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The Companies (Amendment) Act, 2019: An overview

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 Responsibility Amount 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 rupees.

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 Registrar.

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.

Beneficial Ownership:

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. 

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