India - Recent Amendments To The Companies Act, 2013.
Legal News & Analysis - Asia Pacific - India - Regulatory & Compliance
15 August, 2019
On July 31, 2019, the Companies (Amendment) Act, 2019 ('Amendment Act') received the assent of the President of India. The Amendment 'ct has replaced the Companies (Amendment) Second Ordinance, 2019 ('Second Ordinance') and has additionally introduced certain other amendments to the Companies Act, 2013 ('Companies Act’). Some of the key highlights of the Amendment Act are set out below:
⦁ Amendments from the Second Ordinance which have been notified:
Some of the key amendments covered in the Amendment Act were also previously covered in the Second Ordinance and have been in effect from November 2, 2018. These key amendments relate to:
(i) re-categorising 16 offences under the Companies Act previously carrying criminal fines and/or imprisonment into defaults carrying civil liabilities which are subject to an in-house adjudication framework of the Registrar of Companies ('ROC');
(ii) seeking the approval of the Central Government instead of the National Company Law Tribunal ('NCLT') for certain actions (such as for a change in the financial year, conversion of a public company to a private company, etc.);
(iii) introducing a declaration regarding commencement of business in relation to companies incorporated after the Amendment Act, with the ROC having the power to cause a physical verification of the registered office;
(iv) shorter timelines for registration of charges (created after the commencement of the Amendment Act) by a company with the ROC; and
(v) providing for an additional ground of disqualification in relation to appointment as a director of a company (being a director in more than 20 companies).
⦁ Additional amendments to the Companies Act (these are yet to be notified):
The Amendment Act also sets out other amendments to the Companies Act, but these have not been notified as yet. The key proposed amendments are as follows:
(i) a public company will be required to only file its prospectus with the ROC, as opposed to the current requirement where the ROC registers each prospectus only after verifying that its contents meet the prescribed registration requirements for prospectuses;
(ii) the National Financial Reporting Authority ('NFRA') will be able to perform its functions through various divisions (as opposed to one central body). Additionally, where professional or other misconduct is proved against a member or firm of chartered accountants, instead of debarring them from engaging in “practice as a member of the Institute of Chartered Accountants of India” (which was previously the case), the NFRA will debar such a member or firm from being appointed as an auditor or an internal auditor, or from performing any valuation under Section 247 of the Companies Act;
(iii) where a company does not spend the prescribed amount in pursuance of its corporate social responsibility policy, the unspent amount will need to be transferred by the company (within 30 days from the end of the relevant financial year) to a special account opened by the company in a scheduled bank (which will be known as the ‘Unspent Corporate Social Responsibility Account’), with such amounts to be spent within three financial years (failing which the unspent amount will be transferred to a fund specified in Schedule VII to the Companies Act (for example, the Clean Ganga Fund));
(iv) a new offence for a company not spending the prescribed amount on corporate social responsibility, or being in breach of (iii) above, has been introduced whereby the company will be punishable with a fine, and the officers in default will be punishable with imprisonment or a fine;
(v) in instances where an investigation report of the Serious Fraud Investigation Office states that a fraud has taken place in a company in relation to which any of its directors, key managerial personnel or officers have taken undue advantage or benefit (in the form of asset / property / cash / any other manner), the Central Government may present an application before the NCLT with regard to disgorgement of such assets, property or cash;
(vi) in cases of oppression and mismanagement, where the Central Government is of the opinion that:
⦁ a person concerned with the conduct and management of the affairs of the company is guilty of fraud, misfeasance, negligence / default in carrying out his legal obligations, or breach of trust;
⦁ such person has not managed the company’s business in line with sound business principles and commercial practices;
⦁ the manner in which such person has managed the affairs of the company is likely to or has caused serious damage to the company’s trade, industry or business; or
⦁ such person has managed the company with the intent to defraud creditors, members or any other person; for a fraudulent purpose, or even in a manner prejudicial to public interest;
then the Central Government can approach the NCLT for an order against such persons, with the NCLT having the power to determine whether such persons are fit and proper persons to hold an office concerned with the conduct and management of the company; and
(vii) currently, the ROC cannot present a petition for the winding up of a company on the grounds that it is just and equitable to wind up such company. However, this exception has been proposed to be deleted and the ROC will be able to file a petition for the winding up of a company with the NCLT on these grounds.
For further information, please contact:
Zia Mody, Partner, AZB & Partners
1 Note that the High Level Committee on Corporate Social Responsibility has submitted its report to the Central Government on August 7, 2019, where it has recommended that a default of corporate social responsibility provisions should only result in a monetary penalty and not in imprisonment. Further, news reports have suggested that the Central Government, pursuant to the committee's recommendations, may not notify such imprisonment provisions of the Amendment Act; however, no formal announcement has been made in this regard.