Companies (Amendment) Act, 2019: key takeaways

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Companies (Amendment) Act, 2019: key takeaways

Introduction

The Companies (Amendment) Bill received the President’s assent on 31 July 2019 and was published in the official gazette on the same date as the Companies (Amendment) Act, 2019 (Amendment Act ). The Amendment Act further amends the Companies Act, 2013 (Act). Majority of the provisions of the Amendment Act are deemed to have come into effect on 2 November 2018. The remaining provisions, barring the amendment relating to corporate social responsibility, were made effective from 15 August 2019.

In this update, we have discussed the key takeaways of the Amendment Act.

Background

The Amendment Act was notified in the official gazette on 31 July 2019. The Amendment Act includes the various amendments made to the Act pursuant to the Companies (Amendment) Ordinance, 2018, (Ordinance) promulgated on 2 November 2018, and retained in force through two subsequent ordinances, Companies (Amendment) Ordinance, 2019 and Companies (Amendment) Second Ordinance, 2019 (Ordinance Amendments). The Amendment Act has also introduced certain additional changes in the Act (New Amendments). Ordinance Amendments are deemed to have been enacted from the date of the Ordinance, i.e., 2 November 2018. The New Amendments, barring the amendments relating to corporate social responsibility, were enforced with effect from 15 August 2019.

Key takeaways of the Amendment Act

The key takeaways of the Amendment Act are:

  • Dematerialized securities: the Amendment Act sets out that for certain classes of unlisted companies, as may be prescribed, the securities shall be held or transferred only in dematerialized form.
  • Penalty for certain offences: some of the compoundable offences (such as failure in filing annual statement, issue of shares at a discount, failure to file resolutions and agreements with the registrar of companies, etc.) set out in Act were earlier punishable with fine or imprisonment or both. These have been recategorized as civil defaults, rendering the defaulter liable to pay a penalty imposed by adjudicating officers or regional directors.
  • Enhanced penalty for repeated defaults: the Amendment has introduced a provision to provide for enhanced penalty in case of repeated default. In terms of this provision where an offender on whom penalty has been imposed for a default under the Act commits the same default within a period of three years from the date of imposition of the penalty, such an offender will be liable to pay a penalty of twice the amount prescribed for such default in the Act.
  • Corporate social responsibility (CSR): the companies to which the CSR provisions are applicable under the Act, are required to transfer 2% (Designated CSR Amount) of the average net profits made during the three immediately preceding financial years (or where the company has been in existence for less than three financial years since its incorporation, in respect of immediately preceding financial years). Pursuant to the Amendment Act, if there is any unspent amount forming part of the Designated CSR Amount, it shall be transferred to one of the funds specified in Schedule VII of the Act (Schedule VII Fund) within six months from the expiry of the financial year. However, if any such unspent amount relates to any ongoing project, it will be transferred to a special account opened by the company – Unspent Corporate Social Responsibility Account (UCSRA). Amounts transferred to UCSRA will have to be utilized by companies in pursuance of their CSR policies within a period of three financial years from the date of transfer of such amount, failing which, such amounts will be transferred to a Schedule VII Fund.
  • Commencement of business: Commencement of business: the Amendment Act has introduced a new section setting out that a company will be able to commence its business or exercise any borrowing powers only once it has (i) filed, within 180 days of its incorporation, a declaration with the registrar of companies (ROC), setting out that every subscriber to the memorandum has paid the value of shares agreed to be taken by him on the date of making such declaration; and (ii) the company has filed with the ROC a verification of its registered office within 30 days of its incorporation.
  • Registration of charges: the Amendment Act has extended the period allowed for registration of charges created on or after the commencement of the Amendment Act from 30 days from creation of charge to 60 days from creation of charge.
  • Beneficial ownership: the Amendment Act has cast a responsibility on every company to take all necessary steps to identify individuals who are significant beneficial owners in relation to such a company and require such persons to comply with the provisions of the Act on significant beneficial ownership. The Amendment Act does not, however, set out any directive in relation to the steps that should be taken by the companies. In the absence of any directions, this will remain a toothless provision.
  • Power of central government and National Company Law Tribunal (NCLT) in case of oppression and mismanagement: pursuant to the Amendment Act, the central government is empowered to initiate a case against unfit and improper persons involved in the conduct and management of a company and refer it to the NCLT for enquiry and decision. In cases of oppression and mismanagement, the NCLT can now determine whether the person conducting and managing the affairs of a company is fit and proper. If the NCLT arrives at an adverse conclusion, such person can be debarred from holding the office of a director or any other office associated with the conduct or management of any company for a period of five years.

Conclusion

The Amendment Act seeks to strengthen the existing governance norms and compliance management in the corporate sector by making a provision for imposition of enhanced penalties in case of repeated defaults. The central government now has a greater say in cases of oppression and mismanagement, and the individuals responsible for the same can now be directly held accountable.

Further, the Amendment Act has made it mandatory for all companies (required under the Act) to set aside monetary contributions for corporate social responsibility, even if such contribution is not earmarked for a specific purpose.