21 November 2018

COMPANIES (AMENDMENT) ORDINANCE, 2018

Introduction:

The President of India had on 2 November 2018 promulgated The Companies (Amendment) Ordinance, 2018 (Amendment) thereby amending some of the sections of the Companies Act, 2013 (Act).The Amendment addresses adjudication of penalties, corporate governance, de-clogging the National Company Law Tribunal (NCLT) and registration of charges. This update briefly summarises the provisions of the Amendment.

Important Amendments:

1. Prescribing rigid penalties in case of repeated defaults: In case a company or officer of a company or any other person having already been subjected to penalty for default, repeats the same default within a period of 3 years from the date of the order imposing such penalty, it or he shall be liable for the second and every subsequent defaults for an amount equal to twice the amount provided for such default under the relevant provisions of the Act.
   
   
2. Transfer of powers of NCLT to other regulatory authorities: It appears that with the dissolution of Company Law Board and constitution of NCLT, the matters filed before the NCLT have increased tremendously and thus the following powers exercised by NCLT under the Act have been shifted to other regulatory authorities:
   • Power to approve change in financial year: The power vested with the NCLT to approve the change of financial year from April –March for company or body corporate which is a holding company or a subsidiary or associate company of a company incorporated outside India has been transferred to the Central Government.
     
     
   • Conversion of Public Companies into Private Companies: The power vested with the NCLT to approve the conversion of Public Companies into Private Companies has been transferred to the Central Government.
     

3. Declaration by director: The director of the company having share capital is now required to file a declaration that every subscriber to the memorandum has paid the value of the shares agreed to be taken by him on the date of the declaration within 180 days of the incorporation before it commences its business or exercises borrowing power. Non-compliance would lead to the invocation of the penalty clause.
4. Registered Office: If the registrar has a reasonable cause to believe that the company is not carrying on any business or operations, he may cause a physical verification of the registered office and in case of any default, initiate action for removal of the name of the company.
5. Compounding of certain offences: Post amendment, the power of Regional Director to compound offences has been increased to Rs 25 lacs from the previous power of Rs 5 lacs. The provision requiring permission of the Special Court for compounding certain offences which are punishable with imprisonment or with fine has been removed.
6. Replacement of fine with penalty: There has been a re-categorization of the failure to comply with the following provisions by shifting them from the jurisdiction of Special Courts to an in-house e-adjudication framework wherein defaults would be subject to levy of penalty by the Registrar of Companies instead of fine:
   • Prohibition of Issue of shares at discount - Penalty equivalent to amount raised through issue of shares at discount or INR 5,00,000/- (Rupees Five Lac only) whichever is less. The Company shall also be liable to refund all monies received with interest @ 12 % per annum;
     
     
   • Notice to be given to Registrar for alteration of share capital;
     
     
   • Failure or delay in filing of Annual Return. Also the punishment of imprisonment has been omitted.
     
     
   • Explanatory Statement.
     
     
   • Default in providing a declaration with regard to appointment of proxy in a notice calling for general meeting.
     
     
   • Failure/Delay in filing certain resolutions.
     
     
   • Annual Report
     
     
   • Failure/Delay in filing of financial statements. Also, the punishment of imprisonment has been omitted.
     
     
   • Contraventions relating to DIN. Also, the punishment of imprisonment has been omitted.
     
     
   • Accepting directorships beyond specified limits.
     
     
   • Appointment of Key Managerial Personnel.

8. Punishment for Fraud: The amount of fine has been increased to INR 50,00,000/- (Rupees Fifty Lac only) from INR 25,00,000/- (Rupees Twenty Five Lac only)
9. Registration of Charges: With the new amendment, for charges created prior to the commencement of Companies (Amendment) Ordinance, 2018, the registrar may allow 300 (three hundred) days and for charges created after the commencement of Companies (Amendment) Ordinance, 2018 the registrar may allow 60 (sixty) days.
10. Ensuring compliance of the default: The adjudicating officer in addition to the exercise of power of imposing penalties is empowered to direct the company and officer in default to rectify the default stating the non-compliance or default under the relevant provisions of the Act.
11. Disqualification of appointment of directors: A person shall be subject to disqualifications if he exceeds the maximum number of directorships mentioned under the Act.
12. Stock Options: The provisions of the Act which did not entitle independent directors to stock options has been omitted. Further, it stated that they may receive sitting fees, commission, and reimbursement of expenses.
13. Register of significant beneficial owners in a company: In case of failure to make disclosures under Section 90 of the Act, it was only punishable with fine. The punishment has been made more stringent by making contravention punishable with fine or imprisonment or both instead of fine only.

MHCO COMMENT: The Amendment addresses the issues of non-compliance of the provisions of the Act by revising penal provisions as recommended by the Injeti Srinivas Committee. The penalties have been relaxed thereby granting relief to companies. Attempts have also been made to ease the burden on the NCLT by increasing the monetary limits for punishments that may be adjudicated by the Registrar of Companies and shifting certain powers to the Central Government.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.