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Jurisprudence on the Companies (Amendment) Bill, 2019

Recently, on July 25, 2019, the Government has introduced the much awaited Companies (Amendment) Bill, 2019 (“Amendment Bill“) in the Lok Sabha. The Union Cabinet on July 17, 2019 had approved the said Bill. The Amendment Bill as placed in the Lok Sabha seeks to replace the Companies (Amendment) Second Ordinance, 2019 (“Second Ordinance 2019“) which was promulgated by the President on February 21, 2019, which had given a continued effect to the Companies (Amendment) Ordinance, 2019 (“Ordinance 2019“). Further, the Ordinance 2019 was promulgated on January 12, 2019 in order to give a continued effect to the Companies (Amendment) Ordinance, 2018 (“Ordinance 2018“) which was promulgated by the President of India on November 02, 2018.

For ease of reference, the calendar of important dates relating to promulgation of aforesaid Ordinances is as below:

Name of the Ordinance/ Bill Relevant Date
Companies (Amendment) Ordinance, 2018 November 02, 2018
Companies (Amendment) Ordinance, 2019 January 12, 2019
Companies (Amendment) Second Ordinance, 2019 February 21, 2019
Companies (Amendment) Bill, 2019 July 25, 2019

Now, apart from replacing the Second Ordinance 2019, the newly introduced Amendment Bill seeks to provide for certain additional amendments. While introducing the Bill in the Lok Sabha, the Hon’ble Finance and Corporate Affairs Minister, Nirmala Sitharaman said, “the Bill seeks to ensure more accountability and better enforcement to strengthen the corporate governance norms and compliance management in corporate sector as enshrined in the Companies Act, 2013” (“2013 Act“).

Through this write-up, an attempt has been made to capture and provide an insight of the amendments as contained in the Amendment Bill, which are in addition to the amendments proposed by the Second Ordinance 2019.

1. Substitution of the word “Registration” with “Filing” – Amendment to Section 26

The extant provisions under section 26 require a company to deliver a copy of the prospectus to the Registrar for registration. The Amendment Bill seeks to amend this requirement by substituting the word “Registration” with “Filing”.

2. Dematerialisation of securities of Unlisted Companies including Private Companies – Insertion of New sub-section 1A to Section 29

Section 29 of the 2013 Act relates to ‘Public offer of securities to be in dematerialized form’. On September 10, 2018, the Ministry of Corporate Affairs (“MCA“) vide the Companies (Prospectus and Allotment of Securities) Third Amendment Rules, 2018, dated September 10, 2018 inserted a new rule 9A which became effective from October 02, 2018. The said rule 9A provided for the issue of securities in dematerialized form by unlisted public companies.

Now, in furtherance to this, the Amendment Bill seeks to insert sub-section 1A to Section 29, which inter-alia mandates certain unlisted companies that the securities shall, in addition to being issued, also be held and transferred only in dematerialized form after complying with the provisions of the Depositories Act, 1996 and regulations made thereunder. With this proposed move, all shareholders of all private companies shall have to get their holdings dematerialized.

3. NFRA to perform its functions through divisions – Amendment to Section 132

The Bill proposes that Section 132 of the 2013 Act be amended, so as to enable the NFRA to perform its functions through divisions and the Executive Body. Further, Bill has clarified that each division of NFRA shall be presided over by the Chairperson or a full-time Member authorized by the Chairperson. With regard to constitution of an Executive Body, the same shall consist of the Chairperson and full-time Members of such Authority for efficient discharge of its functions.

Moreover, it has been provided in the Bill that where professional or other misconduct is proved, NFRA shall have the power to make order for debarring the member or the firm from:

  • being appointed as an auditor or internal auditor or undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate; or
  • performing any valuation as provided under section 247.

4. CSR made mandatory, Transfer of Unspent CSR money to Funds mentioned in Schedule VII, Insertion of Penalty Provisions and more – Amendment to Section 135  

The 2013 Act provides that if a company fails to spend CSR amount, the Board shall, in its report, specify the reasons for not spending the amount. Now, as a step further to the aforesaid reporting requirement, the Amendment Bill has provided that if companies are not able to spend the desired amount, then they are required to contribute the unspent money to the Funds mentioned in Scheduled VII of the 2013 Act.

The Bill further seeks to insert a new sub-section (6), which provides that any amount remaining unspent pursuant to any ongoing project, undertaken by a company in pursuance of its CSR Policy, shall be transferred by the company within a period of 30 days from the end of the financial year to a special account, named as “Unspent Corporate Social Responsibility Account“. Further, the said amount shall be spent within next 3 years, and if not spent, shall be transferred to the Funds mentioned in Schedule VII, within a period of thirty days from the date of completion of the third financial year.

Lastly, the Amendment Bill seeks to insert a new sub-section (7), i.e. penal provisions relating to non-compliance of the aforesaid provisions. Accordingly, the company shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to twenty-five lakh rupees and every officer of such company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both.

5. CG empowered to file an application to NCLT in case of disgorgement of funds by Director, KMP or Officer – Amendment to Section 212

The Amendment Bill seeks to provide that any officer not below the rank of Assistant Director of Serious Fraud Investigation Office (SFIO), if so authorised, may arrest any person in accordance with the provisions of this section.

Secondly, the person so arrested may be taken to a Special Court or Judicial Magistrate or Metropolitan Magistrate within twenty four hours of his arrest.

Thirdly, where an investigation report submitted by SFIO states that a fraud has taken place and any director, key managerial personnel or officer has taken undue advantage or benefit, then the Central Government may file an application before Tribunal with regard to disgorgement and such director, key managerial personnel or officer may be held personally liable without any limitation of liability.

6. Only fit and proper person to hold the office of director or any other office connected with the conduct and management of any company – Amendment to Sections 241, 242, and 243

The Amendment Bill seeks to empower Central Government to prescribe such company or class of companies in respect of which, applications under such sub-section, shall be made before the Principal Bench of the Tribunal and shall be dealt with by such Bench.

Further, the Bill provides for certain circumstances where Central Government may refer the matter and request the Honorable NCLT to inquire into the case and record a decision about whether the person is a fit and proper person to hold the office of director or any other office connected with the conduct and management of any company.

Amendment to Section 243 provides that where the NCLT reaches to a conclusion that such a person is not a fit and proper person pursuant to section 242, then such a person shall not hold the office of a director or any other office connected with the conduct and management of the affairs of any company for a period of 5 years from the date of the relevant decision of the Tribunal.

However, it has been clarified that the Central Government may, with the leave of the Tribunal, permit such person to hold any such office before the expiry of the said period of five years.

Lastly, the Amendment Bill also seeks to provide that the person so removed from the office of a director or any other office connected with the conduct and management of the affairs of the company shall not be entitled to, or be paid, any compensation for the loss or termination of office.

7. Re-categorization of 16 offences

The Bill also seeks to keep intact the amendments proposed through preceding Ordinances, to 16 sections of the Act, so as to modify the punishment therein from fine to monetary penalties, to lessen the burden upon Special Court. These offences include: (i) issuance of shares at a discount, and (ii) failure to file annual return.

Disclaimer: This write-up is only for academic purposes. Please do not consider it as a professional advice and the same shall not be relied upon for real life facts. We hope that our readers will find this write-up useful in having a better understanding of the key amendments proposed by the Companies (Amendment) Bill, 2019. Happy Reading!

Author Bio

Deepanshu Gawdi heads the firm's Corporate Laws Practice at Faridabad. He is an Associate Member of the Institute of Companies Secretaries of India (ICSI). He carries with himself the practical exposure of various corporate matters while working in a reputed Law Firm. He is young and energetic Pract View Full Profile

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