Guidance note: MCA issues clarifications on corporate procedures in the wake of COVID-19

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Guidance note: MCA issues clarifications on corporate procedures in the wake of COVID-19

Introduction

The novel coronavirus (COVID-19) pandemic and the nation-wide lockdown has made it increasingly challenging for entities to ensure compliance with corporate procedures. In view of this, the Ministry of Corporate Affairs (MCA) has issued various clarifications and notifications so as to reduce the compliance burden of companies, limited liability partnerships (LLPs) and their stakeholders.

This legal alert addresses the key notifications and clarifications issued by the MCA as on 27 April 2020.

MCA issues notifications and clarifications related to holding meetings

Interval between board meetings

In terms of the Companies Act, 2013 (CA 2013), the interval between two consecutive board meetings should not be more than 120 days. A relaxation has been granted in this regard till 30 September 2020.

Accordingly, the gap between two consecutive board meetings can extend to 180 days till the next two quarters.

Board meetings through video conferencing or other audio-visual means

Board meetings may be held through video conferencing or other audio-visual means (VC/OAVM) in respect of restricted matters as well. These include approval of the annual financial statement, board’s report, prospectus, matters relating to amalgamation, mergers, demergers, acquisition and takeover audit committee meetings for consideration of financial statements.

This relaxation is applicable till 30 June 2020.

Shareholders’ meetings through video conferencing or other audio-visual means

(i) All decisions of an urgent nature (i.e., not in ordinary business) that require shareholders’ approval should be passed by companies through postal ballot/e-voting, without holding a physical general meeting. This relaxation is not applicable to matters where any person has a right to be heard.

(ii) An extraordinary general meeting (EGM) in unavoidable circumstances may be held through VC/OAVM till 30 June 2020. Such meetings are required to be held as per the procedure set out in the CA 2013 and the procedure specified by the MCA in this regard. Key terms of such procedure notified by the MCA are as follows:

(a) The meeting must be attended by at least one independent director (where applicable) and an auditor (or an authorized representative who is qualified to be the auditor).

(b) The recorded transcripts of the EGM held through VC/OAVM must be maintained. Public companies are also required to upload such transcripts on the website of the company (if any).

(c) The attendance of members is required to be counted for the purpose of reckoning the quorum under the CA 2013.

(d) The facility of appointment of proxies by members will not be available for such meetings. However, representatives of the members may be appointed for the purpose of remote e-voting or for participation and voting in the meeting held through such facility.

(e) The notice of EGM is required to be sent only to the registered email addresses of the shareholders. A copy of the notice should also be displayed on the website of the company (if any) stipulating clear instructions on how to access and participate in the meeting.

(f) All resolutions passed in accordance with this mechanism are required to be filed with the Registrar of Companies (ROC) within 60 days of the meeting, clearly indicating that this mechanism and the provisions of the CA 2013 have been duly complied with.

Relaxation in holding Annual General Meeting

Companies whose financial year has ended on 31 December 2019 may hold their annual general meeting for such financial year by 30 September 2020. This relaxation is not applicable where the financial year in question is the first financial year of a company.

Independent directors meeting

In terms of the CA 2013, independent directors are required to hold at least one meeting without the attendance of non- independent directors or members of management.

Failure to hold such meeting for the financial year 2019-2020 will not be considered a violation. The independent directors may share their views amongst themselves via telephone, e-mail or any other mode of communication, if they deem necessary.

Notifications and clarifications in respect of filings

No late filing fees

No additional fees will be charged for late filing with respect to any document, return, statement, etc., in the MCA-21 registry from 01 April 2020 to 30 September 2020.

Commencement of business by newly- incorporated companies

In terms of the CA 2013, newly-incorporated companies are required to file a declaration for commencement of business within 180 days of incorporation. An additional period of 180 days has been granted for this compliance.

Filing of Form DIR-3KYC/DIR-3KYC-Web and ACTIVE without any filing fee

Companies whose compliance status has been marked as ‘ACTIVE non-compliant due to non-filing of an e-Form ACTIVE as well as directors whose Director Identification Numbers (DINs) have been deactivated due to non-filing of DIR-3KYC/DIR-3 KYC-Web may become compliant once they file the relevant forms till 30 September 2020, without any filing fee.

The Companies Fresh Start Scheme, 2020 and the revised ‘the LLP Settlement Scheme, 2020’

(i) The Companies Fresh Start Scheme, 2020 and the revised ‘the LLP Settlement Scheme, 2020’ (Schemes) provide an opportunity to companies and LLPs to make good any filing- related defaults, irrespective of duration of default and make a fresh start as a fully compliant entity.

(ii) The Schemes are valid from 1 April 2020 to 30 September 2020.

(iii) The Schemes offer a one-time waiver of additional filing fees for delayed filings by companies or LLPs with the ROC.

(iv) The Schemes also provide immunity from penal proceedings against delayed filings and additional time for filing appeals before the concerned regional directors against imposition of penalties, if already imposed.

(v) The MCA, in its press release, indicated that the intent behind the Schemes is to reduce compliance burden and provide relief to companies and LLPs during this unprecedented situation caused by COVID-19.

Notifications and clarifications in respect of corporate social responsibility (CSR)

Contributions to relief funds for COVID- 19: CSR expenditure

Contributions made to the following for combating COVID-19 qualify as CSR expenditure:

  • PM CARES Fund
  • State Disaster Management Authority Contributions made to the Chief Minister’s Relief Fund or the state relief funds for COVID-19 do not qualify as CSR expenditure.

Contributions made to the Chief Minister’s Relief Fund or the state relief funds for COVID-19 do not qualify as CSR expenditure.

Payment of wages/salary do not qualify as CSR expenditure

The MCA in its clarification has stated that employers have a moral obligation towards their employees, contract laborers as well as the daily workers during the lockdown period as such persons do not have any alternative source of employment/livelihood. Accordingly, payment of wages/salary in such case does not qualify as CSR expenditure.

Ex-gratia payment to qualify as CSR expenditure

Any ex-gratia payment made to temporary/casual workers/daily wage workers over and above the wages (specifically for the purpose of fighting COVID-19) is admissible towards CSR expenditure. However, this is subject to an explicit declaration made to this effect by the board of the company, which is duly certified by the statutory auditor.

Other clarifications/ notifications

Requirement of a resident director

In terms of the CA 2013, every company is required to have at least one director who has stayed in India for a total period of not less than 182 days in the previous calendar year (Minimum Residency).

Non-compliance of Minimum Residency will not be treated as a violation for the financial year 2019-2020.

Implementation of CARO, 2020

The Companies (Auditor’s Report) Order, 2020 (CARO, 2020) will now be made applicable from the financial year 2020-2021, instead the financial year 2019-2020 as notified earlier.

Deposit repayment reserve account

The deadline for the requirement to create the deposit repayment reserve of 20% of deposits maturing during the financial year 2020-2021 is 30 April 2020. This deadline has been extended to 30 June 2020.

Debentures repayment reserve account

The deadline for requirement to invest or deposit at least 15% of the amount of the debentures maturing during the year is 30 April 2020. This deadline has been extended to 30 June 2020.

Extension of timelines

The validity of the names reserved for a new company or an LLP incorporation as well as change in name expiring between 15 March 2020 to 3 May 2020 has been extended for a period of 20 days beyond 3 May 2020.

Conclusion

The MCA has introduced various relaxations to provide relief and reduce the burden of certain compliances under the CA 2013. These relaxations notified by the MCA may aid companies and LLPs in avoiding penalties on account of any unforeseen delays or non-compliances. It is also pertinent to note that the relaxations are only for those compliances that are specifically mentioned, and companies must comply with other provisions of the CA 2013 as applicable.