The Companies (Amendment) Act, 2020 - A step in the right direction
Published: Oct 14, 2020
By Deepti Thakkar & Anirudh Mukherjee
The Companies (Amendment) Act, 2020 (CA Amendment), which seeks to amend certain provisions of the Companies Act, 2013 (2013 Act), has received Presidential assent and has been published in the official gazette on September 28, 2020. Most of the changes under the CA Amendment have been introduced based on the recommendations made by the Company Law Committee (Committee) constituted in 2019 under the chairmanship of Sh. Injeti Srinivas, Secretary, MCA. The CA Amendment has been introduced with the aim of promoting ease of doing business in India and focuses on decriminalisation of compoundable offences under the 2013 Act and decluttering the compliance and governance framework.
Changes to penalty related provisions : Pursuant to the CA Amendment, various changes have been brought about in the penalty provisions under CA, 2013 such that violations involving procedural, technical or minor non-compliances, especially the ones not involving subjective determinations, would be dealt with through civil jurisdiction instead of criminal and only serious violations of the 2013 Act, such as wrongful conduct involving fraudulent elements or injury to public interest, be dealt with under criminal law. Keeping in line with the said approach, the CA Amendment broadly makes the following changes to provisions pertaining to offences under the 2013 Act. Firstly, it removes the specific penalty for certain offences provided in the relevant sections, e.g. variation of shareholder's rights, rectification of register of members, default in respect of publication of order for reduction of share capital, etc., thereby resulting in such violations automatically attracting penalties under Section 450 of the 2013 Act, which is a milder penalty then the currently applicable penalties. Secondly, the CA Amendment removes the punishment of imprisonment in certain offences, e.g. contravention of provisions of Section 8 of the 2013 Act (formation of companies with charitable objects), thereby allowing for such offences to be compoundable. Lastly, the CA Amendment reduces the quantum of fine in respect of certain offences, e.g. such as fine for contravention of provisions relating to transfer and transmission of securities, notice for alteration of share capital.
For certain offences under the 2013 Act, one person companies and small companies are liable to a penalty which shall not exceed one half of the penalty prescribed, e.g. failure to file annual returns. The CA Amendment now extends this provision to apply to violation of any provision of the 2013 Act by one person companies and small companies. Further, this provision has also been extended to all producer companies and start-up companies. The CA Amendment also limits the maximum penalty to INR 200,000 for the company and INR 100,000 for a defaulting officer in respect of offences under the 2013 Act by the aforesaid companies.
Amendment to the definition of 'listed company': Section 2(52) of the 2013 Act defines a 'listed company' as any company which has any of its securities listed on any recognised stock exchange. The term 'securities', as defined under the Securities Contract (Regulation) Act, 1956 (SCRA), includes shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate. Thus, any company whose shares, stocks, bonds, debentures etc. are listed on a stock exchange would qualify as a listed company under the 2013 Act. In view of the same, if a private company would get debt securities listed (offered on a private placement basis) on any recognised stock exchange in accordance with applicable regulations, such private company would also fall under the definition of 'listed company' under the 2013 Act. This was in a way disincentivising to private companies, as under the 2013 Act, a listed company is subject to more stringent regulation compared to unlisted private company.
Accordingly, the CA Amendment amends the definition of 'listed company' by excluding companies issuing specified classes of securities, as may be prescribed in consultation with the Securities and Exchange Board of India from the said definition. Specifics as to the classes of security to be exempted are currently awaited.
Direct listing in foreign jurisdictions: The CA Amendment also introduces a provision wherein certain classes of public companies (as may be prescribed) would be permitted to list specified classes of securities in certain prescribed foreign jurisdictions.
Remuneration to non-executive directors in case of inadequacy of profits : The provisions of the 2013 Act (Section 197 read with 198) deal with remuneration payable to directors and inter-alia provide for remuneration payable to executive directors even in case of inadequacy of profits or losses. The CA Amendment extends the provisions contained in Schedule V of the 2013 Act dealing with remuneration payable to managerial persons where the company has no or inadequate profits, to non-executive directors. An amendment in this regard has also been affected to Section 149(9) of the 2013 Act to extend the said position to independent directors in companies facing inadequacy of profits or losses.
Corporate Social Responsibility (CSR) : The 2013 Act provides that a company which meets the prescribed net worth, turnover or profits threshold is required to constitute a Corporate Social Responsibility (CSR) Committee and spend 2% of its average net profits in the last 3 (three) financial years, in pursuance of its CSR policy. The CA Amendment exempts companies with a CSR liability of up to INR 5,000,000 a year from setting up CSR Committees and the board of directors of such companies would be required to discharge the functions of such committee. Further, companies which spend any amount in excess of their CSR obligation in a particular financial year would be permitted to set off such excess amounts towards their CSR obligations in succeeding financial years in the manner as may be prescribed.
Periodic financial results for unlisted companies : The CA Amendment has introduced a new provision under the 2013 Act, i.e. Section 129A, which empowers the Central Government to require specified classes of unlisted companies to prepare financial results at such period and in such form as may be prescribed and complete the audit or limited review of such periodical financial results. This amendment is aimed at improving corporate governance and bringing more transparency into the affairs of certain closely held companies with large public interest.
Producer companies : The concept of producer companies was introduced in India in 2002 with the introduction of Part IXA in the 1956 Act with the purpose of regulating the Indian agrarian economy more effectively. The 2013 Act did not contain provisions in respect of producer companies and by virtue of Section 465 of the 2013 Act, provisions of Part IX A of the Companies Act, 1956 continued to apply to producer companies. In light of the above, the CA Amendment removes these provisions and adds a new chapter in the 2013 Act for producer companies.
Other changes: Under Section 89 of the 2013 Act (Declaration in respect of beneficial interest in any share), if a person whose name has been entered in the register of members does not hold beneficial interest in the shares, then a declaration of the said beneficial interest is required to be made in respect of such shares. In this regard, the CA Amendment empowers Central Government to exempt application of this provision to a class or classes of persons, as may be prescribed.
As per Section 117 of the 2013 Act (Resolutions and Agreements to be filed), banking companies are exempt from filing with the Registrar of Companies, the resolutions passed to grant loans, or to provide guarantees or security for a loan. The CA Amendment extends this provision to such classes of non-banking financial companies and housing finance companies, as may be prescribed.
Conclusion
In conclusion, the CA Amendment is an important change aimed at easing compliances under the 2013 Act and enabling growth. Changes relating to decriminalization of certain offences, reduction of penalties for start-up and one person companies, etc. are likely to go a long way in encouraging compliance and also reduce burden on the already overburdened judiciary. Changes vis-à-vis CSR expenditure and enabling domestic entities to list in foreign jurisdictions are measures to promote Indian companies to increase their CSR spend and global footprint. Overall, the CA Amendment is a welcome measure which is likely to boost the ease of doing business in India.
[Deepti Thakkar is Principal Associate and Anirudh Mukherjee is Senior Principal Associate - PDS Legal, Advocates and Solicitors and the views expressed are strictly personal.]
