Key Highlights Of The Companies (Amendment) Act, 2019

Key Highlights Of The Companies (Amendment) Act, 2019

The Companies (Amendment) Act, 2019 ("Amendment Act"), received the assent of the President on July, 31, 2019. With the Amendment Act, Central Government seeks to ensure more accountability and better enforcement to strengthen the corporate governance norms and compliance management in corporate sector.

The key amendments of Amendment Act are as follows:

  • Crackdown on shell companies: In pursuit of the drive to curb the menace of shell companies, the Amendment Act provides additional powers to the Registrar of Companies to initiate action for removal of name of a company on specified grounds.

The Amendment Act re-introduces the filing of declaration before commencement of business. Within a period of 180 days from the date of incorporation of a company every subscriber to the memorandum is required to pay the value of the shares agreed to be taken by him/her and file a declaration in this regard. The amendment has been carried out with a view to identify inactive companies at initial stage and initiate their striking off by Registrar of Companies.

The Amendment Act stipulates non-maintenance of registered office by a company as the one of the grounds for removal of the name of the company from the register of Registrar of Companies. It was being observed that a large number of companies were not maintaining their registered office at the premises as registered with the Ministry of Corporate Affairs thereby giving an impression of merely being 'paper companies'. Hence, a need was felt to introduce the changes.

  • Dematerialization of securities: The Amendment Act provides that Central Government may prescribe certain class or classes of unlisted companies to hold or transfer securities only in dematerialized form. This implies that the Central Government may mandate dematerialization of securities for private companies too in future.

  • Corporate Social Responsibility "CSR" provisions made mandatory: In the present scenario, companies which did not comply with CSR provisions merely received notices from the Ministry of Corporate Affairs asking for reasons for not meeting the CSR spend. However, with the Amendment Act, Government has put more effectiveness in the CSR regime. Now, the companies must watch out and precisely comply with the CSR requirements. Under the Amendment Act, if there are any unspent CSR funds during a financial year (in respect of an ongoing CSR Project), in accordance with its CSR policy, the company must transfer such unspent CSR funds into a special bank account within a period of 30 days from the end of the financial year. The amounts transferred to such special account will have to be spent by the company towards the CSR projects (under its CSR policy) within 3 financial years from the date of such transfer. If the company is unable to spend the sum within the prescribed period, then, such unspent amount should be transferred to a fund specified under Schedule VII of the Companies Act 2013, within 6 months from the end of the relevant financial year.

The Amendment Act also provides for penal liability for non-compliance in case a company fails to comply with above mentioned obligations. Additionally, separate penalty for continuing offences has also been prescribed.

CSR in case newly incorporated companies: The Amendment Act has also covered recently incorporated in the ambit of CSR regime. It provides that if a company has not completed 3 years from incorporation, the amount to be spent on a CSR fund will be equivalent to 2 percent of the net profits made by the company in the previous financial year (as against average net profits made by the company in 3 immediately preceding financial years).

  • Reduction in time limit for registering the charge: With a view to ensure timely registration of charges in order to protect the interest of the shareholders and secured creditors at the time of winding up of a company, the time limit for registering the charges with the Registrar of Companies has been reduced from 300 days to 60 days. Further, registration of charge beyond 60 days to be completed within a further 60 days period with ad valorem fees.

  • Investigation into affairs of a Company by Serious Fraud Investigation Office: The Amendment Act seeks to insert a new section thereby empowering the Central Government to make an application to National Company Law Tribunal ("Tribunal") for passing orders for disgorgement of assets, properties or cash of an officer or person or entity which has obtained an undue benefit and also to make such persons personally liable without any limitation, in case of corporate frauds revealed by an investigation by Serious Fraud Investigation Office.

  • Fit & Proper persons to manage a company: The Amendment Act empowers the Central Government to move a matter to Tribunal to inquire whether a person is fit and proper to hold the office of a director or any other office connected with the management of a company on various grounds.

The grounds provided are quite broad and includes matter like negligence in carrying out functions under law, breach of trust, conduct of business with an intention to defraud stakeholders. Once the order is passed, the concerned person cannot hold office of a director or any other office related to the management of the company for a maximum of 5 years from the date of the decision.

  • De-clogging the Tribunal and special courts: With a view to strengthen the enforcement of law against serious corporate offences, the Amendment Act seeks to de-burden the Tribunal and courts of routine nature matters. Hence, the following amendments have been introduced:

  1. The powers pertaining to the change in financial year and conversion of a public into a private company have been delegated to Central Government.

  1. Pecuniary limits of Regional Director to adjudicate compoundable offences under section 441 of the Companies Act 2013 have been increased from existing INR 5 Lakhs to INR 25 lakhs.

  1. 16 sections of the Companies Act 2013 have been amended to re-categorize punishment provided under those sections from fine to monetary penalties to lessen the burden upon the special courts.

  • Penalty for repeated defaults: A new section 454A has been inserted which provides for penalty for repeated defaults by a company or an officer of a company or any other person having already been subjected to a penalty for default under any provisions of the Companies Act, 2013.

Conclusion:

The Amendment Act has deeply focused on the CSR agenda, by indirectly mandating the companies to spend towards CSR activities, against the initial situation of "comply or explain" to now "comply or explain and comply". It seeks to improve 'ease of doing business' in India and keep a check of 'shell companies'. Further, it has replaced the existing system of judicial prosecution for the technical and procedural lapses with the departmental process of imposing the penalties, thereby reducing the burden of cases on the Tribunal and special courts.

For any clarification or further information, please contact

Neetika Ahuja
Associate Partner
E: neetika.ahuja@clasislaw.com

Tanuja Kaushik
Associate
E: tanuja.kaushik@clasislaw.com

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