) of section 14 of
the Amended Act.
Regulation of Shell Companies:
Finance Minister Nirmala Sitharaman
pronounced that government has de registered around 4 lac Shell
companies till date. The word shell company has not been defined anywhere in the
Companies Act, but it symbolizes inoperative companies or those which do not
maintain a registered office. In order to bring the shell companies
under the purview of the Companies Act, section 10A and sub-section (9) of
section 12 has been inserted in the Principal Act. The government has tried to
regulate the same by making it mandatory to file a declaration, not beyond 180
days from the date of incorporation, endorsing that every subscriber to the
Memorandum of Association has paid for their respective agreed shares, with the
Moreover, a company is required to file with the Registrar, a
verification of its registered office as provided in sub-section (2) of section
12. A company cannot commence its business unless the director of the company
files the above stated declaration.
The amended section also imposes a penalty of fifty thousand in case a company
defaults to comply with the requirements stated above. Lastly, a Registrar may
initiate action for the removal of the name of the company from the register of
companies under Chapter XVIII in two cases:
(i) under sub-section (3) of section 10A of the Amended Act, where no
declaration has been filed with the Registrar and he has a reasonable cause to
believe that the company is not carrying on any business or operations and
(ii) under sub-section (9) of section 12, wherein the registrar may cause
physical verification of the registered office of the company if he has reason
to believe that the company is not carrying on any business and operations.
Therefore, the act of de-registration of the shell companies can now be
justified by the insertion of section 10A and sub section (9) of section 12 of
the Amended Act.
Management of the Company:
In order to ensure the effective management of
the companies and to prevent the cases of oppression and mismanagement, the
government has made the provisions to deal with unfit and improper persons with
respect to the conduct and management of the company. Pursuant to the same,
sections 241, 242 and 243 of the Principal Act have been amended. The insertion
of sub-section (3) to section 241, empowers the Central Government to approach
the Tribunal if it is of the opinion that the conduct of the Key Managerial
Persons is against the sound business principles or prudent commercial
practices, inconsistent with the obligation and functions to be carried out by
them, causes injury to the interest of trade etc.
If a person is established to be unfit for the office, then such person will be
barred from holding the office of director, or any other office related to
management for the period of five years of any company, pursuant to sub-section
(1A) of section 243 of the Amended Act. However, the Central Government, with
the prior permission of the Tribunal may permit such person to hold office
before the expiry of said period.
Moreover, The government intends to take severe action against the persons
crossing the permissible limit for the directorship in a public and private
company. And therefore, has made the breach of sub-section (1) of section 165 of
the Principal Act, which prescribes the limit in case of a private company not
more than 20 and in case of a public company not more than 10, as a ground for
disqualification of a director in section 164 of the Amended Act.
The Amended Act makes it mandatory for every
company to identify the individual having significant beneficial ownership (at
least 25%) and require their compliance as per the Act under section 90. In the
event of failing to comply with such requirements, the Amended Act allows the
company or the person aggrieved by the order of the tribunal to make an
application to the Tribunal for relaxation or lifting of the restrictions placed
under sub-section (8) of section 90 of the Principal Act. The same has to be
made within a period of one year from the date of such order. However, in case
no such application has been filed within a period of one year, such shares
would be transferred to the Investor Education and Protection Fund under sub
section (5) of section 125 of the Principal Act.
National Financial Reporting Authority (NFRA):
Section 132 of the
Principal Act has been amended for the efficient discharge of the functions by
National Financial Reporting Authority (NFRA). The same has been done by
allowing NFRA to exercise its function through divisions and the executive body.
It states that every division of NFRA should be presided over by chairperson or
any person authorized by him. The Amended Act also debars auditors who are
guilty of misconduct by NFRA. This gesture is expected to restore the eroding
trust in the financial statement of the company.
A concluding look:
The Amended Act brought about some remarkable changes in the provisions of the
Companies Act. It tries to bring in a robust framework through which the
Companies Act can be implemented. Though, the Opposition parties attempted to
slam the government by stating that the government desired to ratify the law in
haste. But it is evident that its need was imperative. Government had already
promulgated ordinance on these issues more than once in the past, and now it was
high time for a meticulously examined and scrutinized Act.
Written By: Barkha Dwivedi & Dhiraj Yadav
- 4th year students at Dr. Ram
Manohar Lohiya National Law University, Lucknow.