It appears that 2020 has been the year of various amendments for the corporates. With various amendments, the Government has again laid down another set of amendments by way of Companies (Amendment) Bill, 2020. The Union Corporate Affairs Minister Nirmala Sitharaman moved the Bill for passing in the Upper House (Rajya Sabha) on September 22, 2020 stating the various amendments.
The Companies (Amendment) Bill will amend various sections of the Companies Act, 2013 by decriminalizing various non-compoundable offences in case of defaults, but not involving frauds, omitting imprisonment for various offences which were considered procedural and technical in nature. It is to be noted that the Companies (Amendment) Bill, 2020 comes at a time when companies are reeling under stress due the coronavirus pandemic.
The Companies (Amendment) Bill, 2020 has been based on the Company Law Committee which was set up under the Chairmanship of Shri Injeti Srinivas in September, 2019. The CLC was constituted with a view to decriminalize offences and provide ease of doing business to the corporates and other stakeholders. Further, the Companies (Amendment) Bill, 2020 provides majorly for the following:
- Decriminalize certain offences under the Companies Act, 2013 in case of defaults which can be determined objectively and which otherwise lack any element of fraud or do not involve larger public interest;
- To reduce timelines for applying for rights issues so as to speed up such issues under section 62;
- To exempt any class of persons from complying with the requirements of section 89 relating to declaration of beneficial interest in shares;
- To make provisions for allowing payment of adequate remuneration to non-executive directors in case of inadequacy of profits, by aligning the same with the provisions for remuneration to executive directors in such cases;
- To empower the CG to exclude, in consultation with the SEBI , certain class of companies from the definition of “listed company”, mainly for listing of debt securities;
- To extend exemptions to certain classes of non-banking financial companies and housing finance companies from filing certain resolutions under section 117;
- To incorporate a new Chapter XXIA in the Act relating to Producer Companies, which was earlier part of the Companies Act, 1956;
- To relax provisions relating to charging of higher additional fees for default on two or more occasions in submitting, filing, registering or recording any document, fact or information as provided in section 403;
- To provide that the companies which have Corporate Social Responsibility spending obligation up to fifty lakh rupees shall not be required to constitute the Corporate Social Responsibility Committee and to allow eligible companies under section 135 to set off any amount spent in excess of their Corporate Social Responsibility spending obligation in a particular financial year towards such obligation in subsequent financial years;
- To provide for a window within which penalties shall not be levied for delay in filing annual returns and financial statements in certain cases;
- To allow direct listing of securities by Indian companies in permissible foreign jurisdictions as per rules to be prescribed.
Major highlights of the Companies (Amendment) Bill, 2020
♦ Section 2(52): Definition of “Listed Company”
- Exclusion of such listed companies and companies with the intention of getting listed such class of securities from the category of listed companies.
♦ Section 16: Rectification of name
- If a company was registered inadvertently with a registered trade mark of a proprietor, and the name is too identical or resembles an existing trade mark, such company has to change its name within 3 months from the issue of CG’s direction instead of 6 months timeline provided earlier.
- Further, with a view to decriminalize the offence, if committed by a company, in case of default in this section, the CG shall allot a new name as per the directions of the ROC to the company and the ROC shall issue a fresh Certificate of Incorporation. Although the company shall not be prevented from changing its name subsequently.
♦ Section 62: Further issue of shares with respect to Right issue
- The time period for providing offer letter to the existing shareholders under rights issue process is 15 days to 30 days, beyond which the offer is deemed to be declined. It is proposed to lay down such other time period which may be less than the timelines prescribed currently.
♦ Section 89: Beneficial shareholding
- Under the Companies Act, 2013, if a person holds beneficial interest of at least 10% shares in a company or exercises significant influence or control over the company, he is required to make a declaration of his interest to the company. The company is required to note the declaration in a separate register. The Companies (Amendment) Bill, 2020 empowers the central government to exempt any class of persons from complying with these requirements if considered necessary in public interest.
♦ Section 117: Resolutions and agreements to be filed
- The section requires filing of resolutions with the Registrar of Companies. It currently exempts banking companies which are providing loan, guarantee, and security in connection with loan in its ordinary course of business from filing the resolution in e-Form MGT- 14. Such exemption has been extended to registered NBFC and HFCs.
♦ Section 129A: Periodical financial results (newly inserted)
- The Central Government shall require such class or classes of companies to a) Prepare periodical financial results, b) Obtain approval of the Board of Directors, c) Complete limited review of such periodical financial results, d) File a copy with the ROC within 30 days of completion of the relevant period.
♦ Section 135: Corporate Social Responsibility
- Under the Act, companies with net worth, turnover or profits above a specified amount are required to constitute CSR Committees and spend 2% of their average net profits in the last three financial years, towards its CSR policy. The Bill exempts companies with a CSR liability of up to Rs 50 lakh a year from setting up CSR Committees. Further, companies which spend any amount in excess of their CSR obligation in a financial year can set off the excess amount towards their CSR obligations in subsequent financial years.
♦ Section 149: Company to have Board of Directors (Independent Directors)
- The existing provisions provide that Independent Directors are not subject to stock options and are entitled to sitting fees, profit related commission and reimbursement of expenses incurred in attending meetings as per Section 197(5).
- The amendments provide for a new insertion and it states that an Independent Directors and Non-Executive Directors may receive any other sort of remuneration, excluding the aforesaid, in terms of Schedule V where there is no profit or inadequate profits in the company.
♦ Section 197: Overall Maximum Managerial Remuneration and Managerial Remuneration in Case of Absence or Inadequacy of Profits
- Section 197(3) has been aligned with Section 149(9) to include Non-Executive Directors and Independent Directors within the ambit of remuneration payable as per Schedule V in case of no profits or inadequate profits.
♦ Periodic financial results for unlisted companies
- The Companies (Amendment) Bill, 2020 empowers the Central Government to require classes of unlisted companies (as may be prescribed) to prepare and file periodical financial results, and to complete the audit or review of such results.
♦ Benches of NCLAT
- The Companies (Amendment) Bill, 2020 seeks to establish benches of the National Company Law Appellate Tribunal. These shall ordinarily sit in New Delhi or such other place as may be notified.
♦ Direct listing in foreign jurisdictions
- The Bill empowers the central government to allow certain classes of public companies to list classes of securities (as may be prescribed) in foreign jurisdictions.
♦ Producer companies
- Under the 2013 Act, certain provisions from the Companies Act, 1956 continue to apply to producer companies. These include provisions on their membership, conduct of meetings, and maintenance of accounts. Producer companies include companies which are engaged in the production, marketing and sale of agricultural produce, and sale of produce from cottage industries. The Bill removes these provisions and adds a new chapter in the Act with similar provisions on producer companies.
♦ Changes to offences
- The Companies (Amendment) Bill, 2020 makes three changes. First, it removes the penalty for certain offences. For example, it removes the penalties which apply for any change in the rights of a class of shareholders made in violation of the Companies Act, 2013. It shall be noted that where a specific penalty is not mentioned, the Companies Act, 2013 prescribes a penalty of up to Rs.10,000 which may extend to Rs. 1,000 per day for a continuing default.
- Second, it removes imprisonment in certain offences. For example, it removes the imprisonment of three years applicable to a company for buying back its shares without complying with the Companies Act, 2013.
- Third, it reduces the amount of fine payable in certain offences. For example, it reduces the maximum fine for failure to file annual return with the Registrar of Companies from five lakh rupees to two lakh rupees.
- Further, under the Companies Act, 2013 One Person Companies or Small Companies are only liable to pay up to 50% of the penalty for certain offences (such as failing to file annual return).
- The Companies (Amendment) Bill, 2020: (i) extends this provision to all producer companies and start-up companies, (ii) extends this provision to apply to violation of any provision of the Companies Act, 2013 and (iii) limits the maximum penalty to two lakh rupees for the company and one lakh rupees for a defaulting officer.
Thus, the Companies (Amendment) Bill, 2020 gives effect to decriminalization of certain offences under the Companies Act, 2013 and also provide greater ease of living and ease of doing business for companies and citizens as the compliance related issues are being made simpler.
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